Commissioner Of Income-Tax v. Late T.S Srinivasa Iyer. (By Legal Heir S. Balasubramanian)

Thanikkachalam, J.:— In compliance with the directions under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), in T.C Nos. 433 of 1979 and 490 of 1977, the Tribunal referred the following questions to this court for our opinion.

Assessment year 1970-71:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 17,693 representing bad debts written off should be allowed as a proper deduction while computing the business income of the assessee-family for the assessment year 1970-71?”

Assessment year 1969-70:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the claim of the assessee of Rs. 21,682 representing rebate allowed to customers for laboratory charges and copy printing charges payable by them should be allowed as a proper deduction while computing the business income of the assessee-family for the assessment year 1969-70?”

2. The assessee is a Hindu undivided family represented by its legal heir Sri S. Balasubramanian. During the assessment years under consideration, the Hindu undivided family consisted of late Sri T.S Srinivasa Iyer (who died on August 26, 1969) and his son, S. Balasubramanian. On September 6, 1962, there was a declaration of division of the assets of the family. On September 7, 1962, there was a partial partition in respect of certain assets. Some other assets were divided by a partial partition that took place on August 30, 1967. Finally on July 7, 1969, the entire family was partitioned giving rise to two separate Hindu undivided families of late T.S Srinivasa Iyer and S. Balasubramanian, respectively. It is also accepted as a matter of fact that the joint family originally carried on a composite business under the name of Gemini Studios. The activities of the studio business consisted of pre-shooting and post-shooting of cinema films. The business consisted of various departments. There was a cine colour laboratory in which processing of films and development were done for the assessee's own films as well as for the films produced by others. In the shooting department, the assessee is not only shooting its own films, but also undertaking the shooting of films for others. The assessee was exploiting the pictures produced by it. The assessee also used to lease pictures taken by it to others. The assessee was collecting royalties from the pictures leased out. Thus, the assessee was doing a composite business in the film world. In the assessment year 1969-70, the assessee-Hindu undivided family had done some colour photographic work for a party in Calcutta. There was a lot of correspondence between the Calcutta party and the assessee with regard to certain alterations in rates and discount facilities. As a result of the negotiations, the assessee gave by way of discount a sum of Rs. 21,682 outstanding in the accounts of this party. Between 1966 and 1968, the amount of work done for the Calcutta party, Chayaban Pvt. Ltd., resulted in a debit of Rs. 2,35,640 in their account. After taking into account the amounts received from them, the balance in this account stood at Rs. 46,168. After negotiations as stated above, the assessee agreed to reduce the amount to Rs. 21,682. This amount was written off on March 31, 1969. The Income-tax Officer did not allow this amount for the reason that during the previous year relevant to the assessment year under consideration, the assessee did not have the colour laboratory whereunder the above discount was given. According to the Income-tax Officer, the colour laboratory and the printing department with plant and machinery were already sold to a firm, Gemini Pictures Circuit Private Limited. Therefore, the Income-tax Officer pointed out that the assessee was not doing business in the colour laboratory in the assessment year under consideration. As such, according to the Income-tax Officer, the rebate written off in this year related to a discontinued business. On appeal, the Appellate Assistant Commissioner confirmed the disallowance made by the Income-tax Officer. Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal, on considering the facts appearing on this aspect, deleted the addition made by the Department.

3. In the assessment year 1970-71, bad debts and discounts were claimed in respect of four parties. Rs. 17,208 was claimed in respect of ALS Productions, Rs. 453 was claimed in respect of Chitralaya films, Rs. 391 was claimed in respect of Kaveri Films and Rs. 32 was claimed in respect of Government of West Bengal. According to the Income-tax Officer, these amounts also related to the discontinued business and, therefore, he refused to allow the same. On appeal, the Appellate Assistant Commissioner confirmed the disallowances.

4. Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal considering the fact that the assessee during the assessment years under consideration was doing a composite business in films and there was interlacing, interlocking and unity of control, came to the conclusion that the disallowance was not sustainable and accordingly deleted the addition made by the Department.

