S.K. Desai, J.
1. In this reference the following three questions are referred to us at the instance of the Commissioner of Income-tax by the Income-tax Appellate Tribunal, Bombay Bench 'B' :
'(1) Whether, under the guarantee agreement March 5, 1951, the rental income of the several theatres was diverted at source from the assessee before its accrual by an overriding title ?
(2) Whether, on the facts and in the circumstance of the case, the assessee was entitled to set off the rental income against the business loss ?
(3) Whether, on the facts and in the circumstances of the case, there was sufficient and valid consideration for the execution of the guarantee agreement ?'
2. It becomes necessary to state a few facts to enable us to consider the answers to be given. The respondent to this reference and the original assessee is K. M. Mody, a well-known personality in the cinema world since a number of years past. It may be pointed out that when this reference was heard on September 10, 1981, Mr. Dastur pointed out that the original assessee, K. M. Mody, had died and his heirs and legal representatives were Roosi K. Mody and Mrs. Manek Burjor Cooper. These were the son and daughter respectively of the said K. M. Mody. We passed an order on that date directing the Commissioner to carry out necessary amendment in the reference on or before Monday September 14, 1981. The direction has not been carried out by the Commissioner. On a number occasions we have pointed out that the Commissioner and the solicitor to the Central Govt. are attending to litigation in the High Court in the most improper manner and it is said that this has to be repeatedly mentioned both orally and even in judgments. To put it most mildly, the Commissioner has now proclaimed himself to be a most irresponsible and careless litigant at least as far as the Bombay High Court is conceded. It would appear that either the Commissioner or the solicitor to the Central Govt. is not able to attend to their litigation in a proper manner. This has resulted in a number of applications being dismissed as also a number of references being not answered, as the Commissioner did not prosecute matters properly.
3. In this case it is unnecessary, in our opinion, to follow the practice which we have adopted in other matters, that is, holding the Commissioner in the position of a litigant who is not prosecuting his litigation properly and hence not answering the questions submitted to us for our opinion, inasmuch as the assessee may be prejudiced. This is because another reference for earlier year is still pending.
4. We are concerned in this reference with the assessment year 1961-62 to 1963-64. During the years under consideration, K. M. Mody owned or had taken on lease twenty-one cinema theatres at different places. All these theatres had been. lt out by him to Western India Theatres Ltd. This company was a public company having more than 200 shareholders. It was exhibiting films in its own theatres as well as in the theatres taken on lease which included the theatres taken from K. M. Mody. K. M. Mody, however, was very much concerned with the propriety of the said company, holding 65 per cent. of the total number of shares in his own name, his wife and other nominees also held additional shares. K. M. Mody was also the chairman of the board of directors of the said company. A private limited company, Mody Pvt. Ltd., was the managing agent of Western India Theatres Ltd., up to 1959, and the assessee, his wife and his brother were the shareholders and directors of Mody Pvt. Ltd., each of them holding an equal number of shares. After the abolition of the managing agency system and consequently of the managing agents, which took place in 1959. K. M. Mody, the assessee, become the managing direct of Western India Theatres Ltd. At some stage or the other of his long career K. M. Mody had carried on personally the business of production, exhibition and distribution of films. He had also financed various other parties in the cinema line. It was claimed on his behalf which is the claim we shall have to consider-that as part of his business activities he was also guaranteeing loans taken by other persons in this line of business. This was stated to be an incident of his film financing business. All his business activities, according to the assessee, were part of the composite show business or cinema business carried on by him. One Sohrab Mody, who is the full brother of the assessee, was also an equally well known figure in the cinema world. Sohrab Mody was the sole owner of Minerva Movietone. In 1951 Sohrab Mody thought of protecting the first technicolor picture of its kind in India. The title of this picture was 'Jhansi Ki Rani'. The theme of the picture was the historically well-know patriotic and heroic deeds of the Queen of Jhansi at the time of the war of independence of 1857. The international version of the picture in English was also to be produced, and that was named as 'Tiger and the Flame'. Both Sohrab Mody and his wife were to play the main roles. For the purpose of production of this technicolor film, American technicians had been engaged, and the exposed firm was sent to America for developing, processing and printing, as there was no facility for the same in India. Very high hopes were entertained regarding the box-office success of this film-both for the Hindi and International versions.
