The Commissioner of Income Tax and
Excess Profits Tax Vs. The South India Pictures Ltd. [1956] INSC 21 (14 March
1956)
DAS, SUDHI RANJAN BHAGWATI, NATWARLAL H.
AIYYAR, T.L. VENKATARAMA
CITATION: 1956 AIR 492 1956 SCR 223
ACT:
Indian Income Tax Act, 1922 (XI of 1922), s.
10-Whether money received by the Assessee in the accounting period-As a revenue
receipt or capital receipt-On the facts and in the circumstances of the instant
case.
HEADNOTE:
The assessee-a private limited
company-carried on the business of distribution of films. In some instances the
assessee used to produce or purchase films and then distribute the same for
exhibition in different cinema halls and in other cases the assessee used to
advance monies to producers of films and secure the right of distribution of
the films produced with the help of the monies so advanced by the assessee. In
the course of such business it advanced monies to Jupiter Pictures for the
production of three films and acquired the right of distribution of these three
films under three agreements in writing dated the September 1941, July 1942 and
May 1945. The said agreements expressed in similar language contained similar
provisions.
In the accounting year ending 31st March 1946
and in the previous years the assessee bad exploited its rights of distribution
of the three pictures. On 31st October 1945 the assessee and Jupiter Pictures
entered into an agreement cancelling the three agreements relating to the
distribution rights in respect of the three :films and in consideration of such
cancellation the assessee was paid Rs. 26,000, in all by the Jupiter Pictures
during the accounting period as compensation. The question for determination
was whether on the facts and in the circumstances of the case the sum of Rs.
26,000, received by the assessee from the Jupiter Pictures was a revenue
receipt assessable under the Indian Income Tax Act.
Held, per S. R. DAS C. J. and VENKATARAMA
AYYAR J., (BHAGWATI J. dissenting) that the sum received by the assessee was a
revenue receipt (and not a capital receipt) assessable under the Indian Income
Tax Act inasmuch as:(i) the sum paid to the assessee was not truly compensation
for not carrying on its business but was a sum paid in ordinary course of business
to adjust the relation between the assessee and the producers of the films;
30 224 (ii) the agreements which were
cancelled were by no means agreements on which the whole trade of the assessee
had for all practical purposes been built and the payment received by the
assessee was not for the loss of such a fundamental asset as was the ship
managership of the assessee in Barr Crombie & Co. Ltd. v. Commissioners of
Inland Revenue ([1945] 26 T.C. 406); and (iii) one cannot say that the
cancelled agreements constituted the framework or whole structure of the
assessee's profit making apparatus in the sense the agreement between the two
margarine dealers concerned in Van Den Berghs Ltd. v. Clark (L.R. [1935] A.C.
431) was.
It is not always easy to decide whether a
particular payment received by a person is his income or whether it is to be
regarded as his capital receipt. Income is a word of the broadest connotation
and difficult and perhaps impossible to define in any precise general formula.
Though in general the distinction between an income and a capital receipt was
well recognised and easily applied, cases did arise where the item lay on the
border line and the problem had to be solved on the particular facts of each
case. No infallible criterion or test can be or has been laid down and the
decided cases are only helpful in that they indicate the kind of consideration
which may relevantly be borne in mind in approaching the problem. The character
of the payment received may vary according to the circumstances.
BHAGWATI J. (dissenting): that in the instant
case, the pictures, if produced by the assessee itself would have been capital
assets of the assessee. What the assessee did was that instead of producing the
pictures itself it advanced monies to the producers for the purpose of
producing the pictures which it acquired for the purpose. of distribution and
exploitation. Nonetheless, the pictures thus acquired were capital assets of
the assessee which it worked upon in carrying on its business of distribution
and exploitation, the monies it spent on the acquisition of the pictures were
thus capital expenditure and whatever monies were realised by it by working
these capital assets were its capital receipts except of course the commission
which it earned by distribution and exploitation of the pictures which certainly
would be its trading receipts. Having regard to the terms of these agreements
it could certainly not be predicated of these pictures that they were its
stock-intrade so as to constitute the payment in question a trading receipt of
the assessee.
Commissioner of Income-tax v. Shaw, Wallace
& Co. ([1932] L.R. 59 I.A. 206; A.I.R. 1932 P.C. 138; 6 I.T.C. 178), Baja
Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar
and Orissa ([1943) 11 I.T.R. 513, 521;
L.R. 70 I.A. 180), Short Brothers, Ltd. v.
The Commissioners of Inland Revenue ([1927] 12 T. C. 955), Kelsall Parsons
& Co. v. Commissioners of Inland Revenue ([1938] 21 T. C. 608), Glenboig
Union Fireclay Co. Ltd. v. The Commissioners of Inland Revenue ([1922] 12 T.C.
427), Shadbolt 225 (H. M. Inspector of Taxes) v. Salmon Estate ([1943] 25 T.C. 52),
Johnson (H.M. Inspector of Taxes) v. W.S. Try, Ltd.
([1945] 27 T.C. 167), Commissioner of Income
Tax, Bengal v. Shaw Wallace and Company (A.I.R. 1932 P.C. 138), Van Den Berghs,
Ltd. v. Clark (Inspector of Taxes) (L.R. [1935] A.C.
431; 19 T. C. 390; 3 I.T.R. (Suppl.) 17) and
Barr Crombie & Co. Ltd. v. Commissioners of Inland Revenue ([1945] 26 T.C. 406),
referred to.
