Income-tax---

----Business loss---Film distribution---Loss of amount advanced for production of films---Amount was paid for acquiring distribution rights-- Capital loss---Not deductible.

The assessee was a registered firm doing business in the distribution of films. It claimed as business loss the amount advanced for production of a picture. The Income-tax Officer disallowed the claim but the Tribunal allowed it. On a reference:

Held, that there was no evidence on record to show that the assessee was doing money-lending business and in the course of such business, amounts were advanced to the film-maker in fact, the assessee advanced the amounts for the purpose of getting distribution rights to exhibit and exploit a film produced by the person to whom the advances were made. Therefore, the amounts were advanced only to acquire the capital asset, viz., the distribution rights. The loss was not deductible.

CIT v. Coimbatore Pictures (P.) Ltd. (1973) 90 ITR 452 (Mad.) applied.

CIT v. Sethu Film Distributors (1995) 212 ITR 620 (Mad.) and CIT and CEPT v. South India Pictures Ltd. (1956) 29 ITR 910 (SC) ref.

C.V. Rajan for the Commissioner.

Nemo for the Assessee.

JUDGMENT

THANIKKACHALAM, J. --- At the instance of the Department, the Tribunal referred the following question for the opinion of this Court, under section 256(1) of the Income-tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding and had also valid materials to hold that the sum of Rs.40,814 being the advance made to Messrs Iran International Films should be allowed as business loss while computing the total income of the assessee for the year 1977-78?"

The assessee is a registered firm doing business in the distribution of films. It had claimed an amount of Rs.40,814 being advance of sum of Rs.25,814 and Rs.15,000 made in the years ending March 31, 1972 and March 31, 1973, to Iran International Films at No.44/2, Mowbrays Road, Madras-18, towards the production of a picture named, "Allahu Akbar". The payments were made in pursuance of an agreement, dated February 21, 1972. Mr. Akhtar Lufti, the main partner of the said firm had agreed to distribute the same film to some others without the knowledge of the assessee and in breach of the contract with the assessee. The assessee sent legal notice and also tried to ascertain the whereabouts of the partners, so as to proceed further in the matter. The assessee was unable to trace the persons and it was subsequently ascertained that Mr. Akhtar Lufti expired on June 25, 1974, and that the film itself had never been completed, though the assessee had initiated action on the basis of a subsequent contract for distribution with a third party in breach of the agreement with the assessee. Since neither the legal representative nor the other partners could be traced and since there was no prospect for any recovery, the assessee wrote off the entire amount in its accounts for the year ended March 31, 1977, relevant to the assessment for 1977-78. The Income-tax Officer rejected the assessee's contention for allowance of this sum as "bad debts" as the assessee had not taken any action between 1973 and the end of the accounting year. On appeal, the Commissioner of Income-tax agreed with the order passed by the Income-tax Officer.

The assessee preferred an appeal before the Appellate Tribunal and contended that the sum of Rs.40,814 should be allowed as "bad debts". The Appellate Tribunal allowed the appeal filed by the assessee by holding that the sum of Rs.40,814 being the advance made by the assessee to Messrs Iran International Films should be allowed as business loss, as the same was advanced in the course of business. The Appellate Tribunal followed an earlier order of its own in I.T.A. No.442/(Mad.) of 1975-76, dated November 30, 1976, in the case of Messrs Sethu Film Distribution and Messrs Thangam Theatre Distributors in I.T.A. No. 1167 (Mad.) of 1979, dated March 9, 1981.

According to the Tribunal, there is a custom in this line of business as recognised in its two earlier orders to pay advances to producers on distribution agreements being signed. The Tribunal further pointed out that the transaction was not an isolated one as in the case before the Madras High Court in the case of CIT v. Coimbatore Pictures (P.) Ltd(1973) 90 ITR 452. Accordingly, the Tribunal allowed the claim made by the assessee as business loss, incurred during the course of the business.