5. The total cost of production of the film in both its versions was estimated to be Rs. 40 lakhs and Sohrab Mody sought the necessary finance for the same from Western India Theatres Ltd. The company agreed to advance the loan on the personal guarantee of K. M. Mody. Three agreements were entered into in connection with the loan. The first of these agreements was the 'financing agreement'. It was executed on March 5, 1951, between Sohrab Mody as the sole proprietor of Minerva Movietone, referred to as the 'producer' therein, Western India Theatres Ltd., referred to as the 'financier', and Mody Pvt. Ltd., managing agents of Western India Theatres Ltd., referred to as the 'nominee'. By this financing agreement Western India Theatres Ltd., agreed to advance Rs. 25,00,000 during the course of production of the Hindi version of the picture and agreed to advance the further sum of Rs. 15,00,000 at the time of commencement of the shooting of the international version. By cl. 3 of the financing agreement, the producer agreed to execute an irrevocable authority in the form annexed to the document, authorising the distributor to pay over to the financier, as and by way of repayment of the loan, the producer's share of the picture receivable by the producer from the distributor under the distribution agreement. The producer agreed to complete and deliver the Hindi version of the picture prior to the dates therein mentioned. By clause 12 of the agreement right was reserved to the financier in case of default in repayment of the loan by the producer to call upon the guarantor, that is, the said K. M. Mody, to pay the outstanding amount under the collateral agreement which was annexed as ex. C to the financing agreement. The second agreement called the 'distribution agreement' was also executed on the very same date between Minerva Movietone, called the 'producer'. Mody Pvt. Ltd., being the nominee and managing agent of Western India Theatres Ltd., called the 'distributor', and Western India Theatres Ltd., called the 'financier' under the said agreement. By cl. 6 of this agreement the financier was given distribution rights of the Hindi version of the picture for the Bombay circuit. It was also given the distribution rights of the international version of the picture throughout the world. There were various clauses for appropriation of the moneys received for both versions. They have been set out in the statement of the case and need not be adverted to The distribution agreement would indicate that the financier was also interested in the said picture as distributor for one territory in respect of the Hindi version and for all territories in respect of the international version.
6. The third agreement, know as 'guarantee agreement', was also executed on the same date and at the same time between Sohrab Mody as the 'producer', Western India Theatres Ltd., as the 'financier', Mody Pvt. Ltd., referred to as the 'distributor' and K. M. Mody referred to as the 'Guarantor'. By the said guarantee agreement the guarantor K. M. Mody gave a continuing and irrevocable authority to the financier, namely, Western India Theatres Ltd., to recover and to appropriate towards the account of the producer all moneys payable by the financier to the guarantor. By cl. 2 of the said agreement the guarantor also authorised the financier to appropriate rents of the several theatres leased out by him to the financier towards the liability of the producer. In this reference we are concerned with the effect and the impact of these provisions which came into operation during the three years under consideration as also in the earlier years by reason of certain facts which we shall now immediately set out.
7. The Hindi version of the film was released in January, 1953. In the accounting year 1952-53, an amount of Rs. 8,58,586 was received as distribution receipts from the said picture. The hopes entertained for the said picture did not materialise and the same was failure at the box office. The result was that Western India Theatres Ltd., did not receive the repayments as stipulated in cl. 11 of the financing agreement. The said company thereupon exercised its right under the guarantee agreement and began to appropriate the rent of twenty-one theatres payable by it to K. M. Mody towards the loan of Rs. 40,00,000. This continued from the accounting year 1953-54 (assessment year 1954-55) year after year, including the years under reference. In these three years aggregate rents of Rs. 92,101, Rs. 1,47,494 and Rs. 1,22,181 payable to K. M. Mody were appropriated by Western India Theatres Ltd., towards the loan given to Minerva Movietone.
