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B.D. Bharucha v. C.I.T. (1967) 3 SCR 238

B.D. BHARUCHA V. C.I.T. (1967) 3 SCR 238

FACTS

  • The appellant was an individual involved in various business activities, including financing film producers and distributors. 
  • The appellant entered into an agreement with a film distributor firm, Tarachand Pictures, to advance funds for the distribution and exhibition of a film called Shabab. 
  • According to the agreement, the distributors were to share profits and losses with the financier (the appellant), with the appellant advancing a total sum of Rs 100,000.
  • However, due to delays in the release of the film and its subsequent commercial failure, the appellant suffered a substantial loss of Rs 80,759, which he wrote off as a bad debt in his ledger account for the assessment year 1956-57. 
  • The appellant sought to claim this loss as a deduction under Section 10(2)(xi) of the Income Tax Act.
  • The Income Tax Officer disallowed the claim, asserting that the transaction was not a money-lending activity but rather a venture akin to trade, resulting in a capital loss.
  • This decision was upheld by the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal, which considered the transaction as an investment venture rather than a financing deal or money-lending activity.
  • The High Court concluded that the transaction between the appellant and Tarachand Pictures was indeed a money-lending transaction or a financial deal in the course of the appellant's business.
  • Hence, the present appeal.

ISSUE

  • Whether the amount deducted by the appellant is a capital loss or revenue loss under a business?

RULE

  • INDIAN INCOME-TAX ACT, 1922 [REPEALED] Section 10 – Business-10(2)(xi) when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee:

HELD

  • The Court referred to Reid's Brewery Co. Ltd. v. Male to distinguish between losses on capital account and revenue losses. In this case, the brewery company not only brewed beer but also engaged in banking and money-lending activities, providing loans and advances to customers to boost sales of its products. Despite certain sums needing to be written off, the court held that these losses were deductible u/s 10(2)(xi).
  • The debt in question is directly related to the appellant's business activities, and the appellant maintains business accounts using the mercantile basis.
  • Additionally, the debt is an integral part of the appellant's business operations, and it has been determined to be irrecoverable during the relevant accounting period, leading to its formal write-off in the appellant's books.
  • As a result, the Court set aside the judgment of the High Court and ruled in favour of the appellant, allowing the deduction of the loss as a revenue loss under Section 10(2)(xi) of the Income Tax Act.

COMMENTARIES RATIO/NOTE

  • Conditions for allowance of a bad debt. — On a reading of sections 36(1)(vii) and 36(2)(i) and the case-law on the point, the conditions requisite for allowance, upto assessment year 1988-89, of a claim for a bad debt are:—
  1. It must be a proper debt, or a part thereof [A.V. Thomas & Co. Ltd. v. CIT, (1963) 48 ITR (SC) 67, 75]
  2. of a revenue nature contradistinguished from capital nature,
  3.       
    1. which has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or
    2. represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee [CIT v. K.C.P. Ltd., (1974) Tax LR 12 (AP)],
  4. which is established to have become a bad debt in the previous year; and has been written off as irrecoverable in the accounts of the assessee for that previous year

 

If any of the aforesaid essential ingredients is lacking or not established, the assessee is not entitled to claim any amount as bad debt within the meaning of these provisions [N. Annajee Rao & Brother v. CIT, (1974) 97 ITR 265 , 272 (AP)]. Also see, Sarangpur Cotton Mfg. Co. Ltd. v. CIT, (1983) 143 ITR 166 , 171 (Guj); CIT v. Srivinayaga Pictures, (1986) 161 ITR 65 (Mad); G.P. Singhi v. CIT, (1986) 158 ITR 782 , 789 (Del); Travancore Tea Estates Co. Ltd. v. CIT, (1992) 197 ITR 528 , 536 (Ker); Binodiram Balchand & Co. v. CIT, (2001) 251 ITR 819 , 823 (MP)