1994-VIL-63-ITAT-

Equivalent Citation: ITD 052, 239, TTJ 051, 588,

Income Tax Appellate Tribunal CALCUTTA

Date: 27.10.1994

DWARKA PROSAD AGARWAL.

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : N. PACHUAU., R. V. EASWAR.

JUDGMENT

Per R. V. Easwar, J.M.--These two appeals filed by the assessee relate to the assessment years 1985-86 and 1986-87 and they are directed against the common order dated 26-3-1991 passed by the D.C. (Appeals).

2. The assessee is an individual. The accounting years relevant to the assessment years under appeal ended on 31-3-1985 and 31-3-1986 respectively. The assessee carries on the business of film distribution under the name and style of M/s. Amar Jyoti Pictures. On 4th August, 1984 the assessee entered into an agreement with M/s. Guru Dutt Film Pvt. Ltd. Under the aforesaid agreement the assessee was appointed distributors of film 'Bindiya Chamkegi'. There are various conditions relating to the appointment of the assessee as distributors, but they are not very relevant for the purpose of the present appeal. Since the distributorship agreement entailed a large financial out-lay, the assessee entered into two agreements, one dated 23-8-1984 with M/s. Usha Movies and the other dated 24-8-1984 with M/s. Amar Jyoti Industrial Promotion Ltd. From the preamble of these two agreements it appears that the assessee, in order to distribute, exhibit and exploit the picture 'Bindiya Chamkegi' approached the other two parties for financial assistance against the payment liable to be made by the assessee to M/s. Guru Dutt Films towards royalty. Among other terms and conditions it was stipulated that out of the profits or losses arising out of the distribution of the picture the assessee would part with 50% in favour of Usha Movies and 25% in favour of Amar Jyoti Industrial Promotion Ltd. In clause 11 of these two agreements it was stipulated that the agreement shall be purely a joint venture agreement between the parties and shall not in any manner be construed as giving rise to a partnership. The other clauses of the agreements will be dealt with at the proper place.

3. In the statements accompanying the return of income for the assessment year 1985-86 the assessee furnished details of the picture which was released on 7-9-1984. After taking into account the amounts paid as royalty and after adding the expenses in respect of the prints and the publicity and advertisement expenses the total expenditure came to Rs. 9,30,614. Against this the realisation of Rs. 3,83,943 was set off and the loss from the joint venture was arrived at Rs. 5,46,671. 50% of the loss was allocated to M/s. Usha Movies and 25% of the loss was allocated to Amar Jyoti Industrial Promotion Ltd. in terms of the agreements entered into with them. Deducting these losses the balance of loss suffered by the assessee was arrived at Rs. 1,36,667. This loss was claimed by the assessee in the Profit & Loss Account.

4. While completing the assessment for the assessment year 1985-86 under section 143(3) read with section 251 on 31-3-1989 the Income-tax Officer started the computation of the business income from the net loss declared by the assessee in the Profit & Loss Account. From this he reduced a sum of Rs. 30,000 as estimated disallowance of the expenses in respect of the cost of prints, publicity and advertisement. After certain other minor disallowances the business loss was determined at Rs. 68,103 and after setting off the income of Rs. 2,418 under the head 'Other sources', the business loss to be carried forward to the subsequent years was arrived at Rs. 65,690.

5. In the assessment made on 31-3-1989 under section 143(3) for the assessment year 1986-87 the aforesaid loss was duly set off against the business income assessed for that year.