8. It may be mentioned that in 1954-55 rent of Rs. 2,45,484 was appropriated by Western India Theatres Ltd., towards the instalment payable by Sohrab Mody to it. By this time Sohrab Mody had landed himself in an extremely bad financial position. K. M. Mody, therefore, treated the amount as having been lost to him and claimed the same as a business loss. It was also contended that standing as a surety for loans advanced to others was an incident of the film business carried on by K. M. Mody. The additional ground taken was that he had guaranteed the loan advanced to Sohrab Mody out of pure business consideration as he was also interested in the prosperity of Western India Theatres Ltd., and of Mody Pvt. Ltd., in both of which companies he and his wife held a substantial interest. The claim was advanced on the ground that he and Sohrab Mody had guaranteed loans of each other in the past on several occasions and that this was a necessary aspect of the business carried on by them. In the alternative, it was contended that as a result of the guarantee agreement the rental income was diverted at source before its accrual by an overriding title to Western India Theatres Ltd., and the same was, therefore, not liable to tax in the hands of K. M. Mody. The contentions were repeated from year to year. Ultimately by a judgment dated March 12, 1963, in I.T.A. No. 3044 of 1961-62 the Tribunal dismissed the assessee's appeal, holding against him on several points. The first point which found favour with the Tribunal in the said order was that the assessee did not carry on any business in the assessment year 1954-55 and that the main source of his income was income chargeable under the head 'Other sources' under s. 12 of the Indian I.T. Act, 1922. The Tribunal also found that there was no material before it that any financing business had been carried on by the assessee in the years under consideration. It rejected the contention advanced on behalf of the assessee, which was to the effect that he had guaranteed the loan out of commercial expediency. The loss was not allowed under s. 12 of the said Act, as it did not relate to rent. The final contention of the assessee taken in the alternative, namely, that the income was diverted from him by an overriding title before its accrual and hence not his income, was also rejected. The assessee had claimed similar deduction of losses in varying amounts in the assessment years 1955-56 to 1958-59 and also in 1960-61. These claims also camp up before the Tribunal and were rejected by the Tribunal by its judgment dated May 9, 1963, in I.T.A.No. 3051 and others of 1961-62. Similar claim for the assessment year 1959-60, also was rejected by the Tribunal in an appeal decided on August 20, 1963. It is in respect of these matters that another reference is pending in this court, which is Income-tax Reference No. 137 of 1972. [K. M. Mody v. CIT : 141ITR914(Bom) . In our opinion, in this reference it may not be necessary to go into the contention which was taken in the alternative by the assessee, which contention is reflected in question No. 1, as there is sufficient material, in our opinion, to uphold the finding of the Tribunal on the other aspects revealed in questions Nos. 2 and 3. It was contended on behalf of the assessee before the Tribunal that the assessee, K. M. Mody, had carried on composite show business or film business which had different facets, aspects and branches and that one of these was film financing business. Included as an integral and inseparable part of the film financing business was the business of guaranteeing loans raised by other persons in the cinema business. It was urged that K. M. Mody had guaranteed the loan of Sohrab Mody in the course of his film financing business and that the amounts lost, in question, in these years were thus business losses. It was denied that K. M. Mody had stood as surety out of brotherly feelings and it was asserted that this was done wholly out of business considerations.
9. It appears that before the Tribunal the learned advocate, Mr. Khanna, appearing for the assessee, had filed a chart bringing out comparable transactions of the assessee in the past, and these have been noted by the Tribunal in paras. 12 to 18 of the statement of the case.
10. It was next pointed out on behalf of the assessee before the Tribunal that K. M. Mody used to advance very large loans year after year to Western India Theatres Ltd., and that the interest paid by K. M. Mody on capital borrowed by him for advancing these loans were allowed to be deducted as legitimate business expenditure by the ITO up to and including the assessment year 1948-49. The various method of carrying on film financing business were explained to the Tribunal and they have been noted by the Tribunal-and it appears that this submission is correct-that one mode whereby a person may finance another is to guarantee the loan received by that other person from the financier, because by such guarantee he enables the borrower to obtain the loan. It was pointed out to the Tribunal that this method of film financing was not peculiar to the particular case of Sohrab Mody but it had been earlier resorted to by K. M. Mody for other persons also. The loans raised by Sohrab Mody earlier on March 5, 1951, had themselves been guaranteed by K. M. Mody. Alternatively, the argument seems to have been urged that even if it is assumed that film financing is a separate and independent business, then also the assessee was entitled to deduction of the loss suffered by him as a bad debt. It was urged before the Tribunal that the composite business with its several facets had been carried on by the assessee in the assessment year as also in the earlier year and/of subsequent years, though on a smaller scale. It was submitted that the view taken by the earlier judgments of the Tribunal that the assessee had discontinued his business was unsupportable and was not borne out by the facts. The test suggested-and this appears to be the correct test-is not whether any fresh financing transactions were made but whether the financing transactions already entered into continued to be pursued. It would also be correct to state, as was submitted, that a temporary full in fresh business would not amount to closure of the business. Before the Tribunal it had been contended on behalf of the Revenue that the guarantee agreement was an invalid agreement on account of absence of consideration. This plea was negatived by the Tribunal. The Tribunal thereafter went on to consider the two main pleas which had been urged. It upheld the first contention, and we have already stated that we are not inclined to go into the same, that the rental income stood diverted at source by an overriding title before it accrued to the assessee. In that view of the matter, the Tribunal held that the said income was not liable to be included in the assessment of the assessee for the three years under consideration in this reference.
