Bhagabati Prasad Banerjee, J. - (1.) The Tribunal has referred the following questions of law to this court under Section 66(2) of the Indian Income-tax Act, 1922 ("the Act") : "(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of Rs. 1,61,531 under Section 10(2)(xi) of the Indian Income-tax Act, 1922, for the purpose of computing the income from business. (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the debt became bad and doubtful during the relevant previous year. "
(2.) The question of law relates to the assessment year 1958-59 for which the accounting period was the year ended on March 31, 1958.
(3.) The dispute involved in the questions before this court pertains to the claim of allowance of a bad debt or loss incurred by the assessee in the course of its business as film distributors in a sum of Rs. 1,61,531. The said amount had been debited in the profit and loss account as being irrecoverable from the producer and director, Sorab Modi of Bombay, and represented advances made for production of two pictures Waris and Galib. The pictures were neither produced nor received by the assessee at any time. Dispute accordingly arose between them and suits were filed by each of them against the other. As nothing, according to the assessee, could be recovered from the producer and distributor, Sorab Modi, it had no alternative but to write off the amount. The Income-tax Officer rejected the claim for deduction of the written off bad debt and added back the said amount to the total income of the assessee for the assessment year under consideration. Aggrieved by the said order, the assessee brought the matter by way of an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the said claim was premature. The assessee then brought the matter by way of appeal to the Tribunal and the Tribunal held as follows : "The amount aggregating to Rs. 1,61,531 came to be advanced between January 9, 1954, and June 17, 1954. Soon after, disputes arose between the assessee and the producer and on July 19, 1954, the producer served a notice on the assessee proposing to forfeit the said amount and revoking the contract. He also filed a suit in the Bombay High Court on July 23, 1954, claiming damages from the assessee in Suit No. 1069 of 1954. The assessee filed a suit in the Calcutta High Court on August 11, 1954, claiming refund of the amount advanced and damages in Suit No. 2477 of 1954. Thereupon the producer on September 10, 1954, applied for an injunction in the Bombay High Court restraining the assessee from proceeding with the suit at Calcutta and an injunction was granted. The assessee appealed against the order granting injunction and on November 19, 1954, the order was vacated. Thereafter, the producer applied in the Calcutta High Court for stay of the suit filed by the assessee until the suit in Bombay was decided and the assessee also filed a similar application for stay of the suit in Bombay. Both the applications came to be rejected. Both the parties filed appeals against these orders, the producer on September 18, 1955, and the assessee on September 22, 1955. The Calcutta High Court allowed the appeal of the producer on March 1, 1957, and granted stay of the assessee's suit and dismissed the assessee's appeal seeking grant of stay of the suit at Bombay. The assessee applied for leave to appeal to the Supreme Court but it was rejected on July 29, 1957. The assessee, however, applied to the Supreme Court for grant of special leave to appeal against the order staying the suit in the Calcutta High Court but the same was rejected on November 5, 1957. On March 31, 1958, the assessee wrote off the amount in his books as a bad debt or loss incurred. It transpires that, subsequently, an agreement was entered into on September 25, 1959, whereunder the producer, inter alia, agreed to refund a sum of Rs. 2,40,000 in instalments and each of them agreed not to press the suits filed by them and to withdraw the same. It has been stated before us that none of the parties have received (anything) in spite of this agreement and this is not controverted. It is seen from the facts stated above that though the moneys had been advanced in 1954, there was no production of any picture but, on the other hand, the producer started a litigation forfeiting the amount advanced. The assessee tried to assert his rights and filed a suit claiming refund of the amount and damages but the suit could not be proceeded with. For over three years, no progress in the suit filed by the assessee could be made and it was stayed. It has been contended for the appellant that the financial circumstances of the producer were quite bad and its attempts to at least obtain a decree could not be successful and having regard to the then existing circumstances and, viewing the matter from a commercial point of view, the assessee reasonably came to the conclusion that the debt had become bad and irrecoverable and accordingly wrote it off.";