The facts of the case as taken from the
judgment of the Hon'ble The Chief Justice are shortly as follows:The assessee
is a private limited company. It carried on the business of distribution of
films. In some instances the assessee used to produce or purchase films and
then distribute the same for exhibition in different cinema halls and in other
cases the assessee used to advance monies to producers of films and secure the
right of distribution of the films produced with the help of the monies so
advanced by the assessee. In the course of such business it advanced monies to
Jupiter Pictures for the production of three films and acquired the right of
distribution of these three films under three agreements in writing dated the
17th September 1941, 16th July 1942 and 5th May 1945.
The said several agreements were expressed in
similar language and contained similar provisions. The assessee bound itself to
advance a certain sum in instalments specified therein and retain the balance
to be utilised for the purpose of press publicity in such way as it thought fit
and proper and at its sole discretion. Jupiter Pictures in its turn bound
itself to arrange for the delivery to the assessee of twelve copies of the film
to be produced after it would be passed by the Board of Censors (clause 1). The
territories within which the assessee was to have the right of distribution and
exploitation of the film was specified in clause 2 and such right was to enure
for a period of five years from the date of the release of the film. The
assessee was given the right, at its sole discretion, to distribute the films
at such rates and on such terms and conditions and in such manner as it might
deem fit (clause 2). The amounts realised by the distribution of the films was
to be utilised by the assessee in the following way:
namely, in paying itself its distribution
commission and in retaining the available balance until the entire amount of
advance would be discharged (clause 3) and after the entire amount of the
advance would be discharged, in paying to Jupiter Pictures the net realisations
from the film after deducting its commission (clause 4). In case the full
amount of advance could not be recouped from the realisations of the film on or
before the expiry of one and half years from the date of the first release of
the film Jupiter Pictures would be liable to pay to the assessee whatever
balance would remain due with compound interest at twelve per cent. per annum
calculated in the manner mentioned in clause 6. The assessee's commission for
distribution and 226 exploitation of the film through its Organisation was, by
clause 8, fixed at 15 per cent. of the net realisations. In case of sale of
district or territorial rights of the film made by consent of both parties the
assessee alone would be entitled to put through such sales and receive the
proceeds and would be entitled to a commission of ten per cent.
thereon and to appropriate the balance
towards the payment and discharge of the advance made by it (clause 9). The
assessee was to submit to Jupiter Pictures a monthly statement of account and
show all books of account to Jupiter Pictures (clauses 11 and 12). The assessee
was given liberty to appoint sub-agents and sub-distributors at its sole
discretion (clause 13). The amount advanced by the assessee was made
immediately repayable in the event of the film being banned or not passed by
the Board of Censors (clause 14). Clause 15 gave the assessee a charge by way
of security on the negative and positive copies of the film for whatever amount
might be due to the assessee on account of the advance made and in case the
negative and positive copies were in possession of Jupiter Pictures the same
were to be held by the latter as trustee of the assessee. The burden of
insuring the negative copies of the film was placed on Jupiter Pictures at its
own cost (clause 16).
Jupiter Pictures agreed to indemnify the
assessee against all claims or demands of any nature whatsoever by any person
or agency in or upon the film and against all claims of any person or agency on
account of any infringement of copyright (clause 17). If Jupiter Pictures
failed to deliver the film within the time specified therein, the assesses was
given the right, at its option, to complete the picture at its own cost and in such
event, Jupiter Pictures was to be liable to the assessee for all such expenses
with compound interest thereon at 12 per cent. per annum and the assessee would
have all the rights of distribution, sale, etc. as aforesaid (clause 19). The
last clause provided that on the expiry of the period of 5 years the assessee
would return to Jupiter Pictures all copies of the film and balance stock of
loan and saleable publicity materials subject to wear and tear.
In the accounting year ending 31st March 1946
and in the previous years the assessee had exploited its right of distribution
of the three pictures. On 31st October 1945 the assessee and Jupiter Pictures
entered into an agreement cancelling the three several agreements relating to
the distribution rights in respect of the three films and in consideration of
such cancellation Jupiter Pictures agreed to pay to the assessee towards
commission the sum of Rs. 8,666-10-8 (rupees eight thousand six hundred and
sixty-six annas ten and pies eight) for each of the three pictures aggregating
in all to Rs. 26,000 (rupees twenty-six thousand). It is this sum of Rs. 26,000
(rupees twenty-six thousand) which was paid during the accounting year which
forms the subject matter of the question that has arisen between the assessee
and the department.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 32 of 1954.
227 On appeal from the judgment and order
dated the 26th September 1951 of the Madras High Court in Case Referred No. 18
of 1949.
C. K. Daphtary, Solicitor-General of India
(C. N. Joshi and R. R. Dhebar, with him) for the appellant.
R. Ganapathy Iyer, for the respondent. 1956.
March 14.
DAS C.J.-In the year 1945 the respondent
company (hereinafter called the "assessee") received a payment of a
sum of Rs. 26,000 (rupees twenty-six thousand) from Jupiter Pictures Ltd. of
Madras (hereinafter referred to as Jupiter Pictures) pursuant to the terms of
an agreement between the assessee and Jupiter Pictures dated the 31st October
1945.
