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TMI Blog2007 (10) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ows larger with this judgment. 2. First, the facts. The Assessee took on lease two cinema halls, "Capital" and "Minerva" at Ambala. Since 1952 it was exhibiting films in them and earning a part of its income from that activity. The cinema halls were owned by one Lala Beli Ram Sarin. The last time the lease was renewed was in 1968 for a term of six years and three months from 1st December, 1968 to 28th February, 1975 on a consolidated sum of Rs.72,000/- per year. From a copy of the lease deed which has been included in the paper book it appears that the lease was of not only the cinema halls. It included the stalls, godowns and cinema equipments. The lease deed acknowledged that the Assessee had renovated the cinema halls and that future repairs would be at the cost of lessee subject to the condition that the lessee would inform the lessor in advance of his proposal to carry out repairs, renovations and additions. The lessee was to hand over peaceful possession of the cinema halls along with its equipments to the lessor on the expiry of the lease. The lessee was prohibited from transferring or sub-letting the leasehold rights to any third party except for the stalls where contracto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I do not pay this money to you on or before 1st April, 1975, you are at liberty to file a suit for its recovery in the Courts at Delhi. I agree to give you proper receipt for all the machinery, equipment, furniture, etc. and also receipt for having taken possession of the said cinema premises. I confirm that with the signing of the said receipt for the machinery, equipment, furniture etc., I have no claim against you for anything whatsoever and this handing over of the cinemas in the manner provided above is in full and final settlement." 5. It is not in dispute that during the Assessment Year 1975-76 the sum of Rs.1,24,000/- was in fact paid to the Assessee and the balance of Rs.2,00,000/-was paid in five equal instalments in the succeeding years i.e. from the Assessment Year 1976-77 onwards. In the accounts prepared for the year ending on 28th February, 1975 the Assessee showed the sum of Rs.1,24,000/- in the credit side of the Profit and Loss Account ("P and L Account") under the heading "compensation for premature closure of the cinema halls at Ambala". In the accounts for each of the subsequent years beginning from 1976-77 and ending with the Assessment Year 1980-81, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not become assessable in the assessment year 1975-76 only Rs.1,24,000/- became assessable and that the remaining sum of Rs.2,00,000/- accrued to the assessee company to terms of the aforesaid agreement at the expiry of the following accounting periods:- (i) For the period from 1st March, 1975 to February 28, 1976 Rs.40,000 (ii) For the period from 1st March, 1976 to February 28, 1977 Rs.40,000 (iii) For the period from 1st March, 1977 to February 28, 1978 Rs.40,000 (iv) For the period from 1st March, 1978 to February 28, 1979 Rs.40,000 (v) For the period from 1st March, 1979 to February 28, 1980 Rs.40,000" 10. The two questions referred to us at the instance of the Assessee are: "(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,24,000/- realised by the assessee by way of compensation for the termination of the lease of the two cinemas namely Minerva and Capital at Ambala by the lessor constituted a revenue receipt thereby resulting in the income of Rs.1,24,000/- chargeable to tax in the assessment year 1975-76" (ii) Whether on the facts and in the circumstances of the case, the Tribunal was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 199 (Mad), Mr. Monga contended that the sum of Rs.3,24,000/- had to be necessarily treated as a capital receipt which is not taxable. According to Mr.Monga, the mere fact that there were other cinema halls elsewhere from which the Assessee was earning income by exhibiting films did not change the character of the compensation received by the Assessee; it continued to remain a capital receipt. 13. Without prejudice to the above contention, Mr. Monga submits that the sum of Rs.1,24,000/- alone is liable to be treated as revenue receipt in the hands of the Assessee for the relevant Assessment Year 1975-76. He points to the letter dated 21st February, 1975 in which it is clearly indicated that it is only the sum of Rs.1,24,000/- which has been offered as compensation for the business loss and that the remaining sum of Rs. 2 lakhs was payable in five equal instalments of Rs.40,000/- each in the years following the Assessment Year 1975-76. In fact, the Assessee did offer for tax the said sum of Rs.40,000/- in the subsequent Assessment Years. The stand of the Revenue that the entire sum of Rs.3.24 lakhs should be taxed in the Assessment year 1975-76 is contrary to what it submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f