(1) Chidambaram Chettiar, the Kartha of the joint family which was the assessee, was also the Director of the National Movientone Co., Ltd., Madras, to which we shall refer in the rest of this judgment for purposes of convenience as the company. The main line of business of the assessee family was money-lending. The assessee advanced fairly large sums of money to the company, for which the assessee family had a first charge over the assets of the company including the films.
The company went into voluntary liquidation in 1939. The assessee took over a number of films from the company at a valuation in partial discharge of the debt due from the company to the assessee. The assessee wrote off the unrecovered balance as a bad debt, and that claim was allowed by the Income-tax Department in assessing the assessee from its profits in its money-lending business. One of the films so taken over was a Tamil Picture 'Mohini Rukmangada'.
Even in 1938, that is before the company went into voluntary liquidation. one Kameswara Rao of Rajahmundry filed a suit against the company, complaining that a portion of the film Mohini Rukmangada constituted an infringement of his copy-right in his comic play. He claimed Rs. 11,000 as damages. It was during the pendency of the suit that the company went into liquidation and the assessee took over the films including the film Mohini Rukmangada. In the year of account which ended on 12-4-1946 the assessee, represented by its kartha Chidambaram, settled the claim of Kameswara Rao out of Court by a payment of Rs. 5260. The assessee claimed that amount of expenditure as an allowable item of deduction in the assessment of its income in the assessment year 1946-47.
(2) The Income-tax Officer negatived the claim mainly on the ground:
'However, the amount paid was towards compensation for a wrongful act, viz., infringement of copyright and cannot therefore be an admissible deduction.'
The disallowance was upheld on appeal by the Assistant Commissioner. In paragraph 5 of his order the Assistant Commissioner referred to the suit filed by Kameswara Rao and recorded:
'When the appellant took over the assets of the company, this liability was attached to those assets taken over by him and hence it went to reduce the value of the assets taken over by him. In the assessment of the year in which he took over the assets, he was allowed the difference between the amount advanced and the value of the assets taken over as a bad debt. This sum would only go to increase the loss on account of bad debt incurred by him. It is an expenditure which can neither be allowed in the account year nor treated as an expenditure incurred wholly and exclusively for the purpose of the business of exhibiting the films. The disallowance was in order. It is upheld.'
The assessee appealed to the Tribunal. The Tribunal was of the view that the payment to Kameswara Rao constituted an item of capital expenditure. The Tribunal further held that even if it was a revenue expenditure, it was not a charge on the year's income as there was no income from the film in question in the year of account. The Tribunal also stated:
'The Appellate Assistant Commissioner had appreciated the position correctly in paragraph 5 of the order and we are in agreement with it.'
It is against this background we have to answer the question referred to this Court under S. 66(1) of the Income-tax Act:
'Whether on the facts and in the circumstances of the case is the payment of Rs. 5260 in question during the year of account an admissible expenditure for the year of account?'
We agree with the learned counsel for the assessee that the Tribunal was wrong in the view it took that the payment of Rs. 5260 constituted an item of capital expenditure. Apparently the Tribunal overlooked the fact that the film Mohini Rukmangada was part of the stock-in-trade of the assessee, either viewed as a film as such or viewed as an asset taken over in discharge of a debt due to the assessee. If Rs. 5260 had to be paid in addition to what had been already paid to acquire the asset, neither what was paid for the acquisition of the film, nor what was paid later could be viewed as an item of capital expenditure.
The Tribunal was also wrong in the view it took, that because the film in question did not produce any income in the year of account, the expenditure was inadmissible. It would appear that there was some income from the films taken over by the assessee, because the assessment order referred to a sum of Rs. 556 as business income from the films. In addition to these two grounds, it should be remembered the Tribunal also recorded its agreement with the line of reasoning of the Assistant Commissioner in paragraph 5 of his order.
(3) The principal ground on which the Income-tax Officer rejected the assessee's claim was that the payment in question was compensation for a wrongful act. Elaborate arguments were addressed to us by the learned counsel for the assessee that the payment in question should not be viewed as a payment by way of penalty for a breach of law. The learned counsel pointed out that though Kameswara Rao complained of an infringement of a copyright, that claim was never determined by the Court. The claim was settled out of Court by a compromise on payment of Rs. 5260 by the assessee to Kameswara Rao.
Apart from the fact, that there was no allegation that the assessee himself had infringed the copyright of Kameswara Rao--the allegation was that it was the company that had infringed the copyright--what stands out is that there was no determination by the Court of the question, whether the infringement complained of was true. Nor did the Court award any damages as compensation or as penalty for such proved infringement. What was paid was in settlement of a claim, no doubt a claim for damages. The learned counsel referred to the observations at p. 93 in Golder v. Great Boulder Proprietary Gold Mines Ltd., (1952) 33 TC 74, and the observations at p. 215 (of ITR): (at p. 97 of AIR), in Income-tax Appellate Tribunal Bombay v. Chhaganmal Mangilal , an contended that in such cases, where there had been no determination that a wrongful act had been committed by this assessee, no question could arise of viewing the expenditure as the payment of a penalty.
Interesting though the question of law is, it is unnecessary for us to examine the correctness of the contention of the learned counsel for the assessee and to express any concluded opinion of ours, whether in the circumstances of the case, the payment made by the assessee could be equated to a penalty imposed for infraction of law. Even if the contentions of the learned counsel were correct, the claim of the assessee has to be rejected on another ground.
(4) We have already pointed out that even before the assessee took over the films, including the film in question Mohini Rukmangada, Kameswara Rao had filed the suit to recover damages from the company. Chidambaram, the kartha of the assessee family, was also the Managing Director of the Company, and obviously he should have been aware of the pendency of Kameswara Rao's claim when the family took over among others, the film in question, Mohini Rukmangada.
There was thus material on which the Assistant Commissioner could rest his conclusion, that when the assessee took over Mohini Rukmangada, the known factor, that there was a claim against the company, should have been taken into account in fixing the value of the film, by providing for a possible payment to be made by the assessee after the film was taken over. If, for example, the film has been worth Rs. 10,000, and was valued at about Rs. 5,000, with the liability to pay Rs. 5000 or more in future to Kameswara Rao, the second item of payment would, no doubt, be a payment towards the acquisition of the film. But what happened in this case was that the difference between the value fixed for the film taken over and the debt due to the assessee was written off as a bad debt, and the claim was allowed in the year of account in which the films were taken over.
The position virtually was as if the difference between the real market value and what was actually paid for the film, Mohini Rukmangada was written off as a bad debt. That amount was retained in the hands of the assessee but paid over later to Kameswara Rao. Thus virtually for this expenditure actually incurred in 1945-46, a deduction had been claimed under the head 'bad debts' much earlier. The Learned counsel for the Department therefore urged that the assessee could not be permitted to claim the same amount twice over as a deduction, once as a bad debt and again as an item of expenditure. That contention, in our opinion, is well founded, and that was one of the grounds on which the Assistant Commissioner negatived the claim. With that finding also the Tribunal recorded its agreement, though it did not discuss the position in any detail.
(5) Though the two main grounds set out by the Tribunal for upholding the disallowance of the claim did not commend themselves to us, on the ground we have mentioned above the assessee's claim was bound to fail, and that should suffice to answer the question referred to us in the negative and against the assessee.
(6) As the assessee has failed, he will pay the costs of this reference. Counsel's fee Rs. 250/-.
(7) Answer in the negative.