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TMI Blog1956 (3) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer took the view that the sum was in the nature of a revenue receipt and was liable to be brought to account for purposes of calculating the tax. The Appellate Assistant Commissioner upheld this decision. On further appeal by the assessee the Income-tax Appellate Tribunal held that the case was governed by the decision of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace and Company and that the sum received by the assessee was a capital receipt. Accordingly on 26th August, 1948, the Tribunal reversed the decision of the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax and Excess Profits Tax, Madras, the Tribunal under section 66(1) of the Indian Income-tax Act, 1922, referred to the High Court of Madras the question of law quoted above. The High Court agreed with the Income-tax Appellate Tribunal and answered the question in the negative. The present appeal is directed against this decision of the High Court. The facts are shortly as follows : The assessee is a private limited company. It carried on the business of distribution of films. In some instances the assessee used to produce or purchase films and then distribute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net realisations. In case of sale of district or territorial rights of the film made by consent of both parties the assessee alone would be entitled to put through such sales and receive the proceeds and would be entitled to a commission of ten per cent. thereon and to appropriate the balance towards the payment and discharge of the advance made by it (clause 9). The assessee was to submit to Jupiter Pictures a monthly statement of account and show all books of account to Jupiter Pictures (clauses 11 and 12). The assessee was given liberty to appoint sub-agents and sub-distributors at its sole discretion (clause 13). The amount advanced by the assessee was made immediately repayable in the event of the film being banned or not passed by the Board of Censors (clause 14). Clause 15 gave the assessee a charge by way of security on the negative and positive copies of the film for whatever amount might be due to the assessee on account of the advance made and in case the negative and positive copies were in possession of Jupiter Pictures the same were to be held by the latter as trustee of the assessee. The burden of insuring the negative copies of the film was placed on Jupiter Picture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar and Orissa, is a word of the broadest connotation and difficult and perhaps impossible to define in any precise general formula. Lord Macmillan said in Van Den Berghs Ltd. v. Clark (Inspector of Taxes) that though in general the distinction between an income and a capital receipt was well recognized and easily applied, cases did arise where the item lay on the border line and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances. Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. The problem that confronts us has to be approached keeping in mind the different kinds of consideration taken into account in the-different cases. The assessee before us is a company carrying on a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other producers or not to distribute films secured from other producers. In fact in the accounting year the assessee had distribution rights in respect of eleven films including these three. These three agreements would have come to an end on the expiration of the period of five years from the respective dates of release of the films and had only a part of the period to run, a fact which may also be relevantly borne in mind. The cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better box-office collections. In the language of Lord Hanworth, M.R., in Short Bros. Ltd. v. Commissioners of Inland Revenue the sum paid to the assessee was not truly compensation for not carrying on its business but was a sum paid in the ordinary course of business to adjust the relation between the assessee and the producers of the films. The agreements which were cancelled were by no means agreements on which the whole trade of the assessee had for all practical purposes been built and the payment received by the assessee was not for the loss of such a fundamenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment where he said : "It is contended for the appellant that the 'business' of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondent's other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field." If Shaw Wallace and Co. had other distributing agencies similar to those of the two oil companies then it would be difficult to reconcile the decision in that case with the later decisions in Kelsall Parsons & Co. v. Commissioners of Inland Revenue and other cases. It has been urged that the agreements did not create merely an agency for the distribution of the films but were composite agreements consisting partly of a financing agreement creating a security on the films for the monies to be advanced and conferring the right even to complete the films in case the producers failed to do so and partly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements which only were subsisting. In the premises the amount received by the assessee was only so received "towards commission," that is to say, as compensation for the loss of the commission which it would have earned had the agreements not been terminated. In our opinion, in the events that had happened, the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed or sterilized but in the language of Rowlatt, J., in Short Bros. case the amount was simply received by the assessee in the course of its going distributing agency business from that going business. In our judgment, on the facts and in the circumstances of the present case, it falls within the principles laid down in Short Bros. and Kelsall Parsons & Co.'s cases rather than within those laid down in Shaw Wallace's case or Van Den Bergh's case or Barr Crombie's case. Reference was made to section 10(5-A) of the Indian Income-tax Act, 1922, and it was urged that the language of that sub-section impliedly indicated that the sum of Rs. 26,000 (rupees twenty-six thousand) was a capital receipt. We are unable to accept this suggestion. That sub-section was obviously introd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting day of the picture ; (f) a further sum of Rs. 10,000 should be advanced as soon as the picture is passed by the Board of Censors and 12 copies of the film delivered to the distributors ; and the balance of Rs. 3,000 to be retained by the distributors to be utilised for the purpose of press publicity in regard to the said picture to be made by the distributors on behalf of the producer from time to time. The distributors may utilise the said sum for publicity as they think fit and proper and at their sole discretion. 3. The distributors shall from the realisations of the said picture made by them : (a) pay themselves all amounts spent by them for publicity in respect of the said picture such an expenditure having been incurred only after obtaining the consent of the producer ; (b) pay themselves their distribution commission in respect of the said picture as hereinafter provided ; and (c) pay themselves the available balance until the entire advance of Rs. 57,000 should be completely discharged and satisfied. 