Case: B.D. Bharucha,Bombay Vs. Commissioner Of Income-Tax, Central Bombay

by the appellant was, therefore, a capital loss and not a revenue loss. As required by the appellant the Tribunal stated a case to the High Court under S. 66 (1) of the Income-tax Act on the following question of law:"Whether the aforesaid loss of Rupees 80,759 is deductible under any of the provisions of the Act?" By its judgment, dated August 27, 1962, the High Court answered the Reference in the negative and against the appellant. 3. On behalf of the respondent it was submitted that the High Court was right in taking the view that the appellant had advanced a sum of Rs. 1,00,000 not with a view to earn interest thereon but with a view to making an investment in the business of Tarachand Pictures and get a return on the said investment by way of a share of profits in the said business. It was contended that the money was not lent for any definite term and no rate of interest had been fixed under Cl. 3. The argument was also stressed that Cl. 3 of the agreement stipulated that the appellant was to share with the distributors not only the profit but also the loss of the business, and in the case of no money-lending transaction is there a covenant between the parties that the money-lender will share the loss of the business for which the money is lent. In other words, it was argued that no money lending transaction can have the attribute of the money-lender sharing the risk of the loss of the business for which the money is lent, nor could it be a feature of any purely financial deal.We are unable to accept the argument of the respondent that the transaction between the parties under the agreement, dated January 5, 1953 was not a money-lending transaction or a transaction in the nature of a financial deal in the course of the appellants business.If Cl. 3 of the agreement is taken in isolation there may be some force in the contention of the respondent that the term under which the appellant undertook to share the loss took the transaction out of the category of money lending transaction and the loss suffered by the appellant was, therefore, a capital loss.In the present case, however, Cl. 3 of the agreement, dated January 5, 1953 cannot be read in isolation but it must be construed in the context of Cl. 7 which provides that in case the picture was not released in Bombay within 15 months from the date of the agreement, the distributors will return all the moneys so far advanced to them by the appellant together with interest thereon at 9 per cent per annum. It is the admitted position in the present case that the picture was not released by the distributors till the stipulated date, namely, April 4, 1954 but it was released on May 28, 1954 and Cl. 7 of the agreement, therefore, came into operation. The result, therefore, is that on and from April 4, 1954 there was a contract of loan between the parties in terms of Cl. 7 of the agreement and the principal amount became repayable from that date to the appellant with interest thereon at 9 per cent per annum. It follows, therefore. that the appellant is entitled to claim the amount of Rs. 80,759 as a bad debt under S. 10 (2) (xi) of the Income-tax Act and the loss suffered by the appellant was not a loss of capital but a revenue loss. 4. To find out whether an expenditure is on the capital account or on revenue account, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital.But it is not true of all losses, because losses in the running of the business cannot be said to be of capital. The distinction is brought out for example, in Reids Brewery Co. Ltd. v. Male, (1891) 3 Tax Cas 279. In that case, the brewery company carried on, in addition to the business of a brewery, a business of bankers and money-lenders making loans and advances to their customers. This helped the customers pushing sales of the product of the brewery company. Certain sums had to be written off and the amount was held to be deductible. In the course of his judgment Pollock B. said:"Of course, if it be capital invested, then it comes within the express provision of the Income-tax Act, that no deduction is to be made on that amount." but held that:".. no person who is acquainted with the habits of business can doubt that this is not capital invested. What it is, is this. It is capital used by the Appellants but used only in the sense that all money which is laid out by persons who are traders, whether it be in the purchase of goods be they traders alone, whether it be in the purchase of raw material be they manufacturers, or in the case of money-lenders, be they pawnbrokers or money-lenders, whether It be money lent in the course of their trade, it is used and it comes out of capital, but it is not an investment in the ordinary sense of the word." In the present case, the conditions for the grant of the allowance under S. 10 (2) (xi) of the Income-tax Act are satisfied. In the first place, the debt is in respect of the business which is carried on by the appellant in the relevant accounting year and accounts of the business are admittedly kept on mercantile basis. In the second place, the debt is in respect of and incidental to the business of the appellant. It has also been found that the debt had become irrecoverable in the relevant accounting year and the amount had been actually written off as irrecoverable in the books of the appellant.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]We are unable to accept the argument of the respondent that the transaction between the parties under the agreement, dated January 5, 1953 was not a money-lending transaction or a transaction in the nature of a financial deal in the course of the appellants business.If Cl. 3 of the agreement is taken in isolation there may be some force in the contention of the respondent that the term under which the appellant undertook to share the loss took the transaction out of the category of money lending transaction and the loss suffered by the appellant was, therefore, a capital loss.In the present case, however, Cl. 3 of the agreement, dated January 5, 1953 cannot be read in isolation but it must be construed in the context of Cl. 7 which provides that in case the picture was not released in Bombay within 15 months from the date of the agreement, the distributors will return all the moneys so far advanced to them by the appellant together with interest thereon at 9 per cent per annum. It is the admitted position in the present case that the picture was not released by the distributors till the stipulated date, namely, April 4, 1954 but it was released on May 28, 1954 and Cl. 7 of the agreement, therefore, came into operation. The result, therefore, is that on and from April 4, 1954 there was a contract of loan between the parties in terms of Cl. 7 of the agreement and the principal amount became repayable from that date to the appellant with interest thereon at 9 per cent per annum. It follows, therefore. that the appellant is entitled to claim the amount of Rs. 80,759 as a bad debt under S. 10 (2) (xi) of the Income-tax Act and the loss suffered by the appellant was not a loss of capital but a revenue loss4. To find out whether an expenditure is on the capital account or on revenue account, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital.But it is not true of all losses, because losses in the running of the business cannot be said to be of capitalIn the present case, the conditions for the grant of the allowance under S. 10 (2) (xi) of the Income-tax Act are satisfied. In the first place, the debt is in respect of the business which is carried on by the appellant in the relevant accounting year and accounts of the business are admittedly kept on mercantile basis. In the second place, the debt is in respect of and incidental to the business of the appellant. It has also been found that the debt had become irrecoverable in the relevant accounting year and the amount had been actually written off as irrecoverable in the books of the appellant.