TMI Blog1973 (8) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... he instance of the revenue is : " Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding the amounts of Rs. 2,400 and Rs. 11,656 as capital receipts of the company ? " The relevant assessment year is 1959-60 corresponding to the previous year ending June 30, 1965, and the relevant facts are as follows : The assessee-company, besides having other income, carried on cinema films distribution business. It had secured distribution rights of eight pictures for the pre-partition Northern India territory. It entered into an agreement dated August 6, 1946, with its sub-distributor, Messrs. Sind Film Distributing Company, for the exhibition of these films in Sind and Baluchistan territory. Clause 2 of the agreement required the sub-distributor to pay a sum of Rs. 40,000 as deposit for the faithful performance of the terms and conditions of the agreement, which was to be adjusted at the rate of Rs. 5,000 against each of the eight pictures. Under clause 3, the sub-distributor was to pay a sum of Rs. 32,500 as advance against each of the costume pictures and Rs. 25,000 as advance against each of the social pictures. The sub-distributor acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edits represented adjustments in revenue account. The Tribunal in second appeal, however, excluded the said amounts from the assessee's income holding that the assessee's action in transferring these amounts to the profit and loss account could not change the character and nature of the amounts and that the character of these payments was of a loan. The character of Rs. 40,000 received as deposit was that of security amount repayable on due performance of the contract. The sum of Rs. 2,400 which had remained outstanding, was thus merely a deposit and not a trading receipt in the hands of the assessee. Regarding Rs. 2,30,000 paid under clause 3 of the agreement, the Tribunal was of the view that it was an advance, i.e., a loan to the assessee-company repayable by appropriation of 85% of the realisations, which were receivable by the assessee. The assessee, according to the Tribunal, had paid similar advances to the producers in respect of these films, for securing the distribution rights, which was a normal feature of such transactions. In its own turn while giving sub-distribution rights for smaller territories, the assessee-company had demanded and received such advances from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel, were borrowed sums in the nature of capital receipts and could not be regarded as income. The sharp controversy raised as above, illustrates the difficulties experienced in drawing a clear distinction between revenue and capital receipts in respect of borderline items. Even the cases cited by the learned counsel on both sides do not lay down any infallible tests to determine the character of the payments received, which is bound to vary according to the facts and circumstances of the case. Yet, the decided cases do help in indicating the kind of considerations which may usefully be kept in mind in solving the difficulties encountered. Before analysing the facts in some detail, therefore, we will proceed to examine the cases that have been cited before us by the counsel on both sides. The first two cases brought to our notice are judgments of the English Court of Appeal. In Morley v. Tattersall , the court held "that the quality and nature of a receipt for income tax purposes is fixed once and for all when the subject of the receipt is received". Unclaimed balances from the amounts realised on the sale of customer's horses in auctions held by Tattersall, in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to yarn account in adjustment of the price of yarn supplied, as and when delivered. The amounts received under this arrangement were held by the Supreme Court to be taxable as mere advance payments of the price and not as borrowed money. Under the second arrangement, the payment made by the constituents was taken as "contract advance fixed deposit" and it was refunded when the goods were supplied and the price paid in full. The Supreme Court held these payments to be of the nature of trading receipts rather than security deposits or borrowed money. The amounts received were treated as advance payments in relation to each contract number. Under the third arrangement, the assessees demanded and received from the customer as security deposit a certain sum which was to be held as security for the due performance of the contracts by the customer so long as his dealing with them continued. Price was to be paid by the customer in full, i.e., without any adjustment out of the deposit which carried interest. The Supreme Court held that the amount deposited by the customer was no longer to have any relation to the price fixed for the goods to be delivered. The price was to be paid in full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the assessee, the constituents did not sometimes claim this amount of excess which remained with the assessee to their credit. Unclaimed credit balances over three years old were transferred by the company to its profit and lons account and dividends were declared out of the net profit in the account. The amounts so transferred were held to be payments towards price of the scrap to be supplied to the constituents. They were, therefore, held by the Punjab High Court to be essentially trading receipts of the nature of revenue. In Commissioner of Income-tax v. Sandersons and Morgans, the assessee, a firm of solicitors, credited by transfer to profit and loss account certain sums, representing the aggregate of the unclaimed balances in a number of personal, ledger accounts of its clients who had advanced to it money in connection with cases entrusted to it some years back. The Income-tax Officer added the said amount to the assessable income of the assessee. The Calcutta High Court held that the amount in question was not a revenue receipt. When the money was received, it was not received as a trading receipt, but was received by the assessee in its capacity of an agent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the assessee's trading structure and not trade receipts. Such deposits may be made not on account of any goods supplied or services rendered in the course of trade ; but simply in consideration, say, for example, of such person's appointment as an agent. They have no relation to the price of goods supplied or the charges for services rendered and are in the nature of borrowed money and, therefore, capital and not trade receipts, and do not cease to be so by being written in the assessee's books in a particular manner. These broad principles gathered from the authorities which we have noticed, as already stated, cannot be regarded as of universal application, as each case has to depend, in the ultimate analysis on its own facts. Other circumstances may affect their applicability. But they are still useful just to be borne in mind, while examining any given facts. Let us now examine in some detail the facts of the present case. The sum of Rs. 40,000 deposited by the sub-distributor, under clause 2 of the agreement, was clearly money for the faithful performance of the terms and conditions of the agreement and had no relation to the 85% realisations which were earmarked for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o enable the assessee to recoup through such loans some of the advances, which it had, in turn, made to the producers. The stipulation in the agreement allowing the sub-distributor to adjust 85% of the realisations, if any, provided just a mode or the manner for the return of the loan and did not change its character. The contention of the learned counsel for the revenue that these were advance payments of the 85% of the realisations is, thus, not borne out by the facts as placed on record. These amounts were in the nature of loans and were received by the assessee in capital account and not in the revenue account, Mr. Kirpal contended that even if the amounts received by the assessee were treated as capital receipts, as we are inclined to treat them, they were so only to begin with. Their nature and character changed subsequently not by any act of the parties, but by operation of the law of limitation after the expiry of three years. The assessee became entitled to retain the same as its own money after the expiry of the period of limitation, as the sub-distributor could not recover it. He tried to distinguish Tattersall's case and submitted that in that case there had been no c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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