6. If the distributors should fail to realise the full amount due to them as aforesaid from the realisation of the said picture in the manner hereinbefore set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to run ending with 16th September, 1946, 15th July, 1947, and 9th May, 1950, respectively. The only question which falls to be determined by us herein is whether the payment of Rs. 26,000 received by the assessee from the Jupiter Pictures on the cancellation of the said three agreements on the 31st October, 1945, is a capital receipt or income, profits or gains liable to tax in the assessment year 1946-47. The assessee was no doubt carrying on the business of distributors which involved as a necessary corollary the acquisition of films for the purpose of distribution. Those films could either be produced by it or could be acquired by it from the producers who hired them out to it for the purpose of distribution. There was, however, an activity in this business of distributors which consisted of advancing monies to the producers to enable the producers to produce the films and the agreements which were entered into between the producers and the assessee as distributors were composite agreements incorporating therein the terms in regard to the financial assistance as also the distribution and exploitation of the films thus produced by the producers with the financial assistanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same would necessarily be capital expenditure and would not be debited by it in its accounts as trading expenses which would be the position if what it acquired under the terms of the agreements was mere stock-in-trade of its business. The realisations which it made by distribution and exploitation of the pictures would be undoubted trade receipts and, therefore, income, profits or gains and no part of the same would go to its capital account. The monies which it had advanced for the production of the pictures would, however, as and when realised, be credited by it in its accounts as capital receipts and they would certainly not be liable to be treated as trading receipts. There was thus a sharp distinction between the capital account and the trading account, the amounts advanced towards the production of the pictures being capital expenditure and the repayments of these advances as and when made being capital receipts, as distinct from the monies spent by it in the distribution and exploitation of the pictures being trading expenses and the commission realised by it from such distribution and exploitation being trading receipts. As in the cases of mining leases and other spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber, 1941, 16th July, 1942, and 10th May, 1945, were to endure up to 16th September, 1946, 15th July, 1947, and 9th May, 1950, respectively. A sum of Rs. 8,666-10-8 was fixed as the consideration for the surrender of each and the capital assets which had been acquired were all of them surrendered by the assessee to the producers with effect from the 31st October, 1945. The payment thus received by the assessee could only be a capital receipt being the price of the surrender of the capital assets and could not be considered a trading receipt at all. It is well recognised that the problem of discriminating between an income receipt and a capital receipt and between an income disbursement and a capital disbursement is not always easy to solve. Even though the distinction is well recognised and easily applied in general, cases do arise from time to time where the item lies on the border line and the task of assigning it to income or capital becomes one of much refinement. "While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties. In neither of these cases was there any question of any capital asset having depreciated in value or become of less use for the purpose of the assessee's business. Rowlatt, J., observed in Short Brothers, Ltd. v. Commissioners of Inland Revenue at page 968 that the money was not received in respect of the termination of any part of the assessee's business nor was it received in respect of any capital asset as was the sum in the Glenboig's case. Lord Fleming also emphasized this aspect of the matter in Kelsall Parsons and Co. v. Commissioners of Inland Revenue at page 622 that there was no finding that in consequence of the termination, any capital asset was depreciated in value or became of less use for the purpose of the assessee's business. If the assessees in those cases had by virtue of the agreements in question acquired capital assets which they could work in order to earn income, profits or gains, the payments received on termination of the said agreements would certainly not have been held to be trading receipts but capital receipts and as such not liable to tax. Reliance was placed on behalf of the assessee on the decisions in Glenboig Union Fireclay Co. Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious authorities which according to him were useful as illustrations and as affording indications of the kind of considerations which may be relevantly borne in mind in approaching the problem, construed the agreements in question as not ordinary commercial contracts made in the course of the carrying on of the assessee's trade. The agreements in the facts and circumstances of the case before him related to the whole structure of the assessee's profitmaking apparatus, they regulated the assessee's activities, defined what they the might and might not do and affected the conduct of their business and he had difficulty in, seeing how money laid out to secure, of money received for the cancellation of so fundamental an organization of a trader's activities could be regarded as an income disbursement or an income receipt. He expressed the opinion that the asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was a capital asset. They provided a means of making profits but they themselves did not yield profits. Applying the same ratio here, could it not be said that the pictures which were acquired by the assessee fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company engaged in ribbon development the land which it acquired for the purposes of such development is not part of its capital. In such a case the land forms part of its stock-in-trade, just as much as the materials which it buys for the purpose of erecting the buildings on it. The cost of the land must come into its trading account as a trading expense. If it sells the land the price must come into its trading account as a trading receipt. And likewise, compensation for injurious affection must also, in my opinion, be regarded as a trading receipt." In the instant case also, the pictures, if produced by the assessee itself would have been capital assets of the assessee. What the assessee did was that instead of producing the pictures itself it advanced monies to the producers for the purpose of producing the pictures which it acquired for the purpose of distribution and exploitation. None the less, the pictures thus acquired were capital assets of the assessee which it worked upon in carrying on its business of distribution and exploitation, the monies it spent on the acquisition of the pictures were thus capital expenditure and whatever monies were realised by it by working t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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