TMI Blog1955 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ad spent nearly half a lakh of rupees, they found that they could not find the entire finance necessary for completing the picture. Accordingly they entered into an agreement on 21st July, 1939, with another firm called Messrs. Royal Talkie Distributors, Madurai. The terms of this agreement were reduced to writing and this agreement had been appended as annexure A to the statement of the case by the Appellate Tribunal. This agreement is recited to have been made between Chandra Prabha Cinetone by their partners Mr. T. Sadasivam and Srimathi M.S. Subbulakshmi, both residing at Madras hereinafter called the party of the first part and Messrs. Royal Talkie Distributors hereinafter called the party of the second part. The material terms of this agreement run thus: Clause 2: The picture shall be treated as the joint production of both the parties for all purposes. Both the parties shall have equal rights and powers of supervision and management in the matter of the production of the picture. Clause 3: The cast of the picture shall be selected by the parties of both parts and shall include Srimathi M.S. Subbulakshmi as Sakunthala and Serukalathur Sama as Kanvar. Srimathi M.S. Subbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty or remuneration payable to the artistes for the gramophone recording shall be paid to them directly by the gramophone company concerned. Even the amount which the Royal Talkie Distributors advanced under this agreement namely a sum of ₹ 60,000 was found insufficient for completing the production. There was a further and fresh agreement between the same parties on 24th February, 1940, which is appended as annexure B to the statement of the case. The preamble to the agreement recites after referring to the earlier agreement dated 21st July, 1939: .............Whereas more money is required for the completion of the picture 'Sakunthala'; and whereas at the request of the party of the first part, the party of the second part have agreed to supply the necessary additional amount of not less than ₹ 40,000 (rupees forty thousand only); and whereas in consequence certain terms and conditions have to be added to or altered or amended in the prior agreement. The agreement then proceeds to replace clauses 6, 10, 11, 12 and 17 of the previous agreement and the new clauses 4 to 8 were substituted therefor. Clause 4 is in these terms: Irrespective o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Distributors. An account was made up by them upto 12th April, 1942, in respect of the collections from the picture as well as the royalties from gramophone records. These amounts came to ₹ 3,21,241-2-1 and ₹ 9,205-3-9 respectively. The total cost of the picture, making the necessary allowance for expenses incurred by the Chandra Prabha Cinetone was computed at ₹ 2,59,168-14-10 leaving a net profit of ₹ 71,277-7-0. The half share of this profits due to the partners of Chandra Prabha Cinetone was ₹ 35,638-11-6. But these partners had before that date drawn to the extent of ₹ 64,417-14-5 and when the account was struck on that day, the Chandra Prabha Cinetone were in debit to the extent of ₹ 28,779-2-11. On 24th June, 1942, a release deed was executed by the partners of the Chandra Prabha Cinetone to the Royal Talkie Distributors which has been appended as annexure (C) to the statement of the case. Under this document in consideration of the Royal Talkie Distributors remitting the sum of ₹ 28,779-2-11 which the assessee had already overdrawn as per accounts taken on 12th April, 1942, the Chandra Prabha Cinetone relinquished and release ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., of the said picture and in the royalty to be received by the Royal Talkie Distributors from time to time from the gramophone company. This was followed by a declaration by the releasors whereby they agreed that the Royal Talkie Distributors were the sole proprietors of the talkie picture Sakunthala without any claim or right subsisting or in future on the part of the releasors as and from 13th April, 1942. It would thus be seen that the assessee had received in respect of this picture a sum of ₹ 64,417-14-5 made up of 50 per cent. of the profits which had accrued due to the partners under clause 7 of annexure B and ₹ 28,779-2-11 for which they relinquished all their future rights in the picture. In respect of the assessment for 1943-44 and in the case of the assessee the accounting period being the 12 months ended 30th June, 1942, the assessee contended before the Income-tax Officer that out of ₹ 64,417 which had been received from the Royal Talkie Distributors no doubt a sum of ₹ 35,638 was a revenue receipt but the balance of ₹ 28,779 represented merely compensation for giving up their (partners') rights in the picture and for future r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it. do not however see how this passage assists the assessee. It is not denied that the document appended as annexure (C) is a deed of release. Its true nature as a release is not now in dispute. That recites the earlier transactions under which the releasors obtained rights which they ultimately relinquished. In doing so it refers to their right to 50 per cent. of the net profits as attributable to that consideration. In this respect it really repeats the words and the terms contained in the earlier agreements while setting them out in the preamble. If at the time when the agreements were concluded the parties expressly stipulated for moneys being paid to them as and for remuneration for services rendered we are unable to see how the legal effect of such a contract could be obliterated by now starting a theory that they had not rendered any service or it could not be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alised asset and so a capital receipt. Reliance was particularly placed on the judgment of Finlay, J., and the House of Lords affirming him in Van Den Berghs Ltd. v. Clark [1935] 19 Tax Cas. 390; [1935] 3 I.T.R. Suppl. 