5. Before us, learned standing counsel appearing for the Department contended that the colour laboratory and the printing department were given as a running concern to the minor Hindu undivided family and, therefore, this was really a case where the assessee closed down one of its businesses and not a line of its business. According to learned standing counsel, the assessee was not doing colour laboratory business during the assessment years under consideration, since the colour laboratory and the printing department were neither owned nor possessed by the assessee. Learned standing counsel submitted that if at all anybody is entitled to claim this loss, it is only the minor Hindu undivided family which can claim because the minor Hindu undivided family was the owner of the colour laboratory and printing department during the assessment years under consideration. Therefore, learned standing counsel submitted that the rebate as well as the bad debts claimed by the assessee as deductions during the assessment years under consideration cannot be allowed in the hands of the assessee since the assessee was not doing colour laboratory business during these assessment years under consideration.

6. Learned counsel appearing for the assessee contended that as regards the claim of Rs. 18,084 for the assessment year 1970-71, a sum of Rs. 391 had since been realised and that the claim should relate only to the balance. According to learned counsel, ALS Productions had no assets and had become a failed party. Therefore, no amount could be realised from ALS Productions. Any amount spent for prosecuting the litigation would only result in further waste of money. With regard to the other two amounts, viz., in respect of Chitralaya Films and the Government of West Bengal, it was submitted that these were only in the nature of discount given in order to maintain the good relationship with the customers. Therefore, it was submitted that the bad debts claimed by the assessee are allowable deductions. As regards the claim of Rs. 21,682, it was submitted that these amounts do not pertain to a discontinued business. According to learned counsel, the assessee was conducting a composite business which had several facets. Learned counsel submitted that simply because the assessee did not do a particular line of business in a particular assessment year, that does not mean that the assessee closed down its entire business. According to learned counsel, the entire business done by the assessee was an integrated one and there is interlacing, interlocking and unity of control. The assessee's composite business consisted of pre-shooting, post-shooting and exploitation of the pictures. The assessee was doing the business not only with the films produced by it but it also was doing business for others. Learned counsel contended that the assessee's composite business of dealing in films in general like shooting, exploitation, exhibiting and collecting royalties, etc., continued even though the partial partition resulted in some or other of the assets going to the two separate minor Hindu undivided families. It is in the light of this it was submitted that the transfer of colour laboratory alone to the minor Hindu undivided family has to be looked into. In such circumstances, it was contended that the assessee cannot be said to have closed down its business at all during the assessment years under consideration. Accordingly, it was pleaded that the Tribunal was correct in deleting the abovesaid two additions.

7. We have heard the rival submissions. In the assessment year 1969-70, the assessee claimed a deduction of Rs. 21,682 representing the rebate allowed to a customer towards laboratory charges and copy printing charges payable by that customer. So also, in the assessment years 1970-71, the assessee claimed a deduction of bad debts amounting to Rs. 17,693 which was written off on March 31, 1969. We have set out the facts in detail. These bad debts and rebate claimed as deductions relate to the business done in the colour laboratory and the printing department. The assessee was not doing the business in colour laboratory and printing department in the assessment years under consideration.

8. The point that arises for consideration in this reference is that even though the assessee was not doing business in colour processing during the assessment years under consideration and even though the assessee was not the owner nor in possession of the colour laboratory and the printing department during assessment years under consideration, whether the assessee can claim the rebate and the bad debts relating to the above-said business as outgoings in the assessment years under consideration. The facts on record show that the assessee was doing a composite and integrated business in films. The composite business consisted of various departments like pre-shooting, post-shooting, exploitation of films and collection of royalties, etc. The assessee was also doing colour processing work in the cine colour laboratory and the printing department. The entire business was under one common management and all the employees are working under one management. There is interlacing, interlocking and unity of control. Therefore, the Department was not correct in stating that the business of the assessee to which these debts and rebate related was discontinued. In fact, the entire business is indivisible and inseparable and discontinuance of a part of the business will not amount to discontinuance of the entire business carried on by the assessee. In other words, even after certain assets were transferred to the minor Hindu undivided family in the partition arrangement, the assessee was doing business in films. It also remains to be seen that simply because one line of business was closed or that part of the business assets relating to cine colour processing was transferred to the minor Hindu undivided family, that does not mean that the assessee has discontinued its entire business in films.

