By this application under section 66(2) of the Indian Income-tax Act the Commissioner of Income-tax wishes this court to require the Appellate Tribunal to state the case and to refer to it certain questions of law which are said to arise from the order of the Tribunal.
The assessee in this case is a distributor and exhibitor of films and finance film producers against arrangement for distribution rights for certain defined territories.
In connection with the assessments for 1948-49 and 1949-50 the assessee claimed two different sums of Rs. 1,00,714 and Rs. 2,25,000 respectively as bad debts on the ground that these sums could not be recovered out of the advances made to the film producers, namely, Excellent Pictures of Bombay and Shiraz Ali Hakim of Pakistan. The Tribunal found that these amounts had in fact become irrecoverable in the account year relevant to the assessment year 1948-49 and allowed both the items as deductions in concoction with the assessment for the year 1948-49. The Commissioner of Income-tax asked the Tribunal to state the case and refer certain questions of law to us under sub-section (1) of section 66 but the Tribunal dismissed this application on the short ground that no question of law arose for decision. The Commissioner has no presented an application under sub-section (2) of section 66, in which he prays that the Tribunal may be required to state the case and to refer to it the following questions of law, namely :
'(1) Whether the Trinbunals decision that the loss of advances made by the assessee to film suppliers amounted to bad debts within the meaning of section 10(2)(xi) of the Indian Income-tax Act, 1922, is correct notwithstanding that the advances would never have come to swell the taxable profits of the assessee ?
(2) Whether there is any material for the Tribunals assumption that there must have been an oral variation (terms not indicated) of the agreement dated September 27, 1945, between the assessee and Messrs. Excellent Pictures. Bombay, between the dates of the advances of Rs. 1,50,000 (October, 1945, and January, 1946) and the date of the release of the film 'Ratnavali' to the assessee (in June, 1946) ?'
On the September 27, 1945, the assessee entered into an agreement with Messrs. Excellent Pictures known as 'Ratnavali' in terms and conditions stipulated in the agreement. According to this agreement the said picture was to be distributed and exhibited for a period of five years from the date of the delivery or first release in Northern Indian Circuit and in consideration of this arrangement the assessee agreed to pay a sum of Rs. 2,50,000 by way of advance in favour instalments as detailed in the agreement. The assessee was to recover in full the entire advance of Rs. 2,50,000 as also his distribution commissioner thereon at 20 per cent. amounting to Rs. 50,000 by adjusting all the first realisations received from the distribution and exploitation of the said picture until such amount or Rs. 3,00,000 in respect of the said picture was fully realised and recovered. All sums which were to be realised by the assessee thereafter were to be distributed between the assessee and the producers in certain proportions. The producer was at liberty to make an outright sale of the picture to some other parts at any time before it was handed over to the assessee and in that event the assessee was entitled to a commissioner of 7 1/2 per cent. on the advance of Rs. 2,50,000. The assessee did not pay the entire sum of Rs. 2,50,000 mentioned above put he paid a sum of Rs. 1,50,000 by means of three cheques in the years 1945 and 1946. The picture was released to the assessee in June, 1946, but it proved to be a failure and the assessee was able to recover a sum of Rs. 49,286 only till June, 1946. The proprietor of Excellent Pictures was adjudicated insolvent on the December 7, 1948. As the assessee had advanced a sum of Rs. 1,50,000 of Excellent Pictures and as he was able to recover a sum of Rs. 49,286 only by the exploitation of the said picture the assessee wrote off the balance of Rs. 1,00,714 in his books on the August 31, 1947, and claimed a deduction of the last mentioned sum as a bad debt in computing profits and gains for the purpose of the assessment for 1948-49.
The facts of the second case in which the deduction of a sum of Rs. 2,25,000 is being claimed are somewhat similar. On the March 12, 1946, the assessee entered into an agreement with one Shiraz Ali Hakim by which the latter granted exhibition, distribution and exploitation rights to the assessee for a sum of Rs. 2,25,000 for a picture known as 'Mughal-e-Azim'. Unfortunately the picture was never completed and the producer fled to Pakistan and was adjusticated an insolvent on November 11, 1948. The assessee claimed a sum of Rs. 2,25,000 as a bad debt.
The Income-tax Officer disallowed these claims primarily on the ground that they were capital losses. The Appellate Assistant Commissioner was unable to endorse the view and held that one-third of the claim for deductions was allowable in the assessment for 1948-49 and 1/3rd in the assessment for 1949-50. The Appellate Tribunal allowed the appeal of the assessee with the remark that the assessees claim falls within the terms of section 10(2)(xi) and that the sums of Rs. 1,00,714 and Rs. 2,25,000 should be allowed as proper deductions for the assessment year 1948-49. The Appellate Tribunal held, as stated above, that both these amounts had become irrecoverable in the account year relevant to assessment year 1948-49 and allowed both these items as deductions in connection with the assessment for the year 1948-49.