17, and the several cases in which the principle laid down in that case has been followed. What the Court had to consider in Van Den Bergh's case [1935] 19 Tax Cas. 390; [1935] 3 I.T.R. Supp. 17, was the nature of a sum of 450,000 received by the assessee in full settlement of all claims and counter-claims which existed between the assessee and a Dutch company. Both the companies had been engaged in the business of manufacturing and dealing in margarine and similar products. They had entered into pooling arrangements at as early a date as in 1908 under which they bound themselves to work in friendly alliance and to share their profits of their respective business in margarine in specified proportions. This basic agreement of 1908 was being added to and varied from time to time particularly in 1913 and 1920 and, under this, the agreement was to subsist until 1940. In 1922 the assessee made a claim against the Dutch company for about 450,000 as the amount due t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived by way of capital and not an income receipt at all. This decision was reversed by the Court of Appeal but was restored on further appeal by the House of Lords. Lord Macmillan who delivered the leading judgment in the case said at page 431: Now what were the appellants giving up? They gave up their whole rights under the agreements for thirteen years ahead. These agreements are called in the stated cases 'pooling agreements' but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if payment is measured by annual receipts, it is not necessarily in itself an item of income......The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payment of 450,000 was one in respect of sums due in the past to the assessee and regard being had to the ambiguity of the language used, he took it that it was a payment in respect of future rights so as to be consistent with the inference which he was inclined to draw. Dealing with the alternative contention he said at page 413:- But the case is one of undoubted difficulty and it is, I think, proper that I should say something, though quite shortly, upon the other view, which is that this was a sum paid in respect of the past, that is to say, that it was a sum paid in order to make an end of, by way of payment, the claim which the appellant company said they had in respect of the past. If it was that, it was clearly a revenue receipt in some way or other and at some time liable to pay tax. Lord Macmillan dealing with this point at page 431 said: If the payment had been in respect of a balance of profits due to the Appellants by the Dutch company for the years 1914 to 1927, different considerations might have applied, but it is agreed that it is not to be so regarded. We have, therefore, to examine whether ₹ 28,779 or any portion of it was rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught, that there should be on liquidation an immediate prepayment of all the remuneration for services which would eventually have fallen due under the agreement had liquidation not taken place, then the fact that the remuneration for services was prepaid in a lump sum might not have protected it from income-tax. The conclusion reached by the learned Judges was that the sum paid was in respect of remuneration for future services which were dispensed with and not remuneration for past services though payable in the future. The decision in Commissioner of Income-tax v. South Indian Pictures Ltd. [1951] 20 I.T.R. 605 referred to by learned counsel for the assessee does not really assist him. The point decided was that the money received as compensation for the termination of three contracts under which assessee was to render service was not a receipt of a revenue nature. The decision of the Bombay High Court in Commissioner of Income-tax v. Asiatic Textile Company Limited [1955] 27 I.T.R. 315 holding that the sum received by the assessee as damages, compensation or solatium for premature termination of a managing agency was a capital receipt, does not lay down any different pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as he had actually advanced without reference to this notional figure. The position after the second agreement was that the assessee was not entitled to a refund of any portion of the moneys originally advanced by him and yet the share of profits payable to the assessee was not altered so that the 50 per cent. of the profits stipulated as in consideration of the services rendered by the Chandra Prabha Cinetone towards the production of the picture could relate only to items of service other than its original expenditure. The next item to be considered is that contained in clause 17 of the original agreement reproduced in clause 8 of the second. Under this clause copyright in the songs and dialogues of the picture was to vest in both the parties and the royalty and the benefits of any contracts with gramophone companies were to be equally divided between the assessee and the financier. This was of course in addition to the 50 per cent. of the profits referred to earlier. This is one of the items in respect of which the assessee firm released its rights. In regard to this, there is no question of any remuneration being payable in future in respect of services rendered in the past ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share of the net profits. His employment was for a term which was to continue in force until June, 1949, but was terminated on 2nd December, 1942, when the employer assigned the lease of the licensed premises, and transferred his licence. In consideration of the assessee's consent to his termination of the employment he was paid 2,000 in full settlement of all past, present and future claims. The question raised in the case was whether this sum of 2,000 was paid as compensation for loss of management and was therefore not assessable. It was found that during the period of his service, though the assessee had received his salary he had not received anything in respect of his share of the profits. This was ascertained at 1,090. The Crown contended that out of 2,000 paid to the assessee 1,090 was assessable since it represented payments for service rendered. Atkinson, J., and Lord Greene, M.R., on appeal held that there should be an apportionment between the sum attributable to remuneration due on the date of the termination and that which could be attributed to damages for termination of the employment which would be in the nature of a capital receipt. Atkinson, J., s ..... 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