The Judgment of the Court was delivered by

V. Ramaswami, J.:— The following question has been referred for our decision:

“Whether, on the facts and in the circumstances of the case, the irrecoverable part of the advance amounting to Rs. 10,457 was a business loss deductible in the computation of the assessee's income?”

2. The assessee is a private limited company and carries on business as distributor of talkie films. On January 9, 1956, the assessee entered into an agreement with one Joseph Pallipat, a film producer. The following are the relevant clauses of the agreement:

“1. The producers entrust the distribution of the said picture ‘Verum Pechulla’ to the distributors for the territories comprising the revenue districts of Coimbatore and Nilgiris for a period of five years from the date of its first release in the above territory along with simultaneous release in Tamil Nadu.

2. In consideration of the above, the distributors agree to pay an advance to the producers of a sum of Rs. 38,000 (thirty-eight thousand only) as deposit and the same is payable as follows:

(a) Rs. 10,000 (ten thousand only) on signing the agreement.

(b) Rs. 5,000 (five thousand only) on or before 9th February, 1956.

The balance sum of Rs. 23,000 (twenty-three thousand only) against the delivery of prints and publicities.

3. The distributors shall first adjust the amount paid in advance for the said picture, from out of the net realisation of the said picture, the term net realisation shall mean the distributors' share from the exhibitors less their distribution commission……

5. The distributors shall be entitled to a distribution commission for their services of distributing the said picture as below:

15% (fifteen per cent only) up to the net realisation of the picture (picture's share) of Rs. 50,000 (fifty thousand) and 20% (twenty per cent only) from Rs. 50,000 (fifty thousand) up to Rs. 75,000 (seventy-five thousand only) and 25% (twenty-five per cent only) over and above Rs. 75,000 (seventy-five thousand)….

8.(a) The producers also allow the distributors to use free publicities for theatres to the extent of Rs. 1,500 (one thousand five hundred only) at the producer's cost and recover the same from the picture's share of realisation……

15. If the distributors do not realise the full amount due to them from the realisation of the said picture in the manner hereinbefore said on or before a period of one year from the date of first release of the picture, then the producers shall be liable to pay the distributors whatever the amount that may then fall due.

16. The producers agree to supply the said picture for release during February, 1956, subject to censors. In case of any delay, the producers shall pay the distributors interest at the rate of 12% (twelve per cent only) per annum on the amounts advanced by the distributors from the date of delivery of prints to the actual date of delivery of prints and publicities.”

3. It appears that the picture was not released as expected in February, 1956, but it was released after a few months. The assessee had advanced various sums and incurred some expenses on behalf of the producer. This amounted to Rs. 31,567 up to June, 1956. The total collections credited to his account up to June 30, 1961, amounted to Rs. 21,110 leaving a balance of Rs. 10,457. In the year ending June 30, 1961, the assessee claimed a deduction of a sum of Rs. 10,457 as a bad debt. The Income-tax Officer rejected the claim observing that the assessee had not produced evidence to show that all efforts had been taken to realise the debt and that the debt had become a bad debt. The assessee filed an appeal to the Appellate Assistant Commissioner. He produced evidence before the Appellate Assistant Commissioner and satisfied him that the debt had become bad and irrecoverable. The Appellate Assistant Commissioner, therefore, allowed the appeal and directed that the assessee's claim for deduction be permitted. The department preferred an appeal to the Appellate Tribunal. Before the Appellate Tribunal it was contended on behalf of the revenue that the loss, if any, was only of a capital nature and, therefore, could not be allowed as a bad debt. It was further submitted that the advance given to the party had not been taken into account in computing the income of the assessee of the previous year or of any earlier previous year and that, therefore, the assessee would not be entitled to any deduction under section 36(2) of the Income-tax Act, 1961, and that the assessee was not carrying on any money-lending business. On behalf of the assessee, it was contended that it was a bad debt for which he was entitled to get a deduction and that there was nothing in section 36(2) which precluded the allowance of the debt. Alternatively, it was contended that the advance made to the producer was in the course of the business of the assessee and since that amount has become impossible of recovery it had become a loss and that loss was a business loss for which he was entitled to a deduction. The revenue objected to the alternative ground of the assessee on the basis that the assessee had not put forward such a claim before the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal held that the assessee was entitled to put forward the claim as a business loss as no fresh facts are required to be gone into and ultimately held that the sum of Rs. 10,457 became irrecoverable in the year of account and that it was a business loss and that, therefore, the assessee was entitled to the deduction claimed. At the instance of the revenue the above question has been referred. Before we discuss the facts' of this case and the law applicable to the same, it would be useful to refer to some of the decisions which have a bearing on the issue. In Commissioner Of Income-Tax, Madras v. City Motor Service Ltd. [1966] 61 I.T.R 418, 425 Mad... the scope of section 10(2)(xi) of the Indian Income-tax Act, 1922, came up for consideration before this court. It was held:

“… a debt may be treated as a bad debt for purposes of section 10(2)(xi), if there is a debt in point of fact, it is incurred in the course of carrying on and as incidental to the business of the assessee, it is irrecoverable and if it were realised it would have gone to swell the profits. If these indicia are satisfied, we think the assessee would be entitled to the benefit of the first part of section 10(2)(xi).”