Mr. Shastri who appears for the Commissioner of Income-tax frankly admits that the assessee had sustained losses in these transactions but he contends that the trade advances in respect of which the assessee is alleged to have suffered losses were not debts due to the assessee and in any case that they were not bad debts within the meaning of section 10(2)(xi) of the Income-tax Act. In the case of 'Ratnavali' the assessee obtained delivery of the picture but it proved to be a failure and the assessee sustained a loss. He got all that he had bargained for when he advanced a sum of Rs. 1,50,000. If he made a bad bargin and lost the advance made by him, the loss must be characterised as a trading loss allowance for which can be determined under another p provision of law. It cannot be deemed to be a bad debt deduction in respect of which can be allowed under section 10(2)(xi) of the statute. According to Mr. Shastri similar considerations apply in the case of the picture 'Mughal-e-Azim' except that in this case the picture was never completed or delivered to the assessee. The latter might have been entitled to recover money paid on an existing consideration which afterwards failed but such a debt would come into existence only on the date of the failure of the consideration of not when the assessee aid the money in accordance with the terms of the contract. Mr. Shastri invites our attention to the case of Curtis (H. M. Inspector of Taxes) v. J.&G.; Old filed Limited. In this case the managing director of a company of wine and spirit merchants was for many years up to his death on the February 4, 1919, in sole control of the companys business. An investigation after his death showed that many payments and some receipts not relating to the companys books and it was calculated that, as at the February 28, 1919, a sum of Pound 14,000 and due from his estate to the company the debt was valueless and was written off as bad in the companys accounts for the sixteen months to the June 30, 1920. The General Commissioners on appeal allowed the companys claim to deduct the amount in question in computing its profits for assessment in income-tax. Holding that the loss was a bad debt that had arisen in the course of the companys trading, Rowlatt, J., held that there was no evidence to support the Commissioners findings; that the loss was not a trading loss; and that it was an admissible deduction from the companys profits for the income-tax purposes. In the course of his order the learned Judge observed as follows :
'When the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits.'
The decision appears to me to be wholly inapplicable to the facts of the present case, for the bad debt of Pound 14,000 which was alleged by the company to have arisen in the course of the companys business was found by Rowlatt, J., not to be a trading loss. It was sustained by the company as the managing director had made payments relating to his own private affairs and not to the affairs of the company.
The decision of the question whether a valid debt had arisen out of an actual debtor creditor relationship between the parties, turns upon a true interpretation of clause 9 of the agreement between the assessee and the Excellent Pictures which runs somewhat as follows :
'The agents shall in the first instance be entitled to recover for themselves in full the entire advance of Rs. 2,50,000 only in respect of the said picture....as also their distribution commission thereon at 20 per cent. amounting to Rs. 50,000, only by adjusting all the first realisations received from the distribution and/or exploitation of the said picture until such advance amount of Rs. 3,00,000 only in respect of the said picture is fully realised and recovered. After he agents have thus fully recovered and recouped the said advance amount of Rs. 2,50,000 as also the amount of Rs. 50,000 being their commission for distribution thereon at 20 per cent. in respect of the said picture to the principal at Bombay regularly before the 10th day of every month together with statement of such realisations deducting however from mere realisations their distribution commission at 20 per cent. thereon till the principals receive a further sum of Rs. 1,50,000 only, that is, totalling Rs. 4,00,000 only as net income of their share on the said picture. After the principal have thus received a sum of Rs. 4,00,000 as net income of their share on the said picture from the said territories as above-said the agents shall be entitled to receive a distribution commission of 40 per cent. only on all further realisation in the said picture when the commission of 20 per cent. allowed to the agents shall, however, cease to be in force. After deducting their commission of 40 per cent. on all future realisations of the said picture from the said territories after the principles get a net amount of Rs. 4,00,000 the agents shall remit the net amount of the realisations remaining thereof to the principal at Bombay together with the statement of such realisations regularly every month for which it refers. On or before the tenth of the following month.'
To put in a slightly different language the arrangement was that a certain sum of money was to be paid by the agent to the principal by way of an advance for the rights to exploit the picture in question. The amounts received from the distribution and exploitation of the picture were to be retained by the agent until the sum of Rs. 3,00,000 was fully realised and recovered. Any amounts which were recovered thereafter from the distribution and/or exploitation of the said picture were to be distributed in certain proportions between the producer and the agent. A debt is that which one owes to another; any money, goods or services that one is bound to any another; a pecuniary due; a liquidated demand; a sum of money due by certain and express agreement. Includes any claim or demand upon which a judgment for a sum of money or directing the payment of money can be recovered in an action. Debt denotes not on the obligation of the debtor to pay but also the right of creditors to receive and enforce payment. To constitute a valid debt the money must have been advanced with reasonable belief at the time that it would be paid. Evidence of an obligation to repay is the first important factor to be singled out of the surrounding facts and circumstances. For purposes of taxation, a debt is a legally enforceable obligation for payment of money. In the present case the assessee advanced certain sums of money to the producers on the clear understanding that this money was to be repaid in accordance with the procedure set out in the body of the agreement. The debts in question continued to be valid debts although they were payable only in a special way, that is out of the amounts realised from the exploitation of the picture and not out of the debtors general funds. These debts were legally recoverable. It is impossible therefore to hold that no valid debt was in existence. In the present case there was an unconditional obligation on the part of the debtor to pay a certain sum of money to the assessee. The debt had an actual existence as a debt both in law and in fact.