6. The assessee filed appeals to the D.C. (Appeals) for both the assessment years under consideration. In the appeal for the assessment year 1985-86 one of the points raised was against the disallowance of Rs. 30,000 from the expenses claimed against the income from the picture. In the appeal for the assessment year 1986-87 certain minor disallowances and the levy of interest under section 217 were questioned. The D.C. (Appeals) heard the appeals together. He was of the view that the business of the distribution of the film 'Bindiya Chamkegi' carried on by the assessee with M/s. Usha Movies and M/s. Amar Jyoti Industrial Promotion Ltd. under the two agreements was assessable as separate and distinct unit of assessment in the status of Association of Persons. According to him, there was a joint enterprise for a common object, namely, the earning of profits and this constituted an Association of Persons formed by the assessee and the other two entities. He was further of the view that under section 77(2) of the Income-tax Act it was only the Association of Persons which was entitled to carry forward the business loss and no member of the Association of Persons was entitled to do so. Inasmuch as the Income-tax Officer had failed to disallow the entire loss of Rs. 1,36,667 on this ground but had restricted the disallowance only to Rs. 30,000 on estimate, the assessment for the assessment year 1985-86, according to the D.C. (Appeals) required enhancement. Since the Income-tax Officer had set off the loss brought forward from the assessment year 1985-86 against the income under the head 'Business' for the assessment year 1986-87 which set off was also against the provisions of section 77(2), the assessment for the assessment year 1986-87 also required enhancement. In this view of the matter, the D.C. (Appeals) issued notice of enhancement dated 11-2-1991. The assessee filed an elaborate reply dated 20-2-1991. It is not necessary to go into this reply in detail. Suffice it to say that the assessee resisted the enhancement on two grounds. The first was that there was no Association of Persons and the second was that since the department, even assuming that there was an Association of Persons, had opted to assess the assessee, a member of the Association of Persons, the Association of Persons itself can no longer be assessed. Certain decisions were cited in support of the assessee's objection.

7. The D.C. (Appeals) was not impressed by the objections raised by the assessee. According to him the fact that the Association of Persons (A.O.P. for short) can no longer be assessed to tax was not relevant for deciding the appeal. On the contrary, according to him, under section 77 of the Act there was a clear bar against any claim of set off of the assessee's share of the A. O. P's loss against the assessee's other income. Therefore, the D.C. (Appeals) refused to accept the assessee's objections and enhanced the assessment by Rs. 1,06,668 (Rs. 1,36,668 - Rs. 30,000 already disallowed by the I.T.O.). After the enhancement the assessment for the assessment year 1985-86 resulted in a positive income of Rs. 37,052 as worked out by the D.C. (Appeals) himself in paragraph 6 of his order and since there was a positive income for the assessment year 1985-86 there was no question of set off of any loss in the assessment year 1986-87. In this view of the matter the total income for the assessment year 1986-87 was also enhanced by withdrawing the loss of Rs. 65,690 set off in the assessment.

8. The assessee is in further appeal before the Tribunal. The same contentions as were taken before the departmental authorities were repeated before us. Our attention was also invited to the fact that all the three members of the alleged A.O.P. were assessed to tax and, therefore, it was no longer open to the income-tax Officer to bring to tax the A.O.Ps. Since the A.O.P. has not been assessed and since it is no longer open to the department to assess the A. O. P., it is only the assessee who is entitled to have his 25% share in the loss set off against his other income. It was further pointed out on behalf of the assessee that there was no statutory bar against the member of the A.O.P. claiming set off of his share in the loss against his other income. The learned counsel for the assessee invited our attention to the decision of the Andhra Pradesh High Court in the case of Smt. Abida Khatoon v. CIT [1973] 87 ITR 627. In support of the contention that the A.O.P. can no longer be assessed, our attention was invited to the Full Bench decision of the Andhra Pradesh High Court in the case of CIT v. B.R. Constructions [1993] 202 ITR 222.

9. Regarding the merits of the disallowance of Rs. 30,000 it was submitted that full details of the expenses claimed against the picture realisation had been given before the Income-tax Officer. Our attention was also drawn to such details filed in the paper book.

10. The learned counsel for the assessee, therefore, contended that the enhancement of the income for both the years under appeal was invalid and the assessee's claim should be accepted.

11. The learned Departmental Representative at the outset made it clear that the department was not seeking to assess the A. O. P., but all that was being held by the D.C. (Appeals) was that the assessee is not entitled to have his share of the loss adjusted against his other income. He argued that not only there was no provision in the Income-tax Act enabling such set off, but, on the other hand, there was a statutory bar imposed on such claim by section 77(2) of the Act. He drew our attention to the judgment of the Calcutta High Court in the case of Ganga Metal Refining Co. (P.) Ltd. v. CIT [1968] 67 ITR 771. On the question of option to assess the A.O.P. or the members thereof, he relied on the judgment of the Patna High Court in the case of Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688.

