Sabyasachi Mukharji, J.
1. This reference arises out of the assessment year 1962-63 for which the relevant previous year ended on 31st March, 1962. The assessee derived its income from contract business. It entered into a financial agreement with M/s. Cine Films (Private) Ltd. on the 19th December, 1958, for a period of five years and advanced a sum of Rs. 2 lakhs. The agreement was also put in writing on the same date. It would be appropriate, in view of the contentions raised, to refer to the relevant portion of the said agreement. The said agreement, inter alia, stated as follows :
' (3) That in consideration of the financial accommodation given and/ or in lieu of interest for the advance the lender shall be entitled to fifty per cent. of the net profit of the borrower company to be determined in the following manner :
(4) That the net profit mentioned above shall mean the amount of the net profit as per the annual audited profit and loss account of the company subject to the following adjustments of allowances :
(a) credit shall not be given for any income which relates to an income not provided for in previous accounts or which is a realisation against bad debts written off previously or a refund of taxes paid in earlier period, i.e., the period to this agreement.
(b) the following shall not be deducted as charges or expenses :
(i) bad debts written off in respect of any debt debited in the books prior to the date of this agreement.
(ii) income-tax and super-tax or corporation tax payable by the borrowers,
(iii) any prior loss that was incurred by the borrower company during the period prior to the date of this agreement :
Provided always that loss arising during the currency of this agreement, determined in the same manner laid down for the purposes of net profit shall first be deducted from the net profit of any subsequent period and the balance, if any, shall only be divided between the parties as laid down in Clause 3 above.
(7) That if the borrower company during the currency of the agreement makes loss and the share of such loss cannot be recovered from the money due to the lender company failing which Sri K. C. Gupta shall personally pay such amount and for the payment of such deficit he stands a guarantor to the borrower company.'
2. It appears that there was some financial accommodation given by the assessee to the borrower-company and in the words of the said agreement ' in lieu of interest for advance '. It was provided, as mentioned in Clause (3) set out hereinbefore, that the assessee would be entitled to 50 per cent. of the net profit in the business of the borrower company. Clause (4), as we have indicated before, stipulates how the net profit is to be computed. The proviso to that clause is significant. It stipulates ' loss arising during the currency of this agreement, determined in the same manner laid down for the purposes of net profit shall first be deducted from the net profit of any subsequent period and the balance, if any, shall only be divided between the parties as laid down in Clause 3 above '. It does not provide like the first clause that the assessee would be liable for the said loss. The ITO after perusal of the agreement came to the conclusion that the relationship between the assessee and M/s. Cine Films (Private) Ltd. was not that of partners but that of a lender and a borrower. During the year under appeal the business suffered a loss and the assessee's share therein was computed at Rs. 53,236 which was claimed as deduction in the computation of the assessee's income. The ITO disallowed the loss on the ground that the assessee was not to suffer in each year and that it was to be carried forward to the subsequent year to be set off against the profits of that year and that it was only the balance which was to be divided between the assessee and the borrower. In this connection, reference was made to certain clauses which have been set out hereinbefore.
3. Being aggrieved by the said order, the assessee preferred an appeal before the AAC, who, however, confirmed the order of the ITO.
4. The assessee, thereafter, went up in appeal before the Tribunal. It was argued before the Tribunal that the assessee had actually entered into a joint venture with M/s. Cine Films (Private) Ltd. and, therefore, the lossarising therefrom had to be allowed in the computation of the total income. The details of profit and loss account and the position regarding the share assessment in different years from the assessment years 1959-60 to 1963-64 were also produced before the Tribunal. It appears that in previous years the Tribunal had taxed the profit but had not allowed any loss or any deduction in the computation of the profit or the loss suffered from the previous transaction. It was the contention of the assessee before the Tribunal that the ITO having assessed the profits in all the respective years was not justified in law and in equity to disallow the loss arising to it in other years. On behalf of the revenue, it was urged before the Tribunal that the nature of the relationship between the assessee and M/s. Cine Films (Private) Ltd. was that of partners and the agreement, in fact, had created a partnership which was not assessed and, therefore, the loss arising therefrom could not be allowed in the computation of the assessee's total income in view of the restrictions laid down in Section 77(2) of the I.T. Act, 1961, Even otherwise, it was argued, that the joint venture in law was really an unregistered firm and, therefore, the provisions of Section 77(2) of the Act were applicable to it. The Tribunal carefully considered the facts placed before it and also went through the agreement dated 19th December, 1958. The Tribunal came to the conclusion that it was an agreement between a lender and a borrower and it did not create any partnership because M/s. Cine Films (Private) Ltd. was not carrying on any business on behalf of the assessee. No question having been raised on this aspect, we are not concerned whether this finding was correctly arrived at or not. Having held that the agreement was between a lender and a borrower, the Tribunal further considered whether the loss arising to the borrower could be allowed in the computation of the income of the lender. After analysing various clauses, the Tribunal held that the assessee, in the capacity of a lender, was to share both the profit and loss of the borrower company