In the course of the proceedings for the assessment
of the assessee's income-tax for the year 1946-47 and the excess profits tax
for the chargeable accounting period from 1st April 1945 to 31st March 1946,
the following question arose:"Whether on the facts and in the
circumstances of the case, the sum of Rs. 26,000 received by the assessee from
Jupiter Pictures Ltd., is a revenue receipt assessable under the Indian
Income-Tax Act?" The Income-Tax Officer took the view that the sum was in
the nature of a revenue 'receipt and was liable to be brought to account for
purposes of calculating the tax. The Appellate Assistant Commissioner upheld
this decision. On further appeal by the assessee the Income-Tax Appellate
Tribunal held that the case was governed by the decision of the Judicial
Committee in Commissioner of Income-Tax v. Shaw Wallace and Company(1) and that
the sum received by the assessee was a capital receipt. Accordingly on 26th
August 1948 the Tribunal reversed the decision of the Appellate Assistant
Commissioner. At the instance of the Commissioner of Income-Tax and (1) [1932]
L.R. 59 I.A. 206; A.I.R. 1932 P.C. 138; 6 I.T.C. 228 Excess Profits Tax, Madras
the Tribunal under section 66(1) of the Indian Income-Tax Act, 1922 referred to
the High Court of Madras the question of law quoted above. The High Court
agreed with the Income-Tax Appellate Tribunal and answered the question in the
negative. The present appeal is directed against this decision of the High
Court.
[After stating the facts of the case which
gave rise to the present point in controversy and which have been stated above
His Lordship proceeded as follows:] As already indicated the question for
consideration is whether this payment constituted a capital receipt or a
revenue receipt. It may be mentioned here that the answer to this question will
be relevant and helpful only in respect of assessments of other assessees for
assessment years prior to the date when the new sub-section (5-A) was, by the
Finance Act of 1955, added to section 10 of the Indian Income Tax Act, 1922.
It is not always easy to decide whether a
particular payment received by a person is his income or whether it is to be
regarded as his capital receipt. Income, said Lord Wright in Raja Bahadur
Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-Tax, Bihar and
Orissa(1), is a word of the broadest connotation and difficult and perhaps
impossible to define in any precise general formula. Lord Macmillan said in Van
Den Berghs, Ltd. v. Clark (Inspector of Taxes)(2) that though in general the
distinction between an income and a capital receipt was well recognized and
easily applied, cases did arise where the item lay on the border line and the
problem had to be solved on the particular facts of each case. No infallible
criterion or test can be or has been laid down and the decided cases are only
helpful in that they indicate the kind of consideration which may relevantly be
borne in mind in approaching the problem. The character of the payment received
may vary according to the circumstances. Thus the amount received as
consideration for the sale of a (1) [1943] 11 I.T.R. 513, 521; L.R. 70 I.A.
180, 192.
(2) L.R. [1935] A.C. 431: 19 T.C. 390; 3
I.T.R. (Suppl.) 17.
229 plot of land may ordinarily be a capital
receipt but if the business of the recipient is to buy and sell lands, it may
well be his income. The problem that confronts us has to be approached keeping
in mind the different kinds of consideration taken into account in the
different cases.
The assessee before us is a company carrying
on a business and it received the sum in question in connection with that
business. We have, therefore, to ask ourselves as to what is the substance of
the matter from the point of view of a businessman. The assessee contends that
in receiving this sum it was not carrying on its business,/which was to
distribute films, but that it received this amount as and by way of
compensation for not distributing those films, that is to say for not carrying
on its business. The sum was, according to the assessee, received by it in
return for its ceasing to engage in the business of distributing those three
films. We do not think that is the intrinsic business of the matter. Here was
the assessee whose business was to distribute films, purchased or produced by
itself or in respect of which it secured the distribution rights under
agreements with the producers. For the purpose of this distribution business
the assessee obviously,had arrangements with the proprietors of
different/cinema halls.
If any producer failed to deliver an film as
agreed then the exigencies of the assessee's business would certainly have
required the assessee to treat that agreement as terminated by breach and to
enter into another agreement for securing the distribution right in some other
film so as to enable it to fulfil its engagement with the proprietors of the
cinema halls by distributing the new film in the place of the one that had not
been supplied. Likewise if a particular film secured by the assessee failed to
attract public enthusiasm, business exigencies might well have required the
assessee to enter into an arrangement with the producers concerned to cancel
the agreement for distribution of that film and to enter into another agreement
with the same or other producers for acquiring the distribution right in
another film likely to bring a better 230 box-office collection. The
termination of the agreement in each of the circumstances hereinbefore
mentioned could well be said to have been brought about in the ordinary course
of business and money paid or received by the assessee as a result of or in
connection with such termination of agreements would certainly be regarded as
having been so paid or received in the ordinary course of its business and
therefore a trading disbursement or trading receipt. There was no covenant made
by the assessee with Jupiter Pictures not to enter into agreements with other
producers or not to distribute films secured from other producers. In fact in
the accounting year the assessee had distribution rights in respect of eleven
films including these three. These three agreements would have come to an end
on the expiration of the period of five years from the respective dates of
release of the films and had only a part of the period to run, a fact which may
also be relevantly borne in mind. The cancellation of these agreements must
have left the assessee free, if it so chose to secure other films which could
be distributed in the place of these films and/which might have brought in
better box-office collections, In the language of Lord Hanworth, M. R. in Short
Bros., Ltd. v. The Commissioners of Inland Revenue(1) the sum paid to the
assessee was not truly compensation for not carrying on its business but was a
sum paid in ordinary course, of business to adjust the relation between the
assesse and the producers of the films. The agreements which were cancelled
were by no means agreements on which the whole trade of the assessee bad for
all practical purposes been built and the payment received by the assessee was
not for the loss of such a fundamental asset as was the ship managership of the
assessee in Barr, Crombie & Co., Ltd. v. Commissioners of Inland
Revenue(2).
