Commissioner of Income Tax vs T.S. Srinivasa Iyer

Thanikkachalam, J.—In compliance with the directions u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), in

T.C. Nos. 433 of 1979 and 490 of 1977, the Tribunal referred the following questions to this court for our opinion.

Assessment year 1970-71 :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 17,693 representing

bad debts written off should be allowed as a proper deduction while computing the business income of the assessee-family for the assessment year

1970-71 ?

Assessment year 1969-70 :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the claim of the assessee of Rs. 21,682

representing rebate allowed to customers for laboratory charges and copy printing charges payable by them should be allowed as a proper

deduction while computing the business income of the assessee-family for the assessment year 1969-70 ?

The assessee is a Hindu undivided family represented by its legal heir Sri S. Balasubramanian. During the assessment years under consideration,

the Hindu undivided family consisted of late Sri. T. S. Srinivasa Iyer (who died on August 26, 1969) and his son, S. Balsubramanian. On

September 6, 1962, there was a declaration of division of the assets of the family. On September 7, 1962, there was a partial partition in respect

of certain assets. Some other assets were divided by a partial partition that took place on August 30, 1967. Finally on July 7, 1969, the entire

family was partitioned giving rise to two separate Hindu undivided families of late T. S. Srinivasa Iyer and S. Balasubramanian, respectively. It is

also accepted as a matter of fact that the joint family originally carried on a composite business under the name of Gemini Studios. The activities of

the studio business consisted of pre-shooting and post-shooting of cinema films. The business consisted of various departments. There was a cine

colour laboratory in which processing of films and development were done for the assessee''s own films as well as for the films produced by

others. In the shooting department, the assessee is not only shooting its own films, but also undertaking the shooting of films for others. The

assessee was exploiting the pictures produced by it. The assessee also used to lease pictures taken by it to others. The assessee was collecting

royalties from the pictures leased out. Thus, the assessee was doing a composite business in the film world.

In the assessment year 1969-70, the assessee-Hindu undivided family had done some colour photographic work for a party in Calcutta. There

was a lot of correspondence between the Calcutta party and the assessee with the regard to certain alterations in rates and discount facilities. As a

result of the negotiations, the assessee gave by way of discount a sum of Rs. 21,682 outstanding in the accounts of this party. Between 1966 and

1968, the amount of work done for the Calcutta party, Chayaban Pvt. Ltd., resulted in a debit of Rs. 2,35,640 in their account. After taking into

account the amounts received from them, the balance in this account stood at Rs. 46,168. After negotiations as stated above, the assessee agreed

to reduce the amount to Rs. 21,682. This amount was written off on March 31, 1969. The Income Tax Officer did not allow this amount for the

reason that during the previous year relevant to the assessment year under consideration, the assessee did not have the colour laboratory hereunder

the above discount was given. According to the Income Tax Officer, the colour laboratory and the printing department with plant and machinery

were already sold to a firm, Gemini Pictures Circuit Private Limited. Therefore, the Income Tax Officer pointed out that the assessee was not

doing business in the colour laboratory in the assessment year under consideration. As such, according to the Income Tax Officer, the rebate

written off in this year related to a discontinued business. On appeal, the Appellate Assistant Commissioner confirmed the disallowance made by

the Income Tax Officer. Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal, on considering the facts appearing on this

aspect, deleted the addition made by the Department.

In the assessment year 1970-71, bad debts and discounts were claimed in respect of four parties. Rs. 17,208 was claimed in respect of ALS

Productions, Rs. 453 was claimed in respect of Chitralaya films, Rs. 391 was claimed in respect of Kaveri Films and Rs. 32 was claimed in

respect of Government of West Bengal. According to the Income Tax Officer, these amounts also related to the discontinued business and,

therefore, he refused to allow the same. On appeal, the Appellate Assistant Commissioner confirmed the disallowances.

Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal considering the fact that the assessee during the assessment years

under consideration was doing a composite business in file and there was interlacing, interlocking and unity of control, came to the conclusion that

the disallowance was not sustainable and accordingly deleted the addition made by the Department.

