TMI Blog1997 (8) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... has passed speaking order for the said assessment year and followed that order for other years. The facts relating to assessment year 1988-89 are also admittedly the same as in other assessment years, viz., 1986-87,1987-88 and 1989-90. ITA No. 655/Mds./93 (Asst. year 1988-89): 3. During the course of assessment proceedings the Assessing Officer observed that the assessee has sold lease rights of 16 films (mentioned at page 2 of the assessment order). The assessee declared income of Rs. 1,73,600 on account of sale of lease rights of these films. The assessee as lessor sold the films to other parties (lessees) for a certain period as per agreements executed and in the agreements a fixed amount is shown as advance towards sale of lease rights for a particular number of years. The assessee was showing a part of the advance as her income. For instance if the distribution rights and exhibition and exploitation of the films are sold for five years for a consideration of Rs. 10,000, then the assessee was showing only a sum of Rs. 2,000 as her income in spite of the fact that she received Rs. 10,000 from the lessees, which the assessee was describing as advance against sale of lease ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticed that the assessee followed mercantile system of accounting and it was not disputed that the right to receive the consideration arose at the time the lease agreements were executed, and the entire consideration was also realised at that time. The CIT(Appeals), therefore, held that the rights to receive the consideration having accrued when the agreements were executed, the entire sale consideration is assessable in the year of receipt. It was further held that merely because the payment was referred to as an advance in the lease agreements which was to be apportioned for each year of the lease, does not change the position that the entire receipt was a trading receipt and therefore, assessable in the year of receipt itself. The CIT(Appeals) also held that when the assessee had claimed the entire cost of purchase of distribution rights in the year of purchase as permitted under rule 9B of the Income-tax Rules, there was no justification for not accounting for the entire sale consideration when the distribution rights were in turn sold by the assessee. It was therefore, held that the entire sale consideration being assessable in the year of receipt, the method of accounting adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts of the films are not 'advance' in the normal course but are in the nature of trading receipts assessable in the year of receipt. It is therefore, submitted that no interference is called for in this regard. 7. We have examined the rival submissions and have also carefully perused the orders of the authorities below. We have also considered the paper book filed by the assessee's counsel other than those papers which are written in Tamil. For the sake of convenience, we would discuss one of the agreements executed by the assessee with M/s. Sabari Enterprises, Vellore, to whom the assessee has sold the rights of exploitation, distribution and exhibition of the film 'Thiruvilayadal' for Rs. 2.10 lakhs for a period of five years by agreement dated 1-12-1987 for the area of Madras City, North Arcot, South Arcot and Chengleput District including Pondicherry, because all other agreements are on similar lines. In consideration of the lease rights of the film 'Thiruvilayadal' to lessees by the assessee, the lessees agreed to pay the assessee-lessor an advance of Rs. 2.10 lakhs and the same was paid in five instalments as mentioned in clause 2 of the lease agreement dated 1-12-1987. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territories, for which the rights hereinafter granted, the lessors will be at liberty to cancel this agreement, and repossess the prints and then forfeit all amounts paid by the lessees and to claim further damages, as the case may be. 6. The lessees hereby agree not to make any duplicate negatives from the positive prints supplied to them nor reproduce the sound track in any other manner than the reproduction of the same in the usual manner in the regular exhibition theatres in the territory leased herein. The lessees further agree that they shall not cut or alter or interfere with the prints supplied to them. 7. The lessees agree not to sub-lease transfer or allienate the rights of the said picture to any other party or parties firm or company without prior consent of the lessors in writing. 