Nor can one say that the cancelled agreements
constituted the framework or whole structure of the assessee's profit making
apparatus in the sense the agreement between the two margarine dealers
concerned in Van Den Berghs (1) [1927] 12 T.C. 955, 973.
(2) [1945] 26 T.C. 406, 231 Ltd. v. Clark
(Inspector of Taxes) (supra) was. 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.
Learned counsel for the assessee has, as did
the High Court, strongly relied on the decision of the Privy Council in Shaw
Wallace's case (supra). In that case there was no fixed period within which the
distributing agency was to continue, whereas in the case before us the
agreement was only for a fixed period of five years out of which a considerable
part had already expired. In Shaw Wallace's case the entire distributing agency
work was completely closed, whereas the termination of the agreements in
question did not have that drastic effect on the assessee's business at all.
His business of distribution of films continued notwithstanding the
cancellation of these three agreements. In Shaw Wallace's case, therefore, it
could possibly be said that the amount paid there represented a capital
receipt. It is pointed out that in Shaw Wallace's case there were other
agencies also which were continuing. A reference to that case reported sub-nom
Shaw Wallace & Co. v. Commissioner of Income Tax, Bengal(1) will show that
Shaw Wallace and Co.
carried on business as merchants and managing
agents of various companies and that they were also the distributing agents of
the two oil companies as well. The business of managing agency of a company is
quite different from the business of distributing agency of the products of oil
companies. The different managing agencies in that case were entirely different
from and independent of the distributing agency of the two oil companies and
this aspect of the matter was emphasised (1) [1931] 5 I.T.C. 211.
31 232 by Sir George Lowndes towards the end
of his judgment where he said:"It is contended for the appellant that the
"business" of the respondents did in fact go on throughout the year,
and this is no doubt true in a sense. They had other independent commercial
interests which they continued to pursue, and the profits of which have been
taxed in the ordinary course without objection on their part. But it is clear
that the sum in question in this appeal had no connection with the continuance
of the respondent's other business. The profits earned by them in 1928 were the
fruit of a different tree, the crop of a different field".
If Shaw Wallace and Co. had other
distributing agencies similar to those of the two oil companies then it would
be difficult to reconcile the decision in that case with the later decisions in
Kelsall all Parsons & Co. v. Commissioners of Inland Revenue(1) and other
cases. It has been urged that the agreements did not create merely an agency
for the distribution of the films but were composite agreements consisting
partly of a financing agreement creating a security on the films for the monies
to be advanced and conferring the right even to complete the films in case the
producers failed to do so and partly of a distributing agency agreement giving
the assessee the utmost latitude in the matter of the terms and conditions on
which it could exploit and distribute the films. It was argued that the rights
acquired by the assessee under the agreements were in the nature of capital
assets of the assessee's business and the amounts received by the assessee were
the prices or considerations for the sale or surrender of such capital assets
or were received by way of compensation for the sterilization or destruction of
those capital assets.
Kelsall Parsons & Co.'s case and Short
Bros.' case referred to above were sought to be distinguished on the ground
that there the payments were made in respect of the cancellation of contracts
directed to result in the making of the trading profits, whereas in the present
case the cancelled agreements were directed to the acquisition (1) [1938] 21
T.C. 608.
233 of rights in the films which when worked
were to yield profits. The terms of the agreements summarised above clearly
show that they constitute a financing agreement and a distributing agency
agreement. In so far as they were only financing agreements they gave the
assessee a charge on the films to be produced with moneys advanced by it but
gave it no right to distribute the films or otherwise work them for making
income, profits or gains. Therefore, it can hardly be said that by the
financing agreements the assessee acquired capital assets for carrying on its
distributing agency business. In this respect the case differs from the case of
Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue(1), for in
that case the lease of the fire clay fields authorised the assessee who was a
manufacturer of fire clay goods to extract fire clay and manufacture fire clay
goods and consequently was a capital asset of the assessee's business. Further,
in the present case there is no suggestion that any part of the moneys advanced
by the assessee for the production of the films was outstanding.
Assuming that to start with the films
constituted capital assets, the entire capital outlay had been recovered and
the security had been extinguished and that part of the agreements which
constituted financing agreements had been fully worked out and bad come to an
end and the three films ceased to be capital assets and the assessee was
holding the films only under that part of the agreements which constituted the
distributing agency agreements which only were subsisting. In the premises the
amount received by the assessee was only so received "towards
commission", that is to say, as compensation for the loss of the
commission which it would have earned bad the agreements not been terminated.
In our opinion, in the events that had
happened, the amount was not received by the assessee as the price of any
capital assets sold or surrendered or destroyed or sterilized but in the
language of Rowlatt J. in Short Bros.' case (supra) the amount was simply
received (1) [1922] 12 T.C. 427.
234 by the assessee in the course of its
going distributing agency business from that going business. In our judgment,
on the facts and in the circumstances of the present case, it falls within the
principles laid down in Short Bros.' and Kelsall Parsons & Co.'s cases
rather than within those laid down in Shaw Wallace's case or Van Den Bergh's
case or Barr Crombie's case.