distribution thereof. After the Assessee had exploited to a certain extent its right of distribution of three films, the agreements were cancelled and the producers paid an aggregate sum of Rs.26,000/- to the Assessee towards commission. In the relevant accounting year the Assessee had distribution rights in respect of 11 films including 3 films for which it had advanced moneys to the producers. The question then arose whether the sum of Rs.26,000/- was a revenue receipt in the hands of the Assessee. By a 2:1 majority, the Supreme Court held that the sum paid to the Assessee was in the ordinary course of business and that the termination of the agreement did not radically affect or alter the structure of the Assessee"s business. It clarified that the amount was not received by the Assessee as the price of any capital asset sold or surrendered or destroyed. It was held that the decision in Shaw Wallace would not apply in such a case. Again, what appears to have weighed with the Supreme Court in South India Pictures Ltd. was that there was no total cessation of the Asseessee"s business and that the termination of the agreements "did not radically or at all affect or alter the struc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee on the decision of the Andhra Pradesh High Court in Chunduri Venkata Reddi. [1959] 35 ITR 87. It was held by the High Court in that case that the test for determining whether a sum of money is a capital receipt or a revenue receipt was as under (ITR, page 96) : "The amount should have been paid for parting with something which could be described as an enduring asset of the business. The cessation of the business or the cancellation of the agreement should affect the profit-making structure. To quote the words "it should materially destroy or cripple the structure of the profit-making apparatus." 21. The decision in Chunduri Venkata Reddi, [1959] 35 ITR 87 apart from reiterating the well settled law does not particularly help the case of the Assessee since it is distinguishable on facts. Unless the Assessee here is able to demonstrate that there was a compulsory cessation of Assessee"s business and that the source of income was rendered sterile, it will not be able to succeed in its contention that the sum paid by the landlord was a capital receipt. 22. Reliance was also place on the decision of the Supreme Court in Canara Bank Ltd. [1967] 63 ITR 328. The facts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agencies of the assessee. Therefore, even if the revenue is right in saying that the business of the assessee-company in the present case continued despite the divesting of its management as a result of the said Ordinance and the said Act, it is to be seen whether the compensation paid was income or whether it was for the divesting of a part of its profit-making apparatus. The compensation paid cannot be said to be in respect of the profits or gains of any business carried on by the assessee-company nor can it be profit earned by a process of production according to the test laid down by the Privy Council." 24. The above decision was peculiar to the facts of the case. The important distinguishing feature in the present case is that the correspondence between the parties itself indicates that the sum paid by way of compensation was clearly for the loss of business. 25. The facts in K. Eapen Jacob were that the sum was paid under a compromise and as compensation for the Assessee surrendering the source of his income namely, the share in the partnership. In those circumstances since the very source of the income of the Assessee was rendered sterile, the Madras High Court held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or discussion, the question referred at the instance of the Revenue: whether the entire sum of Rs.3,24,000/- became assessable to tax in the Assessment year 1975-76 as contended by the Revenue or only a sum of Rs.1,24,000/- should be assessed to tax since that was the amount received during the assessment year ? 30. The correspondence between the landlord and the assessee unambiguously states that a sum of Rs.1,24,000/- has been paid towards his loss of business. The further sum of Rs.2 lakhs does not bear any such particular description in order to determine whether such sum accrued in that very Assessment Year 1975-76. This coupled with the fact that the Assessee had in fact offered to tax the sum of Rs.40,000/- in every succeeding Assessment Year including 1980-81 indicates that there is no attempt by the assessee to avoid payment of tax in those Assessment Years. If the said sum of Rs.2 lakhs is brought to tax in the year 1975-76 it will doubtless amount to double taxation of the same amount since admittedly a sum of Rs.40,000/- has been offered to tax by the assessee in each of the succeeding Assessment Years as a revenue receipt. 31. In that view of the matter this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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