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TMI Blog1965 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ure or an entire activity or organisation of the assessee had disappeared ? " Till 1946, the memorandum of association of the company did not authorise it to engage in the business of distribution or production of motion pictures. Till then the said company was carrying on business of general financing. In 1947, however, the memorandum of association was amended and a new clause, which reads as under, was inserted: "To carry on the business of film finance whether by system of hire-purchase, co-partnership, profit-sharing, royalty and/or on percentage commission or any other form, and to act as producers, distributors, exhibitors of cinema films and to carry on business of cinematograph trade and industry in all its branches." After the afore-mentioned amendment in the memorandum of association, the said company entered into a contract with Kardar Productions of Bombay and undertook to finance the production of films by them. The agreement contemplated three groups of pictures, that is, groups (A), (B) and (C). At the time of the agreement the pictures to be produced in groups (A) and (B) were ascertained while the pictures in group (C) were still under contemplation. The compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the advance in another group, a supplementary agreement was entered into between the parties on the 7th of February, 1948. The effect of this agreement was that unrecovered amounts against " Shahjahan " and " Keemat " along with the commission were treated as separate block account and the said company could recover these amounts out of future realisations of " Shahjahan " and " Keemat " and from excess realisations of the other group of pictures. Two pictures in group (B), viz., " Natak " and " Dard " proved very successful and the parties expected that the exhibition receipts may amount to nearly Rs. 40 lakhs. At this stage Kardar Productions were approached by other distributors with more attractive terms with the result that they declined to hand over to the company their first picture in group (C) named " Dil-lagi ", which was expected to be a box-office hit. The said company filed a suit for specific performance against Kardar Productions and it was compromised by a consent decree, on the 30th December, 1948. Under the terms of the decree Kardar agreed to pay to the said company a sum of Rs. 5,43,812-5-6 " in respect of the amounts of advances and other moneys due and pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or capital is one of the most vexed questions in the field of taxation laws that judges are called upon to determine. There is, so far as we are aware, no single infallible test for settling the question and each case must depend on its particular facts. What may have weighed in one set of circumstances may have little weight in another. Many cases have arisen on this point and this case raises once more the same troublesome question, namely, whether the receipt in the circumstances is a capital receipt. A number of cases have been referred to and we shall advert to some of them as providing illustrations of treatment given to particular set of facts. Some of the most eminent judges are still of the view that, the best test, though not affording an answer in all cases, is whether or not the sum has been paid or has been received in respect of fixed or circulating capital. To determine that question, particularly in case of payments received on termination of agency contracts, the enquiry to be made is, were the cancelled contracts ordinary commercial contracts made in the course of carrying on the taxpayer's trade or were they such as affected the whole structure of the profit-mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". Another case which must be noticed is Glenboig Union Fireclay Co. Ltd. v. Inland Revenue Commissioners. It is one of the most frequently quoted cases, though under excess profit duty legislation, and the principles to be applied for determining the issue were the same. The appellants were carrying on business inter alia, of fireclay merchants. They were lessees of some fireclay fields over a part of which ran the line of the Caledonian Railway. The railway company brought an action to prevent the appellants from working the fields which was eventually unsuccessful. From the year 1908-1911, during which the action was proceeding, the appellant-company charged on its trading account the expenditure incurred in keeping open the fireclay field which formed the subject of the proceeding and in the year 1913 it received from the railway company an agreed sum as damages in settlement of claims in respect of loss, injury, damages or expenses competent to the appellant in connection with the interdict granted against the appellant during the pendency of the proceedings. After the House of Lords decided against the railway company, it exercised its statutory powers to require part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue. Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." Based on the same principle is the decision of the Supreme Court in Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Income-tax. There it was held that the termination of an agency agreement was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. Other decisions of the Supreme Court wherein the compensation was held to be a capital receipt are Commissioner of Income-tax v. Wazir Sultan & Sons and Godrej & Co. v. Commissioner of Income-tax. In Wazir Sultan's case their Lordships of the Supreme Court held by majority that compensation paid for restricting the area in which the previous age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r specific performance and an injunction was filed restraining the company from purchasing limestone and dolomite from any other person. A fresh agreement between the respondent and the company fell through because of circumstances beyond the control of the parties. The company agreed to pay Rs. 2,50,000 as solatium besides the monthly instalments of Rs. 4,000, remaining unpaid, under the earlier contract. It was held by their Lordships of the Supreme Court that the sum of Rs. 2,50,000 was not paid as compensation for expenses laid out for works at the quarry of a capital nature and could not be held to be a capital receipt on that account, and that the agreements were merely adjustments made in the ordinary course of business. Venkatarama Aiyar J., at page 161, observed: " It will be seen that the receipts, the chargeability of which was in question in the decisions cited for the respondent, were all payments made as compensation for the termination of agency contracts, whereas we are concerned with an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of his business, and that, in our judgment, makes all the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X
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