9. Both learned standing counsel and learned counsel appearing for the assessee relied upon various decisions in order to support their respective contentions. They are : [1985] 152 ITR 640 (Mad) in the case of E.A.V Krishnamurthy and Sons v. CIT; [1987] 164 ITR 525 (Mad) in the case of Commissioner Of Income-Tax v. S.S.M Ahmed Hussain; [1985] 155 ITR 152 (SC) in the case of CIT v. T. Veerabhadra Rao, K. Koteswara Rao and Co.; [1967] 65 ITR 638 (SC) in the case of L.M Chhabda and Sons v. CIT; [1978] 113 ITR 647 (SC) in the case of B.R Limited v. V.P Gupta, Cit, CIT; [1970] 77 ITR 739 (SC) in the case of Produce Exchange Corporation Ltd. v. CIT; [1967] 63 ITR 632 (SC) in the case of Commissioner Of Income Tax, Madras v. Prithvi Insurance Co. Ltd.; [1966] 62 ITR 638 (SC) in the case of Commissioner Of Income Tax, U.P, Lucknow v. Nainital Bank Ltd., [1960] 39 ITR 594 (Bom) in the case of Harihar Cotton Pressing Factory v. CIT; [1985] 151 ITR 616 (Mad) in the case of CIT v. Blue Mountain Estates and Industries Ltd. and [1950] 18 ITR 163 (Mad) in the case of K.S.S Soundrapandia Nadar and Brothers v. CIT. We have carefully gone through all these decisions. All these decisions are rendered on the facts appearing in these cases.

10. The question whether a debt is a bad debt or the question in which year it became a bad debt are questions of fact. Similarly, the question whether the activities of an assessee constitute the carrying on of a trade or business under a statute allowing deduction of bad debts from gross income is largely one of fact, the solution of which requires an examination of the facts in each case. According to the facts appearing in the present case, the bad debts were incurred in relation to the business done in cine colour laboratory and the printing department. These debts became bad in the assessment year under consideration. The assessee had written off the debts on March 31, 1969. So also, the assessee gave certain rebate for the purpose of maintaining good relationship. Both these outgoings were claimed as deductions in the assessment years under consideration. Even though the assessee was not doing this line of business in these assessment years under consideration, the assessee was doing its entire film business during these assessment years under consideration. Even after the cine colour laboratory was allotted to the minor Hindu undivided family, in the partition arrangement, the assessee continued its film business. As already pointed out, the film business done by the assessee prior to the transfer of the colour laboratory was an integrated and composite one consisting of various departments. There is interlacing, interlocking and unity of control. The colour processing and printing department were one unit in the entire business. The abovesaid two losses arose from that unit, when the assessee was doing business in colour processing. The assessee wanted to set off those losses arising in that unit against the income and profits earned in the entire film business which the assessee was carrying on even after the transfer of the colour laboratory to the minor Hindu undivided family. Where more than one business carried on by an assessee are found to constitute one and the same business due to interlacing, interconnection, etc., and one of them is closed, the expenditure in relation to such closed business is deductible from the profits of the continuing business or businesses. Outgoings of this nature are allowed not as a deduction or as allowance but as a component inherent in the process of ascertainment of profits, namely, arriving at the net result of credits and debits referable to a particular activity of the business. Thus, considering the facts appearing in this case in the light of the decisions cited supra, we are of the opinion that the Tribunal was justified in deleting the abovesaid two additions made by the Department in the assessment years under consideration.

11. In that view of the matter, we answer both the questions referred to us in the affirmative and against the Department. The assessee is entitled to its costs. Counsel's fee is fixed at Rs. 500 (one set).