12. We have carefully considered the rival contentions. We have also perused the orders of the departmental authorities and the contents of the paper book filed on behalf of the assessee. We are of the view that the assessee is entitled to succeed in the appeals. On a perusal of the agreements entered into by the assessee it is possible to come to the conclusion that there was a combination or joint enterprise between the assessee and Usha Movies and Amar Jyoti Industrial Promotion Ltd. for exploiting the distribution right of the picture 'Bindiya Chamkegi'. Though the object of entering into the agreements was to secure finance for the purpose of ensuring payment of the huge royalty amounts payable by the assessee in respect of film to the producer M/s. Guru Dutt Films Pvt. Ltd., Bombay, the other terms and conditions of the two agreements, which are identically worded, clearly disclose the intention to exploit the distribution rights of the picture as an A.O.P. Under clause (1) of the agreement, M/s. Usha Movies and M/s. Amar Jyoti Industrial Promotion Ltd. were taken by the assessee as co-sharer in the rights, title and interest and the benefits derived out of the distribution, exhibition and exploitation of the picture for a period of eleven years. M/s. Usha Movies were given the right to exploit the picture in the eastern circuit excluding Bihar and Nepal. Similarly M/s. Amar Jyoti Industrial Promotion Ltd. was also given the right to exploit the picture in the same territory. For giving such right the assessee was to get 5% commission. The agreements were to remain in force during the subsistence of the assessee's agreement with M/s. Guru Dutt Films, producers. As per clause 6 of the agreements after meeting all proportionate expenses arising out of the exploitation of the films, the balance of profit or loss would be shared in the following proportion, reading the agreements together

1. Assessee 25%

2. Usha Movies 50%

3. Amar Jyoti Industrial Promotion Ltd. 25%

As per clause 7 of the agreement, the assessee had no right to surrender the distribution rights to the producers or any other person without the consent of the other two parties. The agreements also provided for sending of the monthly business statements by the two parties to the assessee on or before 20th of every succeeding month. The bad debts arising out of the joint venture was also to be shared in proportion to the profit sharing ratio. It will thus be seen from the terms of the relevant agreements that there was a combination of the enterprise and efforts of all the three parties in the exploitation of the distribution rights. Though the preamble to the agreements recited that the object is for procuring finance for the assessee, an association or combination with the object of producing income can be spelt out by the other terms of the agreements. The fact that in clause 11 it was stated that the agreement shall only be a joint venture agreement and cannot be construed as a partnership agreement does not advance the assessee's case. The joint venture agreement may also give rise to an A.O.P. though not a partnership. We are, therefore, of the considered opinton that there was an A.O.P. constituted by the assessee Usha Movies and Amar Jyoti Industrial Promotion Ltd. for the exploitation of the distribution rights of the picture 'Bindiya Chamkegi'.