4. A bad debt may not come within the ambit of section 36(2) of the Income-tax Act, 1961, but still it may amount to a trading loss incurred in the course of carrying on the business and as such allowable as a deduction. This is the ratio of the decision of the Supreme Court in Badridas Daga v. Commissioner of Income-tax [1958] 34 I.T.R 10, 15, [1959] S.C.R 690 S.C., which was a case under the old Act. The Supreme Court said:

“The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principle, it can be said to arise out of the carrying on the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.”

5. Thus, it is seen that the list of allowances enumerated in sections 30 to 43A is not exhaustive and an item of business loss could be deducted in computing the profits and gains of the business if it is deductible on ordinary commercial principles of accounting.

6. There is no definite finding by the Tribunal that the claim of the assessee is allowable under section 36(2). The assessee had not asked for a reference on the question whether the sum in dispute is allowable as a deduction under section 36(2). The question as framed does not also include the applicability of section 36(2). It is, therefore, not open to the assessee to raise that question in this reference. The only question, therefore, to be considered is whether this amount is deductible as a business loss under section 28. The learned counsel for the revenue faintly contended that this point was not open to the assessee as he had not raised the same before the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal permitted the assessee to raise this point and had answered only that point. In fact, the reference to this court is also only on the question whether the said sum of Rs. 10,457 was a business loss deductible in the computation of the assessee's income. We shall, therefore, proceed to discuss this question.

7. The relevant clauses of the agreement set out above show that the assessee had to advance a sum of Rs. 38,000 and this amount is refundable in full. The assessee could adjust the net realisation towards this advance. Under clause 16 of the agreement, if there is any delay in the releasing of the picture, the assessee would be entitled to 12% interest on the amount advanced and under clause 15 if the entire advance could not be realised within one year from the date of first release of the picture the producer shall pay the entire amount due as on that date. The commission payable was the return for the services rendered in distributing the picture. There is no evidence to show that the assessee was lending advances or that it was part of the business. In fact, it was not the assessee's case that the money was lent in the ordinary course of business of money-lending which was carried on by the assessee. The business of the assessee was distribution of cine films. Having regard to these facts we are of opinion that the loss cannot be treated as a revenue loss. It may be that the advance was made in the course of carrying on business. But, it was paid for the purpose of ensuring the contract which is the very source of its business. The advance is not incidental to the contract or agreement. It is de hors the agreement. The return of the money is not dependent on the performance or non-performance of the agreement. The advance is in the nature of an amount deposited for acquisition of a business, a sort of a temporary investment necessary for getting a business of distribution.

8. We are, therefore, of opinion that the advance made in this case is in the nature of an investment of capital and that, therefore, the loss suffered by the assessee is a capital loss and not a revenue loss. The learned counsel for the assessee relied on two decisions, one in B.D Bharucha, Bombay v. Commissioner Of Income Tax, Central Bombay. In the decision in Commissioner of Income-tax v. Y.V Sreenivasa Murthy the Mysore High Court held, on the facts somewhat similar to the present case, that:

“The advance was made in the context of the acquisition of the right for distribution, and the agreement provided for its repayment in a particular way, A debt so advanced for the acquisition of the right of distribution in the course of a business, which the assessee was conducting as a distributor and exhibitor of pictures, is clearly a debt due to him in respect of the business within the meaning of section 10(2)(xi) of the Indian Income-tax Act, 1922.”

9. In this passage, the learned judges were considering the question with reference to the provisions of section 10(2)(xi) of the Indian Income-tax Act, 1922. The applicability of section 36(2) of the Income-tax Act, 1961, corresponding to section 10(2)(xi) does not arise for our consideration directly on the wording of the question of law referred for our decision. But, the decision of the Mysore High Court did not stop with the finding that the debt there in question was a bad debt within the meaning of section 10(2)(xi). It further held that it was a debt in respect of the assessee's business and, since the debt has become irrecoverable, there could be no computation of the assessee's business income, except after the deduction of the amount of that loss from the gross profits. In that view, the Mysore High Court answered the reference holding that the amount in question is deductible as trade loss. With great respect to the learned judges, we are unable to agree that advances made by distributors to film producers while entering into agreements for distribution rights of pictures should 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. In our view, the facts of the present case do not show that the advances made to the producer are in the nature of a business or trading expense. As already stated, they are investments of a capital nature. The decision of the Supreme Court in B.D Bharucha v. Commissioner of Income-tax also does not support the case of the assessee in the present case. That was a case of an assessee who was a financier of film producers. The Supreme Court held therein, after a consideration of the clauses of the agreement, that money-lending was a part of the business of the assessee and the transaction in question was money-lending in the course of the assessee's business. On that finding, the Supreme Court held that, when the advances made become irrecoverable, they are entitled to deduction under section 10(2)(xi) of the Indian Income-tax Act, 1922, as a bad debt and a revenue loss. But, in the case on hand, it was not part of the business of the assessee to lend monies and the losses were not incurred in running that business.

10. For the foregoing reasons, we hold that the assessee was not entitled to any deduction as business loss in the computation of its income. We, therefore, answer the question in the negative and in favour of the revenue with costs. Counsel's fee Rs. 250.

Question answered in the negative.