1. This is an appeal filed by Thangam Theatre Distributors, Madurai, against the order of the AAC, Madurai Range, confirming a disallowance of Rs. 25,906 claimed as a bad debt in the assessment for the assessment year 1976-77.
2. The assessee is a firm which does business in film distribution. In the assessment for 1976-77 for the accounting year ending 1-11-1975 the assessee claimed a bad debt of Rs. 25,906 in the account of one A.C.Pillai, P/A of Kolammal, Prop. of Saraswati Pictures, Madras. The history of the assessee's dealing with A.C. Pillai is that the assessee entered into an agreement for distribution of the picture "Ranisamyuktha" with A.C. Pillai of Saraswati Pictures, the producer of the film, on 10-1-1962. The agreement provided for the assessee to receive 15 per cent of the collection for the distribution of the film up to Rs. 1,10,000 of the collections and 40 per cent thereafter. The duration of the agreement was five years and the assessee was liable to pay Rs. 1,10,000 as minimum guarantee, which was to be paid in advance.
Rs. 10,000 out of the same was for the purposes of publicity and advertisement for the picture. If, however, the amount due to the producer was to fall below Rs. 1,10,000, the assessee was not entitled to refund of the minimum guarantee amount already paid. The assessee made the payment of Rs. 1,10,000 as per agreement on 21-1-1962 and debited the account of the party by this amount. The collections from the various exhibitors on account of the distribution agreement was credited to the account of the party. The commission due to the assessee was debited to the account of the party, because the entire collections without deduction of the assessee's share of commission was credited to the party's account. The amount of commission thus debited to the producer for the duration of the agreement are as under :Assessment year Amount Rs.1963-64 8,557.331964-65 3,159.421965-66 1,044.021966-67 484.311967-68 539.501968-69 173.05 ---------- The assessee had to make no further payment in respect of this film because the film proved to be a failure. The result was that there was a net amount of Rs. 25,906.81 as a debit on 31-10-1967 relevant to the assessment year 1968-69. There had been no further transactions in this account. The assessee asked for the balance and failed to get the money from the producer. There was also dispute as to the exact amount due.
The assessee's suit filed before the City Civil Court, Madras, in O.S.512 of 1967 failed. It was because the assessee's assumption that it was entitled to claim commission even on the amount of guaranteed minimum when the collection fell short of it, was held by the Civil Court to be not justified. Though the assessee's accounts were accepted to be correct, the Court, on-interpretation of the document, came to the conclusion that the assessee was not eligible for any commission because the collections fell short of the minimum guarantee.
The City Civil Court found that the actual collections were Rs. 93,050.84 which falls below Rs. 1,10,000 and that, therefore, the assessee was not entitled to the claim of commission of Rs. 13,957.63 and nothing was, therefore, found to be payable to the assessee. This decision was rendered on 11-12-1968. However, the assessee took up the matter to the High Court. It is the assessee's case that Shri A.C.Pillai of Saraswati Pictures died meanwhile and that there was no scope of any recovery even if the assessee were to succeed in the appeal. The assessee decided to withdraw the appeal and the High Court in Appeal No. 190 of 1979 dated 3-11-1975 dismissed the assessee's appeal. The assessee wrote off this amount in the accounting year ending 1-11-1975.
It is on these facts that the ITO came to the conclusion that the debt had become time barred long ago. The AAC pointed out that there were no recoveries in this account for the last ten years and that A.C. Pillai died in the year 1970. Further, the assessee lost the case before the City Civil Court in 1968 and the debt, according to the AAC, had become time barred in 1971 or 1972. According to him, it was not admissible during the year either on the ground that it is a trading loss or as a bad debt. The assessee has, therefore, come up in second appeal.
3. The learned counsel for the assessee claimed that the authorities were incorrect in assuming that the debt had become bad much earlier.
The assessee had five prints with it and there was also a pending appeal to the High Court. It was only when there was no chance of recovery of the amount that it was decided to withdraw the appeal before the High Court and the amount was written off. Till the decision to withdraw the appeal before the High Court, the debt had not become bad. It was also pointed out that A.C. Pillai was the power of attorney of Smt. Kolammal, who was shown as the sole proprietrix of Saraswati Pictures. Hence, the AAC was not right in assuming that the amount should have been written off in 1970 because A.C. Pillai died in 1970.
It was only during the accounting year that the assessee found that there was no chance of recovery from Smt. Kolammal and the value of the prints was also nil, it was claimed that it is allowable either as a bad debt or a trading loss. The learned departmental representative relied upon the orders of the authorities below. He claimed that it had become time barred long ago. In the alternative he claimed that since the decision of the High Court dismissing the appeal is dated 3-11-1975, two days after the close of the accounting year, it must relate to the immediately succeeding year and not to the year under consideration. He also argued that it is not a bad debt because only an amount of Rs. 13,957.63 had been taken into account and not the entire amount of Rs. 25,906.81. It was pointed out that the assessee is not a money-lender and that the advance to the producer to get distribution rights is a capital advance and that it is a capital loss. He relied upon the decision of the Madras High Court in CIT v. Coimbatore Pictures (P.) Ltd.  90 ITR 452 wherein it was held that a similar loss of advance by a distributor to a producer has to be treated as a capital loss.