Reference was made to section 10 (5-A) of the
Indian Income Tax Act, 1922, and it was urged that the language of that
sub-section impliedly indicated that the sum of Rs. 26,000 (rupees twenty-six
thousand) was a capital receipt. We are unable to accept this suggestion. That
sub-section was obviously introduced to prevent the abuse of managing agency
agreements being terminated on payment of huge compensation and to nullify the
application of the decision in Shaw Wallace's case to such cases. But that
sub-section does not necessarily imply that if that sub-section were not there
the kind of payment referred to therein would have been treated as capital
receipt in all cases.
For the reasons stated above the referred
question should in our opinion have been answered in the affirmative and we
answer it accordingly. The appeal is, therefore, allowed with costs throughout.
WHAGWATI J.-I had the privilege of reading
the judgment just delivered by my Lord the Chief Justice but I regret I cannot
agree with the same.
The facts leading up to the present appeal have
been fully set out in that judgment and it is not necessary to repeat the same.
The relevant portions of the agreement dated the 17th September 1941 which is
the sample of the three agreements entered into between the Jupiter Pictures
and the assessee may be, however, set out herein:
"Whereas the producer has taken on hand
the production of a Tamil talkie picture 'Kannagi' hereinafter called the said
picture........ and whereas for the purpose of the said production the producer
has approached the distributors for financial assistance and 235 for the
distribution and exploitation of the said picture by the distributors through
their organization and the distributors have agreed to render such financial
assistance by advancing to the producer altogether a sum of Rs. 57,000 on the
terms and in the manner hereinafter appearing and. to distribute and exploit
the said picture through their organization as requested by the
producer.................
Cl. 1. The distributors shall advance to the
producer a sum of Rs. 57,000 only altogether in the manner hereinafter set out:
(a) a sum of Rs. 7,000 only should be
advanced on the execution of these presents;
(b) a further sum of Rs. 5,000 should be
advanced as soon as 5,000 feet of film shall have been completed and roughly
edited, rush print thereof shown;
(c) a further sum of Rs. 10,000 should be
advanced as soon as a further 10,000 feet of film shall have been completed;
(d) a further sum of Rs. 10,000 should be
advanced as soon as a further 15,000 feet of film shall have been completed;
(e) a further sum of Rs. 12,000 should be
advanced on the last shooting day of the picture;
(f) a further sum of Rs. 10,000 should be
advanced as soon as the picture is passed by the Board of Censors and 12 copies
of the film delivered to the distributors; and the balance of Rs. 3,000 to be
retained by the distributors to be utilised for the purpose of Press Publicity
in regard to the said picture to be made by the distributors on behalf of the
producer from time to time. The distributors may utilise the said sum for
publicity as they think fit and proper and at their sole discretion.
Cl. 3. The distributors shall from the
realisations of the said picture made by them:
(a) pay themselves all amounts spent by them
for publicity in respect of the said picture such an expenditure having been
incurred only after obtaining the consent of the producer;
(b) pay themselves their distribution commission
in respect of the said picture as hereinafter provided;
and (c) pay themselves the available balance
until the entire advance of Rs. 57,000 should be completely discharged and
satisfied.
Cl. 6. If the distributors should fail to
realise the full amount due to them as aforesaid from the realisation of the
said picture in the manner hereinbefore set out on or before the expiry of one
and a half years from the date of the first release of the said picture, the
producer shall be liable to pay to the distributors whatever balance may be
then due by them with compound interest at 12 per cent. per annum the said
interest to be calculated on the said balance amount from the date of expiry of
the said one and a half years and the said payment to be made before the expiry
of one month there from.
Cl. 15. And it is hereby expressly agreed by and
between the distributors and the producer that until the entire amount of Rs. 57,000
to be advanced by the distributors should be repaid and discharged in full and
all other claims of the distributors arising hereunder completely satisfied the
negative and positive copies of the said picture shall constitute the security
for whatever amount may be due to the distributors and shall, if in the
possession of the producer or any one on his behalf, be held by them only as
trustees for the distributors.
Cl. 19. In the event of the producer failing
to deliver the said copies of the said picture duly passed by the Board of
Censors as hereinbefore provided before the said period, namely 1-5-1942, the
producer shall become liable to pay to the distributors at the letters' option
such amount as has been advanced by the distributors to the producer including
monies ,spent by the distributors in respect of publicity with interest thereon
at 12 per cent. per annum. But if the said picture be not delivered within two months
thereafter, viz., on or before 1-7-1942 the distributors may at their option
complete the picture at their own cost and in such case the producer shall be
liable to the distributors for all the expenses with compound 237 interest
thereon at 12 per cent. per annum and the distributors shall have all rights as
to the distribution, sale, etc., as aforesaid.
Cl. 20. On the expiry of the period of five
years mentioned in this agreement, the distributors shall return to the
producer all copies of films and balance stock of loan and saleable publicity
materials of the said picture, subject to usual wear and tear and subject to
the distributors receiving back from the producer such unrealised amount, if
any, as mentioned in clause (6) above".
The said three agreements *were dated 17th
September 1941, 16th July 1942 and 10th May 1945, each having a period of five
years to run ending with 16th September 1946, 15th July 1947 and 9th May 1950
respectively.
The only question which falls to be
determined by us herein is whether the payment of Rs. 26,000 received by the
assessee from the Jupiter Pictures on the cancellation of the said three
agreements on the 31st October 1945 is a capital receipt or income, profits or
gains liable to tax in the assessment year 1946-47.
