TMI Blog1978 (2) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... anced a total amount of Rs. 1,68,000. After the film was produced, the assessee, as distributor, realised only Rs. 90,000 towards the advance of Rs. 1,68,000. That picture proved a failure. The agreement did not provide for any security against the advance amount. All that the assessee was entitled to under the agreement was to recover the total sum advanced by him by exercising his rights as a distributor. As there was no scope of recovering any amount more than Rs. 90,000, the assessee and the producer entered into an agreement. By that agreement, a settlement was reached between the parties, under which the assessee received a sum of Rs. 50,000 in full satisfaction of the outstanding amount of Rs. 76,637 and wrote off the balance of Rs. 26,637. That settlement was on May 31, 1968. The assessee had yet another agreement with another film producer, Messrs. Swati Films, for the distribution rights of a film "Siva Leelalu". Under that agreement dated March 4, 1967, he advanced Rs. 43,000 up to May 31, 1967. That picture also proved a failure, and a sum of Rs. 25,311 remained outstanding. As there was no other means of recovering the amount of Rs. 25,311, he entered into a similar ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of security on the negative and positive copies of the films for amounts due on account of advance. The assessee, after exploiting its rights under the agreement to some extent, entered into a settlement with the producers under which the producers paid a sum of Rs. 26,000 to the assessee towards commission. In regard to the amount received by the assessee on account of settlement, both the Tribunal and the High Court held that the amount was a capital receipt. The learned judges, referring to the agreements entered into by the distributors and the producers, observed at page 917 of the report: " Here were three agreements entered into by the assessee in the ordinary course of his business along with several similar agreements. These three agreements were by mutual consent put an end to. The termination of these three agreements did not radically or at all affect or alter the structure of the assessee's business. Indeed, the assessee's business of distribution of films proceeded apace notwithstanding the cancellation of these three agreements." The learned judge ultimately concluded : " In our opinion, in the events that had happened, the amount was not received by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n are valuable only as indicating the matters that have to be taken into account in reaching a decision. The learned judge clearly stated that, when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. In Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1965] 55 ITR 736 (SC), the question arose whether the deduction claimed was in respect of a trading loss. That was a case where a company was carrying on business of manufacturing cloth. Under the memorandum of association of the company, for the purpose of its business, it was authorised to raise or borrow money from time to time to invest its funds, inter alia, in loans to others. The company entered into an agreement with another company whereunder they were appointed as its managing agents in the place of another company. The former managing agents of the company had borrowed moneys from outsiders and entered them in the appellant-company's accounts and invested large sums with themselves in current a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant accounting year and that the amount had actually been written off as irrecoverable in the books of the appellant; and that, therefore, all the conditions for the grant of the allowance under s. 10(2)(xi) were satisfied. The learned judges also made it clear that it is not correct to consider loss as amounting to a loss of capital, since all payments reduce capital in the ultimate analysis and that losses in the running of a business cannot be said to be of capital. In Devi Films Private Ltd. v. CIT [1970] 75 ITR 301, a Division Bench of the Madras High Court observed : " A trading loss has a wider connotation than a bad debt. There may be a bad debt which may not fall within the purview of s. 10(2)(xi) but may well be regarded as one eligible to deduction in the computation of the net profits chargeable to tax because such bad debts will have to be taken into account on the side of debit which will reduce the net profits. But whether allowance can be given in that way may sometimes depend on whether the outgoing, or what is regarded as bad debt resulting in a loss, is on the capital or revenue account. Most trading losses incurred in the course of carrying on of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, etc., derived income from investment in Government securities. A sum of Rs. 50,000 borrowed from a creditor for the purpose of purchasing Government securities was brought in cash to Rajahmundry by its employee and was handed over to its cashier. At a time when the cashier had turned his back to take out some books, a stranger suddenly arrived at the place of the assessee's business and committed theft of Rs. 30,000. In spite of lodging a complaint with the police, the amount could not be recovered. The assessee then claimed deduction of that amount as a business loss in computing its profits and the Tribunal allowed the claim on the ground that the loss was incidental to the carrying on of its business. On a reference at the instance of the revenue, the High Court held that the loss was not allowable as a deduction as the loss was not incidental to the assessee's business. The Supreme court reversed the decision of this court and held that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit. The loss here too is in the course of the film distributi ..... 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