The learned counsel for the assessee tried to distinguish the facts of this case on the ground that the assessee was a distributor who had made money advances of this nature as part of the contract and as a trading practice and that it was not a loan de hors the contract. It was also found that the claim that it is a bad debt was not entertained by the High Court in that case because such an argument was not raised before the Tribunal. He relied upon the decision of the Calcutta High Court in CIT v. Shewbux Jahurilal  46 ITR 688 where it was held that a similar loss arising out of contractual dispute could be claimed when it was finally ascertained and not at the time when it was anticipated in mercantile system of accounting. He also referred to the decision of the Allahabad High Court in A.P.S. Cold Storage & Ice Factory v. CIT  119 ITR 709 where the failure to provide for the loss at the time of arbitrator's award was not found to be a bar till the matter was decided finally by the Court. He further referred to the decision of the Punjab and Haryana High Court in CIT v. Pretty Cycle Industries  123 ITR 227 where a similar postponement in anticipation of further adjustments against such accounts was held to be justified.
As for the argument of the learned departmental representative that the decision of the High Court dismissing the appeal two days later than the end of the accounting year, he claimed that it is easily answered.
The decision to have the appeal withdrawn was taken well before the accounting year and instruction was also given to the counsel during the accounting year. He pointed out that the date of decision to withdraw the appeal is the date on which the final determination was made by the assessee in respect of this debt. The assessee had no reason to expect to lose the appeal or to expect that nothing would be recovered till the matter had reached finality during the year.
4. We have carefully considered the facts as well as the arguments. We do find that the advance was made in pursuance of a contract for distribution of a film. We find that it was the assessee's business to distribute films and that, in fact, the assessee was one of the leading film distributors at Madurai and was distributing a number of other films, where also this kind of minimum guarantee was paid. We do not find that it is necessary for the assessee to be a money-lender to be able to claim the loss consequent on such minimum guarantees. It is the trade practice to pay the minimum guarantee in advance and to suffer the difference as a trading loss. No doubt, the assessee would have been justified in writing off its loss in the assessment year 1968-69 itself when the contract came to an end. But there was a genuine dispute between the parties as to the amount recoverable by the assessee. The assessee thought that it was entitled to receive Rs. 13,957.63 on the actual collections of Rs. 93,050.84. The City Civil Court after going through various authorities under the Contract Act came to a conclusion adverse to the assessee. The assessee was advised to take up the matter to the High Court by its legal advisors. Pending this dispute, the assessee could not make up its mind to write off any part of the debit balance. In fact, a write off at this juncture, it was thought, may well jeopardise the assessee's case before the High Court inasmuch as it may be construed as waiver on the assessee's part of its rightful claim. In fact, the assessee continued to hold five prints even beyond the period of five years because of the fact that the account was not settled. We are, therefore, not impressed by the argument of the authorities below that the amounts had either become bad in a preceding year or the loss had already been incurred. There is nothing to suggest that Smt. Kolammal, proprietrix of Saraswati Pictures, represented by power of attorney by A.C. Pillai, had become incapable of discharging the liability in case the assessee's right was upheld before the High Court. Hence, the argument of the learned AAC that the death of A.C. Pillai in 1970 made it bad in that year, is not based upon any concrete facts.
As for the argument of the learned departmental representative that the debt cannot be treated as a bad debt on the ground that it does not satisfy the condition in Sub-section (2) of Section 36 which requires that no deduction shall be allowed unless such debt "has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year", the assessee has shown that Rs. 13,957.63 has been reckoned as part of the commission receipts on distribution and has been subjected to tax. It was claimed that all that is required is that such debt should have been taken into account.
It is, therefore, claimed that the entire amount of Rs. 25,906 and not merely Rs. 13,957.63 should be allowed. We are not in a position to disagree with this claim because we find that this debt, at least partly, was taken into account in earlier previous years. It has been written off as irrecoverable in the accounts of the previous year. It was found to have gone bad during the year notwithstanding the claim of the authorities that it had gone bad in earlier years. The alternative argument of the learned departmental representative that it had gone bad two days later than the end of the accounting year makes no sense because the decision to withdraw the appeal was obviously taken before the end of the accounting year. It is, therefore, clear that the amount is admissible as a bad debt. Even the other argument of the assessee that it is allowable as a trading loss is well-founded notwithstanding the reliance of the learned departmental representative on the case of CIT v. Coimbatore Pictures (P.) Ltd. (supra). In that case the transaction appears to be an isolated one, unlike the present case where there were numerous such transactions. We also find that it is the custom in this line of business to pay the minimum guarantee amount as advance. The payment was contractual one and the distinction sought to be made by the learned counsel for the assessee, in our opinion, is justified. Even as found earlier, there is clear nexus between the loss to the year under consideration in view of the final decision taken during the accounting year by the assessee not to pursue for the case for recovery of the amount due. Under the circumstances, the amount is allowable in full even as a trading loss.