8. At the expiry of the period of this agreement as calculated herein the lessees shall cease to have any rights whatsoever over the picture and the lessees shall return to the lessors and positive prints in their possession in whatever condition they might then be under paid parcel in the event of any default in returning the print the lessees hereby agree to pay Rs. 300 per print ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 5(1) reproduced above, that whatever income is received or deemed to be received in India by an assessee, or on behalf of an assessee, or whatever income accrues or arises or is deemed to accrue or arise to him in India by an assessee, is taxable in that year. 9. In the case of CIT v. Stanton Stavely (Overseas) Ltd. [1984] 146 ITR 405/[1983] 13 Taxman 162 (Cal.), the brief facts of the case were that the assessee entered into an agreement with Indian Iron Steel Ltd. (IISCO for short) on 9-10-1956. Under that agreement the assessee was entitled to receive commission from IISCO. It was claimed by the assessee that though the amounts were described as commission in the agreement between the assessee and IISCO, the amounts received were actually in the nature of royalty and fees covered by the exemption provided in Rule 1(ix) and Rule 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964, and were liable to be excluded from the total income of the assessee in computing the chargeable profits for the assessment years 1965-66 to 1969-70. The Tribunal after reading various clauses in the agreement, came to the conclusion that the amount received by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nomenclature given by the parties in an agreement, which is not defined in the Act, would not be conclusive while interpreting the document. Therefore, in the aforesaid case, the Hon'ble Calcutta High Court confirmed the finding of the Tribunal that the amounts described as commission in the agreement between the assessee and IISCO were in the nature of royalties and fees for the technical services and not commission, though the word 'commission' was used in the agreement between the parties. 10. Similarly, in the case of Eklingji Trust v. CIT [1986] 158 ITR 810/26 Taxman 9 it was held by the Hon'ble Rajasthan High Court that the name given to the transaction by the parties concerned does not necessarily decide the nature of the transaction. In such a situation, the question always is what is the real character of the receipt, not what the parties call it. 11. Keeping in view the ratio laid down in the aforesaid decisions and the provisions of sections 4 and 5 of the Income-tax Act, 1961, it has to be examined whether the amount of Rs. 2.10 lakhs received by the assessee was deposit or advance against the exploitation, distribution and exhibition rights of the film 'Thiruvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1987 with the lessees, the assessee acquired the right to receive and had actually received the sum of Rs. 2.10 lakhs during the period 1-12-1987 to 20-1-1988, which is relevant to the assessment year 1988-89. The bifurcation of this amount for different periods as mentioned in para-2 of the agreement dated 1-12-1987 has no meaning except a crude untenable device to avoid tax, because such a device has no foundation at all. Since the amount of Rs. 2.10 lakhs is neither refundable by the assessee nor the assessee is bound to pay any interest on that sum to the lessees and the amount was received by the assessee for grant of the rights of exploitation, distribution and exhibition of the picture, we hold that the said sum of Rs. 2.10 lakhs is the assessee's income which has accrued to her and which has been received by her in the accounting year relevant to the assessment year 1988-89 and is correctly includible in her total income for the assessment year 1988-89. In view of the provisions of section 5(1) of the Income-tax Act, the amount of Rs. 2.10 lakhs is chargeable to tax under section 4 of the Income-tax Act, 1961. Apportionment of the said sum of Rs. 2.10 lakhs for five years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g all the aspects of the case and other material on record which came to the notice of the Tribunal subsequently, the Tribunal considered that a different decision would be correct than the earlier one. In the name of judicial uniformity the error should not be perpetuated when different conclusion seems to be correct on the basis of judicial precedents and other material available on record. "To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience"---Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 (SC). 14.1 In the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC), the facts of the case were that, the assessee, a company engaged in the manufacture and sale of paints, had, as a consistent practice, valued its goods-in-process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. For the assessment years 1963-64 and 1964-65, the ITO held that there was no justification to recognise the practice of valuing stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be valued at cost (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g followed by the assessee, or even accepted by the Department in earlier years. The Assessing Officer, therefore, correctly made addition of Rs. 6,51,402 to the total income of the assessee for the assessment year 1988-89 because the whole amount has accrued to the assessee and received by her in the accounting year relevant to the assessment year 1988-89. 15.1 We have looked at the case of the assessee from a different angle also. The assessee has debited the cost of entire cost of acquisition of the rights of exploitation, exhibition and exploitation of the films to the profit and loss account whereas only 1/5th of the amount has been taken into consideration for the purpose of computing the income for assessment year 1988-89. When the entire cost of acquisition of the films is debited to the profit and loss account, there is no justification for not showing the value of closing stock of the films in the P L account. It cannot be said that the value of closing stock of the films leased out by the assessee to various lessees was nil as on 31-3-1988 because she has received the amount of Rs. 8,25,002 from various lessees, whereas the assessee has shown only an income of Rs. 