The assessee was no doubt carrying on the
business of distributors which involved as a necessary corollary the
acquisition of films for the purpose of distribution. Those films could either
be produced by it or could be acquired by it from the producers who hired them
out to it for the purpose of distribution. There was, however, an activity in
this business of distributors which consisted of advancing monies to the
producers to enable the producers to produce the films and the agreements which
were entered into between the producers and the assessee as distributors were
composite agreements incorporating therein the terms in regard to the financial
assistance as also the distribution and exploitation of the films thus produce
by the producers with the financial assistance rendered to them by the
assessee. They were not mere agreements for distribution and exploitation of
the pictures which by themselves would not require any investment of capital
but would 238 merely involve the work of distribution and exploitation of the
pictures. The terms above set out were designed for the purpose of protecting
the interests of the assessee in so far as it advanced considerable sums to the
producers for the purpose of producing the films. Apart from the commission
which the assessee derived from the distribution and exploitation of the
pictures which would certainly be its revenue receipt in the course of the
carrying on of its business as distributors, it was entitled under the terms of
the agreements to repay itself the amounts of the advances which it made for
the production of the pictures as also the interest thereon and the agreements
also provided that the negative and positive"., copies of the pictures
should constitute the security for whatever amount might be due to the assessee
not only in respect of the amounts advanced by it to the producers but also in
respect of all other claims arising under the agreements. The negative and
positive copies of the pictures if in possession of the producers or any one on
their/behalf would only be held by them as trustees of the assessee and the
assessee was invested with a species of proprietary rights over the same. If
the pictures were not delivered within the specified period the assessee was at
liberty to complete the same and in such a case the producers were liable to it
for all the expenses with compound interest at 12 per cent. per annum and all
the rights as distributors were to fasten upon the same. The copies of the
films and all the other publicity materials were to be returned by the assessee
to the producers after the expiry of the period of five years mentioned in the
agreements subject to its receiving from the producers all unrealised amounts
under the agreements.
What is it that the assessee was, acquiring
from the producers under the terms of these agreements? Was it acquiring
capital assets which it would work upon by way of distribution and exploitation
in order to earn its income, profits or gains or was it acquiring
stock-in-trade of its business as distributors? If it was capital assets which
it thus acquired the monies 239 which it advanced to the producers for
acquiring the same would necessarily be capital expenditure and would not be
debited by it in its accounts as trading expenses which would be the position
if what it, acquired under the terms of the agreements was mere stock-in-trade
of its/business.
The realisations which it made by
distribution and exploitation of the pictures would be undoubted trade receipts
and, therefore, income, profits or gains and no part of the same would go to
its capital account. The monies which it had advanced for the production of the
pictures would, however, as and when realised, be./ credited by it in its
accounts as capital receipts and they would certainly not be liable to be
treated as trading receipts.
There was thus a sharp distinction between
the capital account and the trading account, the amounts advanced towards the
production of the pictures being capital expenditure and the repayments of
these advances as and when made being capital receipts, as distinct from the
monies spent by it in the distribution and exploitation of the pictures being
trading expenses and the commission realised by it from such distribution and
exploitation being trading receipts. As in the cases of mining leases and other
species of proprietary rights obtained by an assessee being capital assets
available to the assessee for working upon the same and earning income, profits
or gains, so in the case of these pictures which it acquired by advancing
monies to the producers to be available to it for distributing and exploiting
the same, what it would be acquiring under the terms of the agreements would be
capital assets and if an agreement was subsequently entered into by it either transferring
these capital assets or surrendering them for value, whatever payment would be
realised out of the same would be capital receipts and, not trading receipts.
The nomenclature of that receipt as commission for distribution and
exploitation under the agreements would not make any difference to the position
nor would the fact that, at the time when the said three agreements were.
cancelled., no part of the monies which had been advanced at the commencement
remained outstanding and the only activity of the assessee qua these pictures
was then confined to the distribution and exploitation of the same. The
agreements were composite agreements and what we have got to look to is what
were the rights in these pictures which the assessee had acquired under the
terms of the agreements. It had a species of proprietary rights in these
pictures all throughout the period of the agreements not only in respect of
advances which it had made for producing the same but also in respect of all
other claims under the terms of the agreements and the nature of those rights
would not be changed by the accident of the full amount of the advances being
repaid to it at a particular period of time during the currency of the
agreements. If it acquired capital assets those assets continued in its
possession as such all throughout the period of the agreements and it would not
be legitimate at any intermediate period of time to see what was the position
obtaining at that time for the purpose of converting what were acquired as
capital assets at the dates of the agreements into stock-in-trade of its
business of distribution and exploitation of the pictures.
If this be the true position on the
construction of the agreements it follows that what was done by the assessee on
the 31st October 1945 was to surrender these capital assets to the producers
for a consideration. These capital assets qua the agreements of the 17th
September 1941, 16th July 1942 and 10th May 1945 were to endure up to 16th
September, 1946, 15th July 1947 and 9th May 1950 respectively. A sum of Rs.
8,666-10-8 was fixed as the consideration for the surrender of each and the
capital assets which had been acquired were all of them surrendered by the
assessee to the producers with effect from the 31st October 1945. The payment
thus received by the assessee could only be a capital receipt being the price
of the surrender of the capital assets and could not be considered a trading
receipt at all.
It is well recognised that the problem of
discriminating between an income receipt and a capital receipt 241 and between
an income disbursement and a capital disbursement is not always easy to solve.
Even, though the distinction is well recognised and easily applied in general,
cases do arise from time to time , where the item lies on the border line and
the task of assigning it to income or capital becomes one of much refinement.