Before us, learned standing counsel appearing for the Department contended that the colour laboratory and the printing department were given

as a running concern to the minor Hindu undivided family and, therefore, this was really a case where the assessee closed down one of its business

and not a line of its business. According to learned standing counsel, the assessee was not doing colour laboratory business during the assessment

years under consideration, since the colour laboratory and the printing department were neither owned nor possessed by the assessee. Learned

standing counsel submitted that if at all anybody is entitled to claim this loss, it is only the minor Hindu undivided family which can claim because the

minor Hindu undivided family was the owener of the colour laboratory and printing department during the assessment years under consideration.

Therefore, learned standing counsel submitted that the rebate as well as the bad debts claimed by the assessee as deductions during the assessment

years under consideration cannot be allowed in the hands of the assessee since the assessee was not doing colour laboratory business during these

assessment years under consideration.

Learned counsel appearing for the assessee contended that as regards the claim of Rs. 18,084 for the assessment year 1970-71, a sum of Rs.

391 had since been realised and that the claim should relate only to the balance, according to learned counsel, ALS Productions had no assets and

had become a failed party. Therefore, no amount could be realised from ALS Production. Any amount spent for prosecuting the litigation would

only result in further wast of money. With regard to the other two amounts, viz., in respect of Chitralaya Films and the Government of West

Bengal, it was submitted that these were only in the nature of discount given in order to maintain the good relationship with the customers.

Therefore, it was submitted that the bad debts claimed by the assessee are allowable deductions. As regards the claim fo Rs. 21,682, it was

submitted that these amounts do not pertain to a discontinued business. According to learned counsel, the assessee was conducting a composite

business which had several facets. Learned cousel submitted that simply because the assessee did not do a particular line of business in a particular

assessment year, that does not mean that the assessee closed down its entire business. According to learned counsel, the entire business done by

the assessee was an integrated one and there is interlacing, interlocking and unity of control. The assessee''s composite business consisted of pre-

shooting, post-shooting and exploitation of the pictures. The assessee was doing the business not only with the films produced by it but it also was

doing business for others. Learned counsel contended that the assessee''s composite business of dealing in films in general like shooting,

exploitation, exhibiting and collecting royalties, etc., continued even though the partial partition resulted in some or other of the assets going to the

two separate minor Hindu undivided families. It is in the light of this it was submitted that the transfer of colour laboratory alone to the minor Hindu

undivided family has to be looked into. In such circumstance, it was contended that the assessee cannot be said to have closed down its business

at all during the assessment years under consideration. Accordingly, it was pleaded that the Tribunal was correct in deleting the abovesaid two

additions.

We have heard the rival submissions. In the assessment year 1969-70, the assessee claimed a deduction of Rs. 21,682 representing the rebate

allowed to a customer towards laboratory charges and copy printing charges payable by that customer. So also, in the assessment years 1970-71,

the assessee claimed a deduction of bad debts amounting to Rs. 17,693 which was written off on March 31, 1969. We have set out the facts in

detail. These bad debts and rebate claimed as deductions relate to the business done in the colour laboratory and the printing department. The

assessment was not doing the business in colour laboratory and printing department in the assessment years under consideration.

The point that arises for consideration in this reference is that even though the assessee was not doing business in colour processing during the

assessment years under consideration and even though the assessee was not the owner nor in possession of the colour laboratory and the printing

department during assessment years under consideration, whether the assessee can claim the rebate and the bad debts relating to the abovesaid

business as outgoings in the assessment years under consideration. The facts on record show that the assessee was doing a composite and

integrated business in films. The composite business consisted of various departments like pre-shooting, post-shooting, exploitation of films and

collection of royalties, etc. The assessee was also doing colour processing work in the cine colour laboratory and the printing department. The

entire business was under one common management and all the employees are working under one management. There is interlacing, interlocking

and unity of control. Therefore, the Department was not correct in stating that the business of the assessee to which these debts and rebate related

was discontinued. In fact, the entire business is indiviside and inseparabel and discontinuance of a part of the business will not amount to

discontinuance of the entire business carried on by the assessee. In other words, even after certain assets were transferred to the minor Hindu

undivided family in the partition arrangement, the assessee was doing business in films. It also remain to be seen that simply because on line of

business was closed or that part of the business assets relating to cine colour processing was transferred to the minor Hindu undivided family, that

does not mean that the assessee has discontinued its entire business in films.

