# B.D.BHARUCHA,BOMBAY v. COMMISSIONER OF INCOME-TAX, CENTRAL BOMBAY

- **Citation:** [1967] 3 S.C.R. 238
- **Court:** Supreme Court of India
- **Decided:** 1967-03-21
- **Bench:** J. C. Shah, S. M. Sil{RI, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/b-d-bharucha-bombay-v-commissioner-of-income-tax-central-bombay-4041
- **Pages:** 5

## Headnote

Income-tax Act (11 of 1922), $. 10(2)(xi)-Capital or rewmue
Joss-Nature, how determined,
The appellant, who was carrying on the business
of financing
film
producers and distributors, had
advanced a swn of Rs. 1,00,000 lo a
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firm of film distributors.
Clause 3 of the agreement between the par~
provided that the appellant was not entitled to any interest but that he
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was to share with the distributors their profit and loss; and cl. 7 I?rovided
that in case the picti:re was not released within the stipulated tlme, the
distributors would return to the appellant all the moneys advanced by
him together with interest at 9 % per annum.
There was delay in re·
leasing the picture and a dispute arose between the appellant and
the
distributors, which was settled. The appellant
found that a sum of
Rs. 80,759 was irrecoverable. He accordmgly wrote it off as a bad debt
and claimed it as a revenue loss which should be
deducted under
I»
s. 10(2)(xi) of the Incom!>-tax Act, 1922. The department, the Appel·
late Tribunal, and the High
Court on reference,
held
against
the
appellant, on the basis of cl. 3 of the agreement, that the loss •uffered
by the appellant was a capital loss.
In appeal to this Court,
HELD : Since all payments· reduce. capital one is apt to consider a
E.
loss as a capital loss.
But losses in the running of a business cannot be
said to be of capital. To find out whether an expenditure is on the capitul account or on revenue account, one must consider the expenditure in
relation to the business. In the present case, the debt was in respect of
and incidental to the business of the appellant in the relevant accounting
year, and the accounts of his business were kept on mercantile basis. If
els. 3 and 7 of the agreement are read together, the transaction would be
F
a money-lending transaction or a transaction in the nature of a financlal
deal in the course of the appellant's business, resulting in a loan repayable with interest.
Therefore, the loss suffered was a revenue loss and
the appellant was entitled to claim the deduction of the amount as a bad
debt under s. 10(2) (xi) of the Act.
[24!H; 242E-F)
Reid's Brewery Co. Ltd. v. Male, 3 T.C. 279, applied.