"While each case is found to turn upon its own facts, 'and no infallible
criterion emerges, nevertheless the decisions are useful as illustrations and
as affording indications of the kind of considerations which may relevantly be
borne in mind in approaching the problem................................
The nature of a receipt may vary according to
the nature of the trade in connection with which it arises. The price of the
sale of a factory is ordinarily a capital receipt, but it may be an income
receipt in the case of a person whose business it is to buy and sell
factories" (Per Lord Macmillan in Van Den Berghs, Ltd. v. Clark (H. M.
Inspector of Taxes(1)). It may also be borne in mind that the provisions of the
Indian Income-tax Act are not in pari materia with those of the English
Income-tax Statutes so that the decisions on the English Acts are in general of
no assistance in construing the Indian Acts (Vide the observations of the Privy
Council in Commissioner of Incometax v. Shaw Wallace & Co.(2) and in Raja
Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income tax, Bihar
& Orissa(3)).
The authorities which were cited at the Bar
may, however, be shortly referred to. Counsel for the appellant particularly
relied upon the decisions in Short Brothers, Ltd. v. The Commissioners of
Inland Revenue(4) and Kelsall Parsons& Co. v. Commissioners of Inland
Revenue(5) in support of the position that the cancellation of the agreements
in the present case and the receipt of Rs. 26,000 by the assessee was in the
ordinary course of business in order to adjust the relations between the
producers and the assessee and was simply a receipt in the course of a (1)
[1935] 19 T.C. 390, 428, 431.
(2) [1932] L.R. 59 I.A. 206, 212.
(3) [1943] L.R. 70 I.A. 180, 188.
(4) [1927] 12 T.C. 955.
(5) [1938] 21 T.C. 608.
242 going business from that going business
and nothing else.
It was submitted that it was an essential
part of the assessee's business to enter into agreements of the nature in
question and that it was an ordinary incident of its business that such
agreements may be altered or terminated front , time to time. It was therefore
a normal incident of the business such as that of the assessee that the
agreements might be modified and in parting with the benefits of the agreements
the assessee could not be said to be parting, with something which could be
described as an enduring asset of its business.
This position would have been tenable if the
agreements in question were merely distributing agreements without anything
more. It would then have been an essential part of the assessee's business to
enter into such agreements and also it would have been a normal incident of its
business to modify or terminate the same and to adjust the relations between
the parties. In neither of these cases was there any question of any capital
asset having depreciated in value or become of less use for the purpose of the
assessee's business. Rowlatt, J. observed in Short Brothers, Ltd. v. The
Commissioners of Inland Revenue (supra) at page 968 that the money was not
received in respect of the termination of any part of the assessee's business
nor was it received in respect of any capital asset as was the sum in the
Glenboig's case(1). Lord Fleming also emphasized this aspect of the matter in
Kelsall Parsons and Co. v. Commissioners of Inland Revenue (supra) at page 622
that there was no finding that in consequence of the termination, any capital
asset was depreciated in value or became of less use for the purpose of the
assessee's business. If the assessees in those cases bad by virtue of the
agreements in question acquired capital assets which they could work in order
to earn income, profits or gains, the payments received on termination of the
said agreements would certainly not have been held to be trading receipts but
capital receipts and as such not liable to tax.
(1) [1922] 12 T.C. 427.
243 Reliance was placed on behalf of the
assessee on the decisions in Glenboig Union Fireclay Co. Ltd. v. Commissioners
of Inland Revenue(1) and Van Den Berghs Ltd. v. Clark (H.M. Inspector of Taxes)
(supra), for showing that, if the capital asset of the assessee was sterilized
or destroyed, the payment would be a capital receipt. Lord Buckmaster, in
Glenboig Union Fireclay Co. Ltd. v. The Commissioners of Inland Revenue (supra)
at page 463, expressed the opinion that "it made no difference whether it
be regarded as the sale of the asset out and out, or whether it be treated as a
means of preventing the acquisition of profit that would otherwise be gained.
In either case, the capital asset of the company was to that extent sterilized
and destroyed and it was in respect of that action that the sum had been
paid". Lord Wrenbury also, at page 464 stated that "the mining leases
were capital assets of the company, the company's objects were to acquire
profits by working the mines under and by virtue of the titles and rights which
they hold under the leases and the payment was made to the assessee for
abstaining from seeking to make a profit". Put it in another way:
"The right to work the area in which the working was to be abandoned was
part of the capital asset consisting of the right to work the whole area
demised. Had the abandonment extended to the whole area all subsequent profit
by working would., of course, have been impossible but it would be impossible
to contend that the compensation would be other than capital. It was the price
paid for sterilising the asset from which otherwise profit might have been
obtained. What is true of the whole must be equally true of the part"'
(Page 465). In Van Den Berghs Ltd. v. Clark (H. M. Inspector of Taxes) (supra)
it was held that the payment in question was the payment for the cancellation
of the assessee's future rights under the agreements which constituted a
capital asset of the assessee and that it was accordingly a capital receipt.
Justice Finlay, whose judgment was ultimately restored by the House of Lords,
observed at page 413:
(1) [1922] 12 T.C. 427.