The question now arises whether the debt is a bad debt. When an assessee is unable to collect a debt he undoubtedly suffers a loss in the sense in which the lexicographer uses the term 'loss'. All bad debts may be said to be losses but not all losses are bad debts. A loss is deductible when it occurs or is sustained; bad debts are deductible when the Income-tax Officer estimates them to be irrecoverable. I am of the opinion that certain debts in respect of which deduction has been claimed were actually due to the assessee and that the debts were bad. It has been held repeatedly that the question whether a debt is a bad debt or the question in what year it became a bad debt are questions of fact and the findings of the Tribunal on these questions can be disturbed by the court only if there is no evidence to support them or if the Tribunal has misdirected itself in law (Kangas Law of Income-tax page 366). Whether a debt became bad a in a year in which deduction of bad debt was claimed is a question in the first instance for the Appellate Tribunal the decision of which can be reversed by this court only in accordance with law, that is when not resting upon an adequate factual foundation. The question whether activities of an assessee constitute the carrying on the trade or business under a statute allowing deduction of bad debt from gross income is largely one of fact the solution of which requires an examination of the facts in each case.
But it is not necessary for us to decide in a proceeding under section 66(2) whether certain advances made by the assessee fall within the ambit of the expression 'debt' or 'bad debt' particularly when this question was not raised before the Appellate Tribunal. The question whether the advances made by the assessee amount to debts does not appear to have been raised either before the Income-tax Officer or before the Appellate Assistant Commissioner. The question which was agitated before the Income-tax Officer was whether the advances were trade debts or not. He held that the advances made by the assessee were in the nature of financial arrangements. He held further that as the producers were free to seek distribution and exploitation rights of the picture for the same territories for which the assessee had contracted and as they were at liberty to sell to any person and at any price at their discretion as the assessee was to get a commissioner of 7 1/2 per cent. on the said advance the commissioner in such a case was nothing different from what we call in common parlance as 'interest' or 'investment'. The Appellate Assistant Commissioner held that the entire amount advanced by the assessee to the producers was either to be recouped by him from their share of realisations or in case such share was deficient balance was returnable after a specified period. In both the cases the assessee was only entitled to a particular percentage of commission out of the gross realisations and the advances were mere loans to help the principal to meet the costs of production in one case and the cost of purchasing the all-India right in the other. The Officers found completely in favour of the assessee that the debt became irrecoverable during the relevant year of account. Mr. Shastri did not support the reasoning of the Appellate Assistant Commissioner in either of these two claims but tried to make out a different case before the Tribunal. He suggested that the advances made by the assessee to the vendors when they became irrecoverable did not amount to debts due to the assessee. No detailed argument appears to have been addressed to the Tribunal in support of this contention, for he contended himself by stating that in the case of the amount due from the Excellent Pictures no amount whatsoever became payable to the assessee in terms of the agreement with that firm, for whereas the assessee had agreed to advance as sum of Rs. 2,50,000 the actual advance did not exceed a sum of Rs. 1,50,000. The Tribunal observed that there was no force in the contention put forward by Mr. Shastri and which did not find place anywhere either in the orders of the Income-tax Officer or the Appellate Assistant Commissioner. The Tribunal rejected this contention on three grounds, namely (1) that an oral variation in the agreement could easily have been made, (2) that in the facts and circumstances of this case it certainly appears to have been made; otherwise the vendor would not have handed over the picture 'Ratnawali' to the assessee for distribution and exhibition when a sum of Rs. 1,50,000 had been advanced instead of the stipulated amount of Rs. 2,50,000 and (3) that according to the correspondence which had passed between the parties the Excellent Pictures had agreed to refund a portion of the sum of Rs. 1,50,000 which would not be recovered as a result of distribution of the picture to be produced by that company against which the advance of Rs. 1,50,000 had been made by the assessee. The question of law raised by Mr. Shastri to the effect that the advances made to the producers do not fall within the ambit of the expression 'debt' was raised but was not pursued. It has been held repeatedly that a question which has not been raised before the Tribunal cannot be raised before this Court. In Mash Trading Co. v. Commissioner of Income-tax, a Full Bench of this court held that if a question of law has not been raised or considered by the Appellate Tribunal, that question cannot be held to arise out of the order of the Tribunal within the meaning of section 66(1) of the Indian Income-tax Act and the question cannot therefore be referred to the High Court under section 66 of the Act.
There can be little doubt that the debts which were due to the assessee were debts of the trade the profits of which are not being computed.
For these reasons I am of the opinion that no question of law arise in this case or even if on arises it was not raised before the Appellate Tribunal and cannot now be agitated before us. The petition must be dismissed with costs which I assess at Rs. 150.