which was to be recovered from the former, according to the particular manner and procedure laid down in the agreement. The Tribunal further observed that the position which emerged was that the assessee instead of charging interest from the borrower had undertaken to participate in the profit and loss of the business and that the loss coming to its share during the year was clearly allowable being incidental to its business of advancing funds. According to them, it was only in connection with the mode of recovery of the loss that a particular procedure was laid down which did not mean that the accrual of the loss to the assessee was to be postponed or that the profit arising to it could not be taxed in a particular year as, under the I.T. Act, the profit and loss of each year was to be determined independently and the ITO had violated this principle while taxing the profit in the other years. The Tribunal, therefore,directed the ITO to set off the loss of Rs. 53,236 from the income of the assessee in accordance with law. On these, under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was to share and set off the loss arising to M/s. Cine Films (P.) Ltd. during the year '
5. The question really depends upon the construction of the agreement, as we have mentioned hereinbefore. We have set out the relevant portion of the clauses of the agreement and we have also indicated that the consideration of the financial investments for accommodation in lieu of interest, it should normally be the consideration for lending money the lender was entitled to 50 per cent. of the net profit. It is further significant to note that in contradistinction to the expression ' the lender shall be entitled to 50 per cent. of the profit ' in the proviso to that clause, it is mentioned, ' provided always that the loss arising during the currency of this agreement determined in the same manner laid down for the purposes of net profit shall first be deducted from the net profit of any subsequent period and the balance, if any, shall only be divided between the parties, as laid down in Clause 3 '. It does not stipulate that the lender shall be liable to 50 per cent. of the loss. This is one part of it. The second important aspect is that if the borrower company, during the currency of the agreement, suffered loss and the share of such loss could not be recovered from the money due to the lender company, one K. C. Gupta was made a guarantor for making up the loss. Now, the question is what is the meaning of ' money due '. Is it the money due to tbe lender with principal as well as interest or is it the money due meaning thereby the consideration for the financial agreement of which 50 per cent. of the profit which the lender was obtaining 'in lieu of the share interest for the advance '. It is true that the expression ' money advanced ' is not very clear. Normally, the expression ' money due ' from the borrower to the lender would include both the principal as well as the interest. But, here, as no interest was being paid, the consideration for advance ' in lieu of interest ' was participation in 50 per cent. of the profit. It is possible to construe the expression ' money due ' to mean, the money being 50 per cent. of the profit, and that is to be paid in the manner laid down in Clause 4 under the different sub-clauses thereof. In this aspect, we have also to bear in mind the difference in the language used between Clause 3 and Clause 4 thereof, which we have indicated hereinbefore. After all an agreement of this kind of lending and borrowing between business people should be construed from common sense point of view. If there was any profit made by the borrower company then that profit was to be computed in certain manner. But, if over and above, the lending company is made liable to share the loss for advancingmoney for which he had not apparently paid any interest, in our opinion, that would not be construing the agreement reasonably or in consonance with the principles of equity. Reliance was placed in this connection on the decision in the case of CIT v. Madho Pd. Jatia : 105ITR179(SC) . There, the Supreme Court had observed that it was well settled that there was no equity about taxes. If the provisions of a taxing statute were clear and unambiguous full effect should be given to them irrespective of any consideration of equity. Where, however, provisions were couched in language which were not free from ambiguity and were capable of having two interpretations, a view which was favourable to the assessee should be adopted. The fact that such interpretation was also in consonance with ordinary notion of equity and fairness would further fortify the court in adopting the last course.
6. Reliance was also placed on the observations of the Supreme Court in connection with the fact that in the previous year the profits earned had been taxed without setting off the loss from the venture of loan. Therefore, it was urged that it was in consonance with justice and equity that the loss should be allowed. Here, we are not concerned with the construction of any taxing provision. Therefore, the principle where two constructions are possible, one which is in consonance with justice and equity and in favour of the assessee should be preferred than the other, does not fall for our consideration. But if the principle would be wherever the facts and circumstances arise and the expression used is couched in ambiguous language, it should be construed in an ordinary sense, then, in our opinion, to construe an agreement of loan where there is no provision for getting any interest of the consideration for loan as the profit to be earned by the borrower, then such a profit as computed in the agreement will be the correct construction and will be more in consonance with the ordinary principle of equity and justice. In view of this principle, we are of the opinion that on the construction of the agreement, the assessee, in the facts and circumstances of the case, was not entitled to set off the loss arising from M/s. Cine Films (P.) Ltd. from the assessee's income for the year in question. The Tribunal, in our opinion, must construe the effect of that clause in that light.
7. The question, therefore, is answered in the negative and in favour of the revenue. In the facts and circumstances of the case, each party will pay and bear its own costs.
Sudhindra Mohan Guha, J.
8. I agree.