## Text

B.D.BHARUCHA,BOMBAY
v.
COMMISSIONER OF INCOME-TAX, CENTRAL BOMBAY
March 21, 1967
[J. C. SHAH, S. M. Sil{RI AND V. RAMASWAMI, JJ.]
Income-tax Act (11 of 1922), $. 10(2)(xi)-Capital or rewmue
Joss-Nature, how determined,
The appellant, who was carrying on the business
of financing
film
producers and distributors, had
advanced a swn of Rs. 1,00,000 lo a
B
firm of film distributors.
Clause 3 of the agreement between the par~
provided that the appellant was not entitled to any interest but that he
C
was to share with the distributors their profit and loss; and cl. 7 I?rovided
that in case the picti:re was not released within the stipulated tlme, the
distributors would return to the appellant all the moneys advanced by
him together with interest at 9 % per annum.
There was delay in re·
leasing the picture and a dispute arose between the appellant and
the
distributors, which was settled. The appellant
found that a sum of
Rs. 80,759 was irrecoverable. He accordmgly wrote it off as a bad debt
and claimed it as a revenue loss which should be
deducted under
I»
s. 10(2)(xi) of the Incom!>-tax Act, 1922. The department, the Appel·
late Tribunal, and the High
Court on reference,
held
against
the
appellant, on the basis of cl. 3 of the agreement, that the loss •uffered
by the appellant was a capital loss.
In appeal to this Court,
HELD : Since all payments· reduce. capital one is apt to consider a
E.
loss as a capital loss.
But losses in the running of a business cannot be
said to be of capital. To find out whether an expenditure is on the capitul account or on revenue account, one must consider the expenditure in
relation to the business. In the present case, the debt was in respect of
and incidental to the business of the appellant in the relevant accounting
year, and the accounts of his business were kept on mercantile basis. If
els. 3 and 7 of the agreement are read together, the transaction would be
F
a money-lending transaction or a transaction in the nature of a financlal
deal in the course of the appellant's business, resulting in a loan repayable with interest.
Therefore, the loss suffered was a revenue loss and
the appellant was entitled to claim the deduction of the amount as a bad
debt under s. 10(2) (xi) of the Act.
[24!H; 242E-F)
Reid's Brewery Co. Ltd. v. Male, 3 T.C. 279, applied.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1230 of
G
1966.
Appeal by special leave from the judgment and order dated
August 27, 1962 of the Bombay High Court in Income-tax Reference No. 18 of 1961.
S. T. Desai, M. N. Shroff for /. N. Shroff, for the appellant.
H
R. M. Hazarnavis, Gopal Singh, S. P. Nayyar for R. N.
Sachthey, for the respondent.
t
BHARUCHA v. C.I.T. (Ramaswami, J.)
239
A
The Judgment of the Court was delivered by
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Ramaswami, J, This appeal is brought, by special leave, from
the judgment of the High Court of Bombay dated August 27,
1962 in Income Tax Reference No. 18 of 1961.
The appellant is an individual having income from House
Property, Government Securities, Cinema Exhibition and financing film producers
and distributors.
During the period from
March 3, 1952 to November 5, 1952 the appellant advanced a
sum of Rs. 40,000/- to a firm of film distributors known as Tarachand Pictures. The appellant thereafter entered into an agree.
ment dated January 5, 1953 with Tarachand Pictures under which
the appellant advanced a further sum of Rs. 60,000/- in respect
of the distribution, exploitation and exhibition of a Picture called
"Shabab". According to cl. 2 of the agreement the distributors
were to pay a lumpsum of Rs. 1,750/- by way of interest on the
initial advance of Rs. 40,000/-. Clause 3 of the agreement read
as follows :-
"No interest will run henceforth on this sum of
Rs. 40,000/- as also on the advances to be made as provided hereinabove but in lieu of interest it is agreed that
the Distributors will share with the Financier profit and
loss of the Distribution, Exploitation and Exhibition of
the picture SHABAB in the Bombay Circuit, two-third
going to the Financier and one-third to the Distributors."
Clauses 4 and 5 were to the following effect :-
"4. The Distributors shall on or before the 15th of
every month submit to the Financier a Statement of
Account of the business done during the previous month
in respect of the picture 'SHABAB' in the territories of
Bombay Circuit."
"5. The Distributors shall keep the proper accounts
of the business of the picture 'SHABAB' and the same as
well as all documents, reports and contracts will be
available to the Financier or his agent for inspection."
Clause 7 read as follows :-
.
"In case the picture is not released in Bombay withm 15 months from the date hereof the Distributors shall
be bound to immediately return all the moneys so far
advanced to the Distributors by the Financier. In that
event the Distributors shall be bound to return all the
moneys together with interest thereon
@ 9% per
annum."
Clause 8 stated :
"In case of any breach being committed by the Dis-
240
SUPREME COURT REPORTS
(1967] 3 S.C.R.
tributors of any of the terms herein provided this agree·
ment shall at once terminate and the moneys paid by
the Financier shall be at once r~aid by the Distributors
to the Financier with interest @ 9% per annum."
It appears that the distributol's were not in a position to, exlubit
the film in Bombay within the stipulated time.
When the fihn
was ultimately released for exhibition it proved to be unsuccessful. The matter was taken to the Cit;r Civil Court and ultimately
a consent decree was obtained in Suit No. 2061 of 1954 in the
Bombay City Civil Court. In the end the appellant found that
there was a balance of Rs. 80,759/- which was irrecoverable and
he accordingly wrote it off as a bad debt on December 31, 1955
in the ledger account.
For the assessment year 1956-57, the
corresponding previous year being the calendar year 1955, the
appellant claimed a loss of Rs. 80,759/- which he had written off
as bad debt, under s. 10(2)(xi) of the Income-tax Act.
By his
assessment order dated July 31, 1957, the Income-tax Officer
disallowed the claim on the ground that the moneys
advanced
by the appellant under the agreement could not ,be regarded as a
dealing in the course of his financing business, but the true nature
of the transaction, as evidenced by the agreement, was a venture in
the nature of a trade. The Income-tax Officer accordingly held
that the loss was a capital loss and it could not be allowed as a
bad debt under s. 10(2)(xi) of the Income-tax Act. The appellant
took the matter in appeal to the Appellate Assistant Commissioner
of Income-tax who dismissed the appeal. The appellant preferred
a second appeal before the Income-tax Appellate Tribunal which
by its order dated February 19, 1960 rejected the appeal, holding
that the loss of Rs. 80,759/- was a capital loss and not a loss of
stock-in-trade.
The Tribunal took the view that the transaction
was not a joint venture with the distributors or any partnership
business and that it was also not a mere financing deal or a part
of the money-lending activities of the appellant. According to the
Appellate Tribunal, the true nature of the transaction was an
investment of the capital for a return in the shape of share of
profits, and the loss suffered 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 Rs .. 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 ~nd against the appellant.
On behalf of the respondent it was submitted that the High
Court was right in taking the view that the appellant had advanced
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BHARUCHA v. C.I.T. (Ramaswaml, !.)
24L
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 arc 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 appellant's 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 a 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 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 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 b.it a revenue loss.
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 distinc-
242
. SUPREME COURT REPORTS
(1967) 3 S.C.R .
tion is brought out for example, in Reid's Brewery Co. Ltd. v.
Male('). In that case, the brewery company carried on, in addition to the business of a brewery, a business of bankers and moneylenders making loans and advances to their customers. This helped the customers in 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 account."
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.
For these reasons, we hold that the judgment of the Bombay
High Court dated August 27, 196?. should be set aside and the
question referred to the High Court must be answered in the
affirmative and in favour of the appellant. We accordingly allow
this appeal with costs here and in the High Court.
V.P.S.
Appeal allowed.
(0 3 Tax C... 279.
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