13. The next question, however, is whether the assessee is entitled to have the share of the loss set off against his other income. This question has to be decided in favour of the assessee. Under the scheme of the Act, income-tax is only one tax and it is not a collection of taxes under various heads of income. This principle is well settled and has been recognised by the Madras High Court as long back as in the case of CIT v. T. Namberumal Chetty & Sons [1933] 1 ITR 32 at page 37 by the learned Chief Justice, Sir Owen Beasley. The same principle was laid down In the case of B. M. Kamdar, In re [1946] 14 ITR 10 of the Bombay High Court by the learned C.J. Beaumont. The Supreme Court reaffirmed this principle in the case of East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49. The corollary of this principle is that it is implicit in the Income-tax Act that a loss from one source of income can be set off against the income from another source under the same head. This principle was implicit in the 1922 Act. It was made explicit in section 70 of the 1961 Act. Under section 71 of the new Act loss under one head of income can be set off against another head of income. A perusal of these two sections which deal with the adjustment of the losses from one source against the income from another source under the same head and from one head of income against income from another head of income shows that there is no express prohibition in these sections against any member of the A.O. Ps. setting off his share of the loss against the income from some other source under the same head. Even section 77 of the Act deals only with losses by unregistered firms or their partners and does not make provision for losses of A.O.Ps. or their members. Section 77(2) which was specifically referred to both by the D.C. (Appeals) and by the learned D.R. does not contain any prohibition against the member of A.O.Ps. adjusting his share of loss in the A.O.P. against his other income either under the same head but from a different source or under a different head altogether. In other words, that section is not applicable to a case of a member of an A.O.Ps. Section 77(2) is a repetition of the second proviso to section 24(1) of the 1922 Act. The decision of the Calcutta High Court to which the learned D.R. made a reference arose under the old Act. That case is clearly distinguishable in the sense that that was not a case of an A.O.Ps. but was a case of an unregistered partnership firm. This is made clear in the discussion of the facts at page 775 of the report. In this page the High Court noticed that the fact found was that there was a partnership of three companies and that such a partnership was an unregistered firm under the Income-tax Act. The other distinction between the facts of the present appeals and the decision of the Calcutta High Court is that whereas we are concerned with a set-off claim under section 70 of the new Act, in the case before the Calcutta High Court the assessee had claimed the set off of the share of loss from an unregistered firm against its income under another head in accordance with section 24(1) of the old Act. A reference to section 24(1) of the old Act clearly shows that that section provides for a set off of the loss under one head of income against the income from another head. We have earlier seen that the forerunner of section 77(2) of the new Act was the second proviso to section 24(1) of the old Act. The High Court itself considered that section 24(1) of the old Act would not be applicable to the case of an A.O.P. (please see page 781 of the report). From this it is clear that the High Court has only held that in the case of an A.O.P. the share of the loss of a member cannot be set off against his income under another head ; the High Court has not said that the member's share of the loss cannot be set off against his income under the same head but from a different source. This is our understanding of the judgment of the High Court cited by the learned D.R., having, regard to the judgment of the Supreme Court in the case of CIT v. P. M. Muthuraman Chettiar [1962] 44 ITR 710 which was also referred to by the High Court at pages 780 and 781 of the report. It was further recognised by the High Court in the same page (781) that a set off can be regarded both on general principles as well as on the terms of any special statute. The general principles are inherent in every accounting of the assessee and if the assessee carries on several businesses, he is entitled to set off the loss in one business against the profit in another business in computing his total income. Thus, contrary to what the D.C. (Appeals) and the learned D.R. have contended, the judgment of the Calcutta High Court rendered after referring to the principles laid down by the Supreme Court in the judgment expressly allows set off on general principles. However, if the statute imposes any limitation on such right, the same has to be given effect to. We have already seen that section 77(2) does not expressly refer to an A.O.P. or a member thereof. Thus, the right of the member of an A.O.P. to adjust his share of the loss under section 70 of the Act against the income from another source under the same head is not at all affected. This principle has been recognised and upheld by the Madras High Court in the case of CIT v. S. K. S. Rajamani Nadar [1977] 109 ITR 258 and by the Andhra Pradesh High Court in the case of Smt. Abida Khatoon, both cases arising under the 1961 Act.

14. We are, therefore, of the considered opinion that though there was an A.O.P. in the present case, the assessee's 25% share in the loss made by the A. O. P. was rightly set off by the Income-tax Officer in the assessment against the assessee's other income. The enhancement made by the D.C. (Appeals) was not justified for both the years.

15. That leaves us with the disallowance of Rs. 30,000 out of the expenditure claimed against the picture realisation. Since complete details have been given with regard to the expenditure and no specific inflation or unvouched expenditure has been pointed out by the Income-tax Officer who has made the disallowance only on estimate, we delete the disallowance and direct the Income-tax Officer to accept the loss as claimed by the assessee for the assessment year 1985-86.

16. Our decision for the assessment year 1985-86 will mean that the enhancement made for the assessment year 1986-87 is also not sustainable and the set off granted by the ITO of an amount of Rs. 65,690 was proper.

17. In the result, the appeals are allowed

 

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