11. The Tribunal thereafter considered the alternative submission advanced on behalf of the assessee, namely, that he was entitled to deduct the amount in question as a trading loss. On the basis of the material which was placed before it, it was found that the assessee had owned theatres, had rented theatres and had leased out the same to Western India Theatres Ltd. It was noted further that he had leased out machinery also and that he had financed and guaranteed various persons engaged in the production, distribution and exhibition of films. It was also found that he had carried on this financing activity by all the several methods normally known to the trade, one of which was by guaranteeing loans taken by the borrowers. It was also found that K. M. Mody had guaranteed the loan given to his brother, Sohrab Mody, in the course of his regular business. The contention of the Revenue that this was out of brotherly feelings was rejected. The common practice in the trade as also the common practice pertaining to loans raised by Western India Theatres Ltd., and Mody Pvt. Ltd., were also found in favour of the assessee by the Tribunal and is reflected in para. 35 of the statement of the case.
12. On this material, and, in our opinion, there is ample material which has been referred to by the Tribunal in its order, the Tribunal held that the various activities carried on by the assessee were interconnected and formed one composite and integral business.
13. The Tribunal next considered the question whether the business was being carried on during the assessment year under reference, and it was of the view that the several facts earlier noted and the further facts noted in para. 36 of the statement of the case showed that the business which gave rise to the loan was being carried on during the years under reference as also in the following years. According to the Tribunal, there was no material to indicate in the intention of the assessee to discontinue his film business or film-financing business for good. The Tribunal was unable to accept the submission that merely because there were no fresh financing transactions it would amount to discontinuance of the business.
14. The Tribunal thereafter considered the position of Sohrab Mody. It had been contended on behalf of the Revenue that the assessee had not taken steps to recover the amount from Sohrab Mody and, therefore, the assessee could not be said to have suffered a business loss or his debts could not be said to have become bad. The Tribunal found that the studio of Sohrab Mody was sold off, that even his wife's properties had been sold, and that there remained no other assets from which the assessee could have recovered the dues from his brother, that is, the said Sohrab Mody. Accordingly, the Tribunal accepted the assessee's plea that he was entitled to set off the losses in the three years under reference as business losses. It, however, rejected the claim of the assessee that the amounts could be deducted as bad debts. It also rejected the claim of the assessee for a deduction of the losses under s. 10(2)(xv) and s. 37 of the Indian I.T. Act, 1922, and the I.T. Act 1961, respectively
15. In our opinion, on questions Nos. 2 and 3, on the facts available and which have been fairly and adequately summarised in the statement of the case, the Tribunal has taken the correct view of the legal position and has come to the correct conclusions. Mr. Joshi, however, drew our attention to two decisions of the Supreme Court and one of the Punjab High Court and submitted that it view of these decisions he was entitled to content that there was no consideration for the guarantee agreement and that this could not be regarded as a business loss and that, therefore, the assessee was not entitled to set off the same against the rental income. We may briefly note the three decisions. The first of these is the decision of the Supreme Court in Madan Gopal Bagla v. CIT : 30ITR174(SC) . In that case an amount of Rs. 55,030 had been claimed by the assessee as a bad debt. The assessee had contended that it was the usual custom in Bombay for merchants to borrow from banks on the joint security of each other and that the loss incurred in respect of the amount borrowed by the other merchant was a loss incurred in the assessee's business. This claim was rejected by the Supreme Court. The observations in the judgment of the High Court have been set out at p. 180 of the report and it was found by the High Court, whose decision was up held by the Supreme Court, that the assessee was not a person carrying on the business of standing surety for other persons but was simply a timber merchant. The facts found in the case before us are totally different, and hence the observations and the ratio in Bagla's case : 30ITR174(SC) , can afford us no real assistance. In CIT v. Jagannath Kissonlal : 41ITR360(SC) . The Supreme Court allowed the assessee before it to deduct the loss suffered by it in the transaction. The High Court had also held that the loss was a permissible deduction either as a business expenditure or in the alternative as a trading loss. This view of the High Court was confirmed by the Supreme Court, which referred to the finding of the Tribunal of there being a well recognised practice in Bombay of carrying on business by borrowing moneys from banks on the basis of joint and several liability by which the borrowers could borrow at a lower rate of interest than they would otherwise have to pay. Neither of the two decisions of the Supreme Court-one in favour of the Revenue and the other in favour of the assesse are of real assistance inasmuch as they depend on the findings of fact, which in the case before us are totally in favour of the assessee. Once there is a finding that the assessee carried on a composite business, one of the facets of which was the film financing business and once we have the further finding that this was a mode of film financing, then it would have to be held that this was a business loss suffered by the assessee and the assessee was, therefore, entitled to set off the same against his rental income.