244 The ground is not very easy to express,
but the ground upon which I desire to put this part of the case is this, that
the true view here is that the agreement which was cancelled was just a capital
asset of, the Company and, if that is right, it seems to me to follow that,
distinguishing such cases as Short Brothers(1), one ought to hold that the sum
received was not an income receipt at all". Lord Macmillan, after
discussing the various authorities which according to him were useful as
illustrations and as affording indications of the kind of considerations which
maybe relevantly borne in mind in approaching the problem, construed the
agreements in question as not ordinary commercial contracts made in the course
of the carrying on of the assessee's trade. The agreements in the facts and
circumstances of the case before him related to the whole structure of the
assessee's profit-making apparatus, they regulated the assessee's activities, defined
what they might and might not do and affected the conduct of their business and
he had difficulty in seeing how money laid out to secure, or money received for
the cancellation of, so fundamental an organization of a trader's activities
could be regarded as an income disbursement or an income receipt.
He expressed the opinion that the asset, the
congeries of rights which the appellants enjoyed under the agreements and which
for a price they surrendered, was a capital asset.
They provided a means of making profits but
they themselves did not yield profits.
Applying the same ratio here, could it not be
said that the pictures which were acquired by the assessee from the producers
were capital assets of the assessee, the object of the assessee being to acquire
profits by distributing and exploiting the pictures under and by virtue of the
titles and rights which the assessee acquired under the agreements or that they
provided the means of making profits though they themselves did not yield
profits? That being the true position on the construction of the agreements,
the only result would be that the pictures constituted capital assets (1)
[1927] 12 T.C. 955.
245 of the company and the payment in
question was one for the cancellation of the assessee's rights under the
agreements and was accordingly a capital receipt.
The distinction between capital assets on the
one hand and the stock-in-trade on the other was sought to be supported by
reference/to the decisions in Shad bolt (H. M. Inspector of Taxes) v. Salmon
Estate (1) and Johnson (H. M. Inspector of Taxes) v. W. S. Try Ltd. (2). These
were cases of assessees which carried on the business of building and selling
houses or building and development business and in the course of their business
acquired plots of land which they utilised for, the purpose of constructing
buildings thereupon, which buildings together with the plots of land on which
they stood were sold by them for a consideration.
The question which arose was whether the
acquisition of the plots of land on which the buildings were thus constructed
was the acquisition of a capital asset or a trading asset ,by the assessees.
Justice Macnaghten, whose judgment in the King's Bench Division was the final
judgment in Shadbolt (H. M. Inspector of Taxes) v. Salmon Estate (supra)
remarked at page 57 that "it was not disputed that in the course of such a
trade as this, the trade of building houses for sale, the land on which the
houses were-" built was part of the stock-in-trade of the business and was
not a capital asset. The land being thus a part of their stock-in-trade, the
payment in question for the bit sold by the assessees would have been a trading
receipt and the right to build on the plots was likewisea trading
asset".In Johnson (H. M. Inspector of Taxes) v. W. S. TryLtd. (supra),
also, the judgment of the same learned Judge was the final judgment on the
point in issue. The following observations of the learned Judge at page 172 are
very instructive:
"Although in most cases land belonging
to a trading company was part of its capital assets, in the case of a company
engaged in ribbon development the land which is acquired for the purposes of
such development is not part of its capital.
In such a case the land forms part of its
stock-in-trade., just (1) [1943] 25 T.C. 52.
(2) [1946] 27 T.C. 167.
246 as much as the materials which it buys
for the purpose of erecting the buildings on it. The cost of the land must come
into its trading account as a trading expense. If it sells the land the price
must come into its trading account as a trading receipt. And, likewise,
compensation for injurious affection must also, in my opinion, be regarded as a
trading receipt".
In the instant case also, the pictures, if
produced by the assessee itself would have been capital assets of the assessee.
What the assessee did was that instead of producing the pictures itself it
advanced monies to the producers for the purpose of producing the pictures
which it acquired for the purpose of distribution and exploitation.
Nonetheless, the pictures thus acquired were
capital assets of the assessee which it worked upon in carrying on its business
of distribution and exploitation, the monies it spent on the acquisition of the
pictures were thus capital expenditure and whatever monies were realised by it
by working these capital assets were its capital receipts except of course the
commission which it earned by distribution and exploitation of the pictures
which certainly would be its trading receipts. Having regard to the terms of
these agreements it could certainly not be predicated of these pictures that
they were its stock-in-trade so as to constitute the payment in question a
trading receipt of the assessee.
Both the Income-tax Appellate Tribunal and
the High Court relied upon the decision of the Privy Council in commissioner of
Income-tax, Bengal v. Shaw Wallace & Co. (supra), and were of the opinion
that the present case was covered by that decision. On the facts of the case as
set out in the above appeal it does not appear to be clear whether the two
selling agencies there were the only selling agencies which had been acquired
and worked by Shaw Wallace & Co., and it, is debatable under the
circumstances whether the authority of that decision is not shaken by the decisions
in Short Brothers' case (supra) and Kelsall Parsons & Co.'s case (supra).
It is sufficient to observe that the agreements in the case of Shaw Wallace
& Co. were not deemed to constitute capital 247 assets of the assessee and
that aspect of the question was not at all considered by the Privy Council. It
is not, therefore, necessary to express any opinion on the correctness or
otherwise of that decision in this case.
Having regard to all the circumstances
adverted to above, it is, therefore, clear that the payment of Rs. 26,000
received by the assessee from the producers was in consideration of the
surrender by the assessee of the capital assets which it had acquired from the
producers under the three agreements in question and constituted a capital
receipt not liable to tax for the assessment year 1946-47. The answer given by
the High Court to the referred question was, therefore, correct and I would
dismiss the appeal with costs.
ORDER.
BY THE COURT:-In accordance with the Judgment
of the majority, the appeal is allowed with costs throughout.
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