Both learned standing counsel and learned counsel appearing for the assessee relied upon various decisions in order to support their respective

contentions. They are E.A.V. Krishnamurthy and Son Vs. Commissioner of Income Tax, in the case of E. A. V. Krishnamurthy and Sons v. CIT

Commissioner of Income Tax Vs. S.S.M. Ahmed Hussain, ; Commissioner of Income Tax, A.P. Vs. T. Veerabhadra Rao, K Koteswara Rao and

Co., ,; L.M. Chhabda and Sons Vs. Commissioner of Income Tax, Gujarat, ; B.R. Limited Vs. V.P. Gupta, Commissioner of Income Tax,

Bombay, ; Produce Exchange Corporation Ltd. Vs. Commissioner of Income Tax (Central), Calcutta, ; Commissioner of Income Tax, Madras

Vs. Prithvi Insurance Co. Ltd., ; Commissioner of Income Tax, U.P. Vs. Nainital Bank Ltd., ; Harihar Cotton Pressing Factory Vs. Commissioner

of Income Tax, Bombay North, ; Commissioner of Income Tax, Tamil Nadu-I, Madras Vs. Blue Mountain Estates and Industries Limited, and

K.S.S. Soundarapandia Nadar and Bros. Vs. Commissioner of Income Tax, . We have carefully gone through all these decisions. All these

decisions are rendered on the facts appearing in these cases.

The question whether a debt is a bad debt or the question in which year it became a bad debt are questions of fact. Similarly, the question

whether the activies of an assessee consititute the carrying on of a trade or business under a statue allowing deduction of bad debts from gross

income is largely one of fact, the solution of which requires an examination of the facts in each case.

According to the facts appearing in the present case, the bad debts were incurred in relation to the business done in cine colour laboratory and

the printing department. These debts became bad in the assessment year under consideration. The consideration. The assessee had written off the

debts on March 31, 1969. So also, the assessee gave certain rebate for the purpose of maintaning good relationship. Both these outgoings were

claimed as deductions in the assessment years consideration. Even though the assessee was not doing this line of business in these assessment

years under consideration, the assessee was doing its entire film business during these assessment year under consideration. Even after the cine

colour laboratory was allotted to the minor Hindu undivided family, in the partition arrangement, the assessee continued its film business. As

already pointed out, the film business done by the assessee prior to the transfer to the colour laboratary was an integrated and composite one

consisting of various departments. There is interlacing, interlocking and unity of control. The colour processing and printing department were one

unit in the entire business. The abovesaid two losses arose from that unit, when the assessee was doing business in colour processing. The assessee

wanted to set off those losses arising in that unit against the income and profits earned in the entire film business which the assessee was carrying on

even after the transfer of the colour laboratory to the minor Hindu undivided family. Where more than one business carried on by an assessee are

found to constitute one and the same business due to interlacing, interconnection, etc., and one of them is closed, the expenditure in relation to such

closed business is deductible from the profits of the continuing business of businesses. Outgoings of this nature are allowed not as a deduction or as

allowance but as a component inherent in the process of ascertainment of profits. Namely, arriving at the net result of credits and debits referabel

to a particular activity of the business. Thus, considering the facts appearing in this case in the light of the decisions cited supra, we are of the

opinion that the Tribunal was justified in deleting the above said two additions made by the Department in the assessment years under

consideration.

In that view of the manner, we answer both the questions referred to us in the affirmative and against the Department. The assessee is entitled

to its costs. Counsel''s fee is fixed at Rs. 500 (one set).