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection we may state that the entries in the books of account or in the balance sheets of the assessee are not reliable for determining the legal nature of the rights and obligation of the parties to the transaction. When, as already stated, there was no liability of the assessee to refund any amount to the lessees in respect of grant of lease for exploitation of the rights of exhibiting the pictures by the assessee to the lessees, then the showing of the amount as 'current liabilities' in the balance sheet has no relevance or meaning because there is no liability to any one in respect of the amounts shown under the head 'Current liabilities'. 18. The next ground is with regard to sale of lease rights to related concerns. The grounds raised by the assessee for the assessment year 1988-89 (ground Nos. 9 to 17) is that the CIT(Appeals) should have deleted the addition made by the Assessing Officer adding the minor grand daughter's income in the hands of the assessee. The Assessing Officer found that the assessee claimed to have sold the lease rights of distribution, exhibition and exploitation of Tamil film 'Chinna Thambi Periyathambi' to M/s. Sri Devi Films, a proprietary concern o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from exhibition of the film. The Assessing Officer stated that the assessee had admitted income by way of royalty a sum of Rs. 30,000 from this picture and that in the absence of the alleged sale agreement, she would have accounted for Rs. 2,78,943 as collections from the picture for the period 1-6-1987 to 31-3-1988. The Assessing Officer then stated that minor Sri Devi who is the proprietress of lessee concern has no experience or expertise for exhibition or exploitation of the films and that she did not carry out any part of the actual distribution work as the same distribution rights were retained by the assessee. The assessee has realised collections from the exhibition of the picture from various theatres in the areas of Tiruchy, Tanjore, Pudukottai till 31-3-1988 and has entered the full collections in her ledger, and on 31-3-1988 the assessee has transferred an amount of Rs. 1,14,995 towards share of M/s. Sri Devi Films. There was no actual transfer of share of collections from the picture to the lessee and it was only book entry made at the year end by way of book adjustment. The Assessing Officer also found that the amount of Rs. 1,14,995 has been arrived at after deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the assessee per se is double taxation. It is therefore, pleaded that the assessee's claim for deleting the additions made and sustained by the CIT(Appeals) be accepted. 20. The learned Departmental Representative, on the other hand, supported the orders of the authorities below on this issue, and argued that the name of the minor grand daughter has been used to reduce the burden of taxation by, the assessee and in the circumstances the transaction was not a genuine one and the inclusion of the collection realised of Rs. 2,48,943 as the assessee's income for the assessment year 1988-89 should be confirmed. 21. We have carefully considered the rival submissions, facts of the case and material on record. The facts mentioned by the Assessing Officer in paras 17 and 18 of the assessment order have not been disputed. The fact remains that the assessee has purchased the lease right of distribution, exhibition and exploitation of the film 'Chinna Thambi Peria Thambi' from the producers, M/s. Chemba Creations, Madras by an agreement dated 13-10-1986 for a period of five years at the cost of Rs. 5.75 lakhs. The cost including the print cost was Rs. 5,90,000. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those shares to Aril, a wholly-owned subsidiary company. Aril had no other business or source of income whatever except receiving the dividends on those Inarco shares. The dividend income was not transferred to the assessee-company and it did not find a place in its profit and loss account with the result that the available surplus for payment of bonus to workmen got reduced, and bonus was paid at the rate of 4 per cent only for 1969 instead of at 16 per cent, to which the workmen would otherwise have been entitled. Subsequently in 1971, Aril was wound up and amalgamated with the assessee-company. The workmen raised an industrial dispute claiming bonus at 16 per cent for 1969. The Industrial Tribunal, and the High Court on a writ petition rejected the claim on the ground that the assessee-company and Aril were two independent companies with separate legal existence and the profit made by Aril could not be treated as the profit of the assessee-company. On an appeal to the Hon'ble Supreme Court, the decision of the High Court was reversed and it was held that a new company was created wholly-owned by the principal company, with no assets of its own except those transferred to it by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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