TMI Blog1960 (3) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... krishna Rao. The firm was engaged in the business of producing cinematograph films, and it commenced its business in September, 1945. The first of the two questions set out above relates to the assessment of the profits earned from one of the pictures produced by the firm, viz., Rathnamala. When the case was taken up for hearing the learned advocate for the assessee intimated that the assessee does not want to press for the decision of this court on question No. 1. We, therefore, consider it unnecessary to offer our opinion on the point covered by the question. The other question relates to a film in Tamil, Pulandiran, which the assessee originally planned to produce. Towards that end the assessee also engaged certain artists and technicians. Mrs. Bhanumathi, one of the partners of the assessee firm, was herself the principal actress in the proposed film. Soon thereafter, the assessee took a partner, Messrs. Balaji Pictures, Madras, for the venture. The terms of the partnership agreement were reduced to the form of a document on July 26, 1946. Under that agreement, the cost of production of the picture and collections therefrom were agreed to be shared in the proportion of 2: 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. The agreement is in writing, and is dated August 25, 1948. Under its terms, the assessee was paid a further sum of ₹ 37,500 in full quit of its interest in the picture, and the amounts expended for the same. It was also agreed that Mrs. Bhanumathi and a few of the actors, who had evidently been engaged by the assessee, were to be released from their obligation to act in the picture. The effect of the transaction was the assessee got ₹ 35,100 from Rama Doss and ₹ 37,500 under the release deed, while the expenses amounted to only ₹ 39,957-15-2, the profit being ₹ 32,642. It is the character of this receipt that has to be adjudged in this reference. It is necessary, therefore, to consider the purpose for which the payment was made to the assessee under the release deed dated August 25, 1948. That document states that the sum of ₹ 37,500 is paid to the assessee in consideration of its giving up its picture and that it shall have thereafter no interest in the production and management of the picture. The document contains certain other provisions as well. Clauses 4 and 7 therein contain certain covenants of a restrictive nature. Clause 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax [1959] 37 ITR 381 (SC) to support the contentions. Those cases, however, related to abridgment of rights of an agent under sales or managing agency agreement. It was held that compensation given for the abridgment of such rights, would partake the character of a capital receipt, there having been, as a result of the agreement, a deterioration or injury to the business structure or profit earning apparatus of the assessee. But an agency contract cannot always be considered as a profit earning apparatus, so as to render any compensation for an injury caused to that contract to be treated as a capital receipt. Where the work of an agent is to bring about the business between his principal and his customers, the agency would be the apparatus which leads to the business and, therefore, so far as the agent is concerned, a capital asset. But where, however, the assessee has a business in taking up agency on behalf of others, i.e., the agency is one of the business which the assessee has, such business could be held to be a circulating capital or stock-in-trade, and the compensation received in respect of injury thereto would be a revenue receipt. The basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e monies advanced by the assessee had been fully repaid, an agreement was entered into by the assessee with the producers, cancelling the agreement relating to the distribution rights of the three films, in consideration of which the assessee was paid a sum of money. The question that arose for consideration by the Supreme Court was whether that receipt was of a capital or revenue nature. It was held that the compensation paid was not for preventing the assessee from carrying on his business, but one paid in the ordinary course thereof to adjust the rights between the assessee and the producers of the film, and that the agreement cancelled could not be deemed to be such a fundamental asset of the assessee, on which his whole trade had been built, so as to constitute the framework of the profit-making apparatus. From the majority judgment of the Supreme Court, it is clear that the tests to be applied for ascertaining whether a particular receipt by the assessee in such circumstances was a revenue or capital receipt are (1) whether the original agreement entered into by the assessee was in the course of the carrying on of its business, and (2) whether the termination of the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealing with a commercial asset, but one that affected the future business of the assessee, and that the compensation paid should be held to be one for an injury done to the profit making asset. The contention was raised on the basis of the principle laid down in Beak ( H.M. Inspector of Taxes) v. Robson [1943] 11 ITR (Suppl.) 23 (HL)., In that case, the assessee agreed to serve as director of a company on certain terms as to salary and bonus. The agreement provided that, if his service agreement was terminated by the company for any of the reasons which enabled them so to terminate, he, in consideration of a payment of a sum of 7,000, was not to compete directly or indirectly with the company within a radius of 50 miles of its place of business, until five years had elapsed after the termination of his service. It was held that the payment of 7,000 was made for giving up a right wholly unconnected with his office and being operative only after he ceased to hold that office, could not be held to be emoluments of the office. It must be noticed that the payment in the case was made not in consideration of any service rendered or to be rendered as an employer, but for a covenant not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 4 is not unconnected with the commercial asset, for which the assessee was paid. Clause 7 prohibits the assessee from producing any picture relating to the same subject as Pulandiran for a period of ten years. It is contended for the department that that is an ordinary incident of every contract of sale of a film not to infringe its copyright. But, it must be remembered that there was no completed picture by the time when the release deed was executed. There could, therefore, have been no copyright. What, therefore, the agreement provided for was to prevent the retiring partner from taking advantage of his position and produce a rival picture which would affect the commercial value of the picture in respect of which he was paid ₹ 37,500. It is fairly well recognised that the life of a cinematograph film would be about 3 years, after which period the profit earning capacity would be next to nothing. When, therefore, the assessee covenanted not to produce a picture on the same subject as Pulandiran, the covenant probably exceeded what was merely incidental to the transfer of rights, evidenced by the release. Whether such an obligation cast on the assessee was one pure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular company out of a large number. I gave myself the example of an actor who covenanted for a limited period not to act under his own or well known stage name. But between the two extremes there is a large area, and for myself I am disposed to think that within that area it may well be a matter of degree. In so far as it is a matter of degree it would be, I think, a question of fact. The question whether the agreement in the present case not to compete by producing a film similar to Pulandiran was purely incidental to the release of the rights of the assessee in the picture or whether it was independent of it in regard to any portion thereof, was not considered either by the department or the Tribunal. That aspect of the matter was not put forward by the assessee before them. If, however, it were to be held (1) that the consideration for the release was intended to cover both the release of the rights in the picture and the restrictive covenants, and (2) that the restrictive covenant in clause 7 was independent (in part or whole) of the rights in the picture given up, there would be a case for allocating the respective parts of the consideration and ascertaining the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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