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.;