1. The following question has been referred to us by the Tribunal under Section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and circumstances of the case, the assessee is not entitled to the deduction of the sum of Rs. 1,00,000 in the computation of its business income under Section 36(1)(vii) or Section 28 of the Income-tax Act, 1961, for the assessment year 1962-63 ?'
2. The assessee is a private limited company engaged in the financing of film production and in film distribution. Under an agreement dated 7th May, 1959, the assessee advanced a sum of Rs. 1,00,000 to one film producer, K. Munirathnam, hereinafter called 'the producer', carrying on business of film production under the name and style of 'Sivakami Pictures'. In consideration of this financial assistance, it was provided in the agreement that the assessee was to be paid interest at 12 per cent. and a share of six annas in the rupee from the net profits realised by exploitation of the picture to be produced. Another agreement came to be executed on the 6th July, 1960, between the assessee and the producer whereunder the assessee was to advance further sums and in consideration of the assessee rendering further financial assistance the producer had agreed to increase the profit share payable to the assessee from 6 annas to8 annas in the rupee. Under the above two agreements the assesses had advanced monies to the producer from time to time aim the aggregate amount so advanced as on 9th October, 1961, came to Rs. 5,07,611.99.
3. On 9th October, 1961, the assessee and the producer entered into an. arrangement which was reduced to an agreement Under this arrangement the assessee has to give a remission of Rs. 1,00,000 in the amount due and payable to it by the producer in consideration of the producer producing four further pictures in addition to the picture under production called 'Kumara Raja' and give to the assessee the lease rights for the districts of Trichy and Tanjore, including Karaikal, in the four pictures to be produced by the producer on the terms and conditions set forth in the agreement. The terms and conditions under which the producer agreed to produce the next four pictures and give the lease rights in the above districts to the assessee are these : The producer has to produce the first picture within 12 months from the date of the agreement and the three next pictures at an interval of 8 months between each picture. Six positive prints were to be given to the assessee at the cost of the producer. Option was given to the assessee either to take or refuse the lease of any picture if it was not satisfied. In the event of the assessee refusing to take on lease any picture the producer has to be paid Rs. 1,00,000 for such a picture. If the producer failed to produce the first picture within a period of one year, then until such picture is produced the producer has to pay the assessee a sum of Rs. 16,750 per month with interest at 18 per cent. per annum from April 21, 1961, till such a picture was produced and released. If there was a default in payment of the said amount of Rs. 1,00,000 or the monthly payment of Rs. 16,750 as set out above, the assessee would be entitled to take proceedings for the recovery of the entire sum of Rs. 4,07,611.99 together with interest at 18 per cent. per annum. In respect of the pictures produced by the producer and taken on lease by the assessee in relation to the districts set out above, the excess collections over and above the sum of Rs. 4,07,611.99, if any, will be treated by the assessee as his remuneration or royalty. The agreement specifically stated that the producer shall not be entitled to any excess collection in consideration of the concession shown by the assessee in remitting a sum of Rs. 1,00,000. The preamble to the agreement is as follows :
'Whereas the party of the second part is a regular producer of films and his present financial position is such that he is obliged to request the party of the first part to give a remission of Rs. 1,00,000 in the amount due and payable to the party of the first part and in consideration of such remission being granted by the party of the first part, the party of the second part has agreed and undertaken to produce and to give to the party of the first part the lease rights for the districts of Trichy and Tanjoreincluding Karaikal in the next four pictures, which will be produced by the party of the second part on the terms and conditions set forth hereunder.'
4. For the assessment year 1962-63, the assessee declared a loss of Rs. 70,444 after claiming a deduction of the sum of Rs. 1,00,000 as bad debt. The Income-tax Officer considered the terms of the various agreements set out above and held that under the terms of the first agreement the right to proceed against the producer has not become barred and the amount has not become irrecoverable, and, therefore, the assessee was not entitled to treat the said sum as a bad debt and claim deduction in relation to the same.
5. Aggrieved against the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. It was contended on behalf of the assessee that it had lost once and for all the right of collection of the said amount of Rs. 1,00,000, that the debtor was not a man of means, that it was a genuine remission that was allowed by the assessee purely out of commercial consideration and expediency and that, therefore, it should be treated as an allowable item. The Appellate Assistant Commissioner, however, agreed with the Income-tax Officer and rejected the assessee's appeal holding that under the agreement dated 9th October, 1961, the assessee had entered into an entirely fresh business deal in consideration of the so-called remission of Rs. 1,00,000, that in the circumstances the remission was only in the nature of adjustment against the original loan account for valuable consideration and that there was in fact no loss or bad debt to the extent of Rs. 1,00,000.