Learned standing counsel for the Department submitted that the Tribunal was not correct in stating that there is a custom in this line of business as recognised in -its two earlier orders to pay advance to producers on distribution agreements being signed. According to learned standing counsel, the business or the assessee is to Exhibit and exploit the feature films. The business of the assessee is not money-lending. There is no evidence on record to show that the assessee is also doing money-lending business and in the course of such business, amounts were advanced by the assessee to the film-maker. It was, therefore, submitted that the Tribunal ought to have followed the decision of this Court rendered in CIT v. Coimbatore Picture (P.) Ltd. (1973) 90 ITR 452. The amount advanced by the assessee for obtaining distribution rights, is capital in nature. In any event. It was submitted that the loss incurred by the assessee is not a business loss or a trading loss. On the other hand, none was present, on behalf of the assessee. We have heard learned standing counsel and perused the records carefully.

The fact remains that the assessee claimed a sum of Rs.40,814 as "bad debts" before the authorities below. The assessee advanced the abovesaid amount to Iran International Films towards the production of a picture. The payments were made in pursuance of an agreement, dated February 21, 1972. One of the partners of the firm, to which the amounts were advanced expired on June, 25, 1974. Therefore, the partnership firm was dissolved. The said partner, before he expired, entered into a contract with a third party for distribution of the said film as against the contract entered into with the assessee. The assessee was unable to find out other partners and the legal heirs of the dead partner, in spite of his best efforts. The assessee has also sent notices to the other partners as well as to the legal heirs of the dead partner. Ultimately, the assessee wrote off the said amount as "bad debts" to the accounts. However, when the matter came up for consideration before the Tribunal, the Tribunal considered that it is a business loss and, therefore, allowable as revenue expenditure, since it was incurred during the course of business. The Tribunal distinguished the judgment of this Court rendered in CIT v. Coimbatore Pictures (P.) Ltd. (1973) 90 ITR 452. In the abovesaid decision, this Court held that the advances made by distributors to film producers while entering into agreement for distribution rights of pictures need not necessarily be an advance on revenue account incurred in the course of business. In order to entitle a deduction on the ground of business loss, the loss should not only have been incurred in the course of the business, but it should also be in the nature of a revenue loss. According to the facts arising in the present case, there is no evidence on record to show that the assessee was doing money -lending business and in the course of such business, amounts were advanced to the film-maker. In fact, the assessee advanced the amount for the purpose of getting distribution rights to exhibit and exploit a film produced by the person to whom the advance were made. Therefore, the amounts were advanced only to acquire the capital asset, viz., the distribution rights. In the order, the Tribunal has pointed out that according to the fact arising in the decision in CIT v. Coimbatore Picturies (P.) Ltd. (1973) 90 ITR 452 (Mad.), the Advance was in respect of an isolated transaction. In the present case also, the facts would go to show that the transaction is an isolated one though made at two instances. Hence, the assessee has to prove that in the course of business, the assessee incurred business loss or trading loss which is allowable as revenue expenditure. The facts on record in the present case would go to show that the decision rendered in CIT v. Coimbatore Picture (P.) Ltd. (1973) 90 ITR 452 (Mad.) would apply on all fours to the facts of the case.