16. Mr. Joshi, however, very strongly relied on the decision of the Punjab High Court, in Brij Mohan Laxmi Narain v. CIT . In that case the assessee whose main business was money lending had stood surety to the extent of Rs. 1,25,000 for certain loans advanced by a back to a company of which the assessee was a director. The bank pressed for payment of the loan and the assessee was required to pay an amount of Rs. 1,15,449 towards satisfaction of the loan. The amount became irrecoverable from the company and hence the assessee claimed it as an allowable deduction either as a bad debt or as business expenditure. It was observed by the Bench that there was no consideration for the guarantee to the bank and further that the advantage gained by the assessee was indirect. Accordingly, the Bench held that the loss which the assessee sustained in the enforcement of the guarantee was a capital loss and did not amount to a business loss.
17. Undoubtedly, the decision is in favour of the submissions advanced on behalf of the Revenue before the Tribunal, which submissions were repeated before us by Mr. Joshi. However, we are unable to accept both the approaches as well as the conclusions of the Punjab High Court, and in particular the observation that there was no consideration for the guarantee to the bank. If at the instance of the assessee the bank had advanced the loan to the company, that itself would be a consideration for the guarantee. Further, it appears to us that the distinction made between direct benefit and indirect benefit is not very relevant and the real question would be whether the guarantee was given as a part of the business activity of the assessee. The other incidental question would be whether the assessee was concerned with the loan, and in the case before us, it is clear from the facts found by the Tribunal that the assessee, K. M.Mody, was vitally interested in the loan given to Minerva Movietone for production of the picture. That loan was expected to result in accretion of large amounts not only to the assessee's brother but to the limited companies in which the assessee was substantially interested as chairman and managing agent and subsequently as the managing director. He was also a substantial shareholder in both the limited companies. He was thus vitally concerned with the financing agreement and had also entered into a guarantee as part and parcel of his composite shown or film business. We are, therefore, unable to accept the view which found favour with the Punjab High Court.
18. In our opinion, there was ample material before the Tribunal for the view that it has taken that there was sufficient and valid consideration for the execution of the guarantee agreement. There was also, in our view, ample material for the Tribunal to arrive at the finding that the assessee was entitled to deduction of the rental income against the business losses in the three amounts earlier indicated.
19. Accordingly, on questions Nos. 2 and 3, we uphold the view taken by the Tribunal and answer the same as under :
Question No. 2 : In the affirmative and in favour of the assessee.
Question No. 3 : In the affirmative and in favour of the assessee.
20. Since this will enable the assessee to set off the rental income against the business losses, it appears to us unnecessary in this reference to consider whether the rental income was diverted at source by an overriding title. It may be that we might be required to go into this aspect of the matter in the other reference, namely, Income-tax Reference No. 137 of 1972 (reported as Appendix at p. 914 infra). This is because certain material which was brought on the record in this matter does not appear to have been brought on the record before the Tribunal of before the AAC or the ITO in that matter. However, we will not express any further opinion on that reference. It is clear to us that in view of the answers given on question Nos. 2 and 3, question No. 1 need not be answered in the present reference. Accordingly, we refrain from answering the same.
21. The Commissioner will pay costs of the reference to the assessee.