6. There was a further appeal by the assessee to the Appellate Tribunal. It was contended for the assessee before the Tribunal that as the agreement dated 9th October, 1961, enabled the assessee to recover only a sum of Rs. 4,07,611.99 and nothing more, the sum of Rs. 1,00,000 in respect of which remission was given by the assessee under the agreement has to be treated as a bad debt of a genuine remission and, therefore, it should be allowed either as a bad debt under Section 37 or as a business loss under Section 28 of the Income-tax Act of 1961. The Tribunal, however, did not agree with the assessee's contention. According to the Tribunal the sum of Rs. 1,00,000 in respect of which deduction was claimed did not represent a bad debt or business loss of the year under consideration, that the so-called remission of Rs. 1,00,000 which has been given under the agreement dated 7th May, 1959, was only in consideration of acquisition of certain valuable rights in the form of the lease rights of certain pictures in respect of ,the districts of Trichy and Tanjore including Karaikal, that the effect of the agreement dated 9th October, 1961, was to substitute the loan agreement dated 7th May, 1959, for Rs. 1,00,000 with a fresh agreement under which the assessee was to get lease rights in certain pictures which are to be produced by the producer for certain districts. The Tribunal also found that there was nothing to show that the rights acquired in consideration of the so-called remission of Rs. 1,00,000 under the agreement dated 9th October, 1961, were not valuable rights,
7. The question referred to us involves mainly the interpretation of the three agreements whose terms have been set out in brief earlier. The amount of Rs. 1,00,000 has been remitted by the assessee under the third agreement in consideration of the assessee getting the lease rights in the four pictures to be produced by the producer at certain stated intervals, in the districts of Trichy and Tanjore including Karaikal. Though the assessee stated that the financial position of the producer was such that he was obliged to request the assessee for a remission of Rs. 1,00,000 from and out of the total sum of Rs. 5,07,611.99 due to him as on the date of the agreement, there is no material on record to show that the producer was not in fact a man of means. The agreement in fact sets out the mode of repayment of the balance of Rs. 4,07,611.99 and that shows that the producer was a man of means. In this case the assessee has not given the so-called remission of Rs. 1,00,000 without consideration on the basis of the financial condition of the producer. The third agreement in more than one place says that the remission was in consideration of the producer agreeing to produce four films and giving the assessee the lease rights in those pictures for the districts of Trichy and Tanjore including Karaikal in addition to the original right given to the assessee for the lease of the picture called 'Kumara Raja' which was then under production. We are not inclined to agree with the contention of the learned counsel for the assessee that the lease rights provided for under the agreement as consideration for the remission should not be taken into account in considering the question whether the sum of Rs. 1,00,000 is a bad debt or a trade loss and that such lease rights are merely rights in future which cannot be valued during the relevant assessment year. Whether the lease rights were of any value during the assessment year or not is not a relevant matter for considering the question at issue. The question is whether the sum of Rs. 1,00,000 was given up by the assessee as a bad debt or whether it has become a trade loss. Under the terms of the agreement the assessee gave up his right to collect the sum of Rs. 1,00,000 from the producer on consideration of getting certain, lease lights in relation to certain pictures to be produced by the producer. We are not here to see whether the arrangement entered into by the assessee is really beneficial or not. What is material is that the giving up of the sum of Rs. 1,00,000 was in consideration of the assessee acquiring certain new rights.
8. We are also not inclined to accept the contention of the learned counsel for the assessee that the agreement dated 9th October, 1961, has to be construed merely as providing the manner of collection of the balance of Rs. 4,07,611.99. In our view, a perusal of the said agreement makes it clear that the agreement not only provides for the manner of collection of the sum of Rs. 4,07,611.99 but also provides for the acquisition of new rights by the assessee in the place of his right to collect the sum of Rs. 1,00,000. If we accept the argument of the learned counsel that the said agreement merely provides for the manner and method of collecting the sum of Rs. 4 lakhs and odd from the producer, we will be ignoring the specific terms of the agreement which specifically confers on the assessee the lease rights in relation to the four pictures to be produced by the producer for certain districts and enables the assessee to exploit the said lease rights and make collections over and above the said sum of Rs. 4 lakhs and odd. Clause 8 of the agreement specifically confers a right on the assessee to appropriate and retain such surplus collections from the four pictures over and above Rs. 4 lakhs and odd as remuneration and royalty. It also specifically provides that the producer shall not be entitled to any surplus collections from the assessee in view of the concession given to him by the assessee. On the specific terms in which the agreement is couched it is not possible for us to treat the sum of Rs. 1,00,000 as having been in fact remitted, though the word 'remission' has been used. What in fact has taken place is to substitute the assessee's right to collect the sum of Rs. 1,00,000 immediately with fresh rights such as the lease right in the four pictures to be produced and to have them exploited in the districts referred to above and to retain and appropriate the excess collections over and above the sum of Rs. 4 lakhs and odd. It cannot, therefore, be stated that the sum of Rs. 1,00,000 was given up by the assessee as irrecoverable during the year in question. As already stated, though one lakh of rupees has been treated as an amount remitted under the agreement, in substance it is a price paid by the assessee for acquisition of the lease rights in the four pictures to be produced for exploitation in the districts referred to above. In our view the Tribunal has come to the correct conclusion that the sum of Rs. 1,00,000 is neither a bad debt nor a trading loss.
9. The result is that the question referred is answered against the assessee. The revenue will have its costs from the assessee. Counsel's fee Rs. 250.