Our attention was drawn to another decision of this Court rendered in CIT v. Sethu Film Distributors (1995) 212 ITR 620. According to the facts arising in that decision, the assessee is a registered partnership firm, carrying cat business in film distribution. As per the agreement entered into with Visalakshi Films on September 30, 1964, the assessee advanced a sum of Rs.80,000 and in consideration of the amount, the assessee was to get exhibition and exploitation rights of the picture, for distribution in certain districts for a period of ten years. The assessee was also entitled to a commission of 15 per cent. up to a net realisation of Rs.85,000 and 25 per cent. over and above net realisation of Rs.85,000. It was the case of the assessee that as the advance was not fully recoverable, it had to write off a sum of Rs.15,630 and this should be allowed as "business loss". Similarly, the assessee has also entered into an agreement with Kamallalayam Picture on August 17, 1966, as per the terms of which the assessee was to advance a sum of Rs.40,000 and in consideration thereof was to get the exhibition and exploitation rights of the picture. The assessee was also to get a 15 per cent. commission on the net realisation till the realisation reached Rs.43,000 and 20 per cent. thereafter. The amount not realised from that party was shown as Rs.21,720 and this, was written off and claimed as a "business loss". In the said decision, this Court found that on the basis of the statement filed by the assessee, the assessee used to advance moneys to various producers as a film financier, apart from the business of distribution of pictures. Therefore, on the facts the Tribunal came to the conclusion that the assessee was also doing money-lending business and in the course of the money-lending business, the amounts were advanced to the film-makers and, therefore, the loss incurred was considered to

be a business loss. But, according to the facts arising in the present case, there was no evidence on record to show that the assessee was also doing money-lending business and in the course of the money -lending business, the amounts were advanced to the film-makers so as to enable the assessee to claim the loss incurred as business loss. Therefore, the decision rendered in CIT v. Sethu Film Distributors (1995) 212 ITR 620 (Mad.) would render no assistance to the assessee to support his case.

A decision of the Supreme Court was also brought to our notice reported in the case of CIT and CEPT v. South Indian Pictures Ltd. (1956) 29 ITR 910. According to the facts arising in that case, the assessee had carried on the business of distribution of films and he had entered into three agreements for advancing moneys to certain motion picture producers towards the production of three films and acquiring the rights of distribution thereof The agreements, inter alia, provided that the assessee would advance certain sums of money in instalments for the production of the films, the assessee acquiring the sole right to distribute the films for a period of five years from the date of release of each film. The assessee was to pay itself from the money realised by the distribution of the films its commission and the amount advanced to the producers and to pay the balance to the producers. The assessee had a charge by way of security on the negative and positive copies of the films for amounts due on account of the advance. If the producers failed to deliver the films within the time specified, the assessee had the right to complete the picture at its own cost. On the expiry of the period of five years, the assessee had to return to the producers all copies of the films and the balance stock of loan and publicity materials.

After the assessee had exploited to a certain extent its right of distribution of the three films, the agreements were cancelled and the producers paid an aggregate sum of Rs.26,000 to the assessee towards commission. In the relevant accounting year, the assessee had distribution rights in respect of eleven films including these three. On these facts, while answering the question, "Whether, on the facts and in the circumstances of the case, the sum of Rs.2G,000 received by the assessee from Jupiter Pictures Limited is a revenue receipt assessable under the Indian Income-tax Act?". The Supreme Court held by a majority judgment, as follows:-- (headnote):

.....that the sum paid to the assessee was not compensation for not carrying on its business but was a sum paid in the ordinary course of business to adjust the relation between the assessee and the producers; the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business; the amount received by the assessee was only so received "towards commission", i.e., as compensation for the loss of the commission which it would have earned had the agreements not been terminated: the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed but the amount was simply received by the assessee in the course of its going distributing agency business from that going business; that, therefore, the sum was an income receipt. "

The abovesaid amount was held an income receipt because the assessee received the said amount, in the course of its doing distributing agency business. It is only under these circumstances, the Supreme Court considered that the sum of Rs.26,000 received during the course of the business of distribution which is the business of the assessee. But, according to the facts arising in the present case, the loss was not incurred in the distribution business, but the loss was incurred in acquiring the distribution right which is a capital asset. Therefore, the loss should be a capital loss and not revenue loss. Thus, considering the facts arising in this case and in the light of the judicial pronouncements cited supra, we hold that the Tribunal was not correct in coming to the conclusion that the loss incurred by the assessee in acquiring the distribution rights is a revenue loss. In that view of the matter, we answer the question referred to us, in the negative and in favour of the Department. No costs.

M.B.A./1269/FCReference answered.