TMI Blog1956 (3) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... DAS., VENKATARAMA AIYAR JUDGMENT The Judgment of S. R. Das, C.J., and Venkatarama Aiyar, J., was delivered by DAS, C. J.--In the year 1945 the respondent company (hereinafter called the "assessee") received a payment of a sum of Rs. 26,000 (rupees twenty-six thousand) from Jupiter Pictures Ltd. of Madras (hereinafter referred to as Jupiter Pictures) pursuant to the terms of an agreement between the assessee and Jupiter Pictures dated the 31st October, 1945. In the course of the proceedings for the assessment of the assessee's income-tax for the year 1946-47 and the excess profits tax for the chargeable accounting period from 1st April, 1945, to 31st March, 1946, the following question arose : "Whether on the facts and in the circumstances of the case, the sum of Rs. 26,000 received by the assessee from Jupiter Pictures Ltd. is a revenue receipt assessable under the Indian Income-tax Act ?" The Income-tax 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 App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the distribution of the film was to be utilised by the assessee in the following way : namely, in paying itself its distribution commission and in retaining the available balance until the entire amount of advance would be discharged (clause 3) and after the entire amount of the advance would be discharged, in paying to Jupiter Pictures the net realisations from the film after deducting its commission (clause 4). In case the full amount of advance could not be recouped from the realisations of the film on or before the expiry of one and half years from the date of the first release of the film Jupiter Pictures would be liable to pay to the assessee whatever balance would remain due with compound interest at twelve per cent. per annum calculated in the manner mentioned in clause 6. The assessee's commission for distribution and exploitation of the film through its Organisation was, by clause 8, fixed at 15 per cent. of the 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. there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d pies eight) for each of the three pictures aggregating in all to Rs. 26,000 (rupees twenty-six thousand). It is this sum of Rs. 26,000 (rupees twenty-six thousand) which was paid during the accounting year which forms the subject-matter of the question that has arisen between the assessee and the Department. As already indicated the question for consideration is whether this payment constituted a capital receipt or a revenue receipt. It may be mentioned here that the answer to this question will be relevant and helpful only in respect of assessments of other assessees for assessment years prior to the date when the new sub-section (5-A) was, by the Finance Act of 1955, added to section 10 of the Indian Income-tax Act, 1922. It is not always easy to decide whether a particular payment received by a person is his income or whether it is to be regarded as his capital receipt. Income, said Lord Wright in Raja Bahadur Kamakshya 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 Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar film secured by the assessee failed to attract public enthusiasm, business exigencies might well have required the assessee to enter into an arrangement with the producers concerned to cancel the agreement for distribution of that film and to enter into another agreement with the same or other producers for acquiring the distribution right in another film likely to bring a better box-office collection. The termination of the agreement in each of the circumstances hereinbefore mentioned could well be said to have been brought about in the ordinary course of business and money paid or received by the assessee as a result of or in connection with such termination of agreements would certainly be regarded as having been so paid or received in the ordinary course of its business and therefore a trading disbursement or trading receipt. There was no covenant made by the assessee with Jupiter Pictures not to enter into agreements with 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 expiratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d notwithstanding the cancellation of these three agreements. In Shaw Wallace's case, therefore, it could possibly be said that the amount paid there represented a capital receipt. It is pointed out that in Shaw Wallace's case, there were other agencies also which were continuing. A reference to that case reported sub-nom Shaw Wallace Co. v. Commissioner of Income-tax, Bengal, will show that Shaw Wallace and Co. carried on business as merchants and managing agents of various companies and that they were also the distributing agents of the two oil companies as well. The business of managing agency of a company is quite different from the business of distributing agency of the products of oil companies. The different managing agencies in that case were entirely different from and independent of the distributing agency of the two oil companies and this aspect of the matter was emphasised by Sir George Lowndes towards the end of his 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 purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this respect the case differs from the case of Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenues, for in that case the lease of the fireclay fields authorised the assessee who was a manufacturer of fireclay goods to extract fireclay and manufacture fireclay goods and consequently was a capital asset of the assessee's business. Further, in the present case there is no suggestion that any part of the moneys advanced by the assessee for the production of the films was outstanding. Assuming that to start with the films constituted capital assets, the entire capital outlay had been recovered and the security had been extinguished and that part of the agreements which constituted financing agreements had been fully worked out and had come to an end and the three films ceased to be capital assets and the assessee was holding the films only under that part of the agreements which constituted the distributing agency agreements 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 termi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave agreed to render such financial assistance by advancing to the producer altogether a sum of Rs. 57,000 on the terms and in the manner hereinafter appearing and to distribute and exploit the said picture through their organization as requested by the producer ......... : 1. The distributors shall advance to the producer a sum of Rs. 57,000 only altogether in the manner hereinafter set out : (a) a sum of Rs. 7,000 only should be advanced on the execution of these presents ; (b) a further sum of Rs. 5,000 should be advanced as soon as 5,000 feet of film shall have been completed and roughly edited, rushprint thereof shown ; (c) a further sum of Rs. 10,000 should be advanced as soon as a further 10,000 feet of film shall have been completed ; (d) a further sum of Rs. 10,000 should be advanced as soon as a further 15,000 feet of film shall have been completed ; (e) a further sum of Rs. 12,000 should be advanced on the last shooting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eon at 12 per cent. per annum. But if the said picture be not delivered within two months thereafter, viz., on or before 1st July, 1942, the distributors may at their option complete the picture at their own cost and in such case the producer shall be liable to the distributors for all the expenses with compound interest thereon at 12 per cent. per annum and the distributors shall have all rights as to the distribution, sale, etc., as aforesaid. 20. On the expiry of the period of five years mentioned in this agreement, the distributors shall return to the producer all copies of films and balance stock of loan and saleable publicity materials of the said picture, subject to usual wear and tear and subject to the distributors receiving back from the producer such unrealised amount, if any, as mentioned in clause (6) above." The said three agreements were dated 17th September, 1941, 16th July, 1942, and 10th May, 1945, each having a period of five years 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 Jupi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivered within the specified period the assessee was at liberty to complete the same and in such a case the producers were liable to it for all the expenses with compound interest at 12 per cent. per annum and all the rights as distributors were to fasten upon the same. The copies of the films and all the other publicity materials were to be returned by the assessee to the producers after the expiry of the period of five years mentioned in the agreements subject to its receiving from the producers all unrealised amounts under the agreements. What is it that the assessee was acquiring from the producers under the terms of these agreements ? Was it acquiring capital assets which it would work upon by way of distribution and exploitation in order to earn its income, profits or gains or was it acquiring stock-in-trade of its business as distributors ? If it was capital assets which it thus acquired the monies which it advanced to the producers for acquiring 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e but also in respect of all other claims under the terms of the agreements and the nature of those rights would not be changed by the accident of the full, amount of the advances being repaid to it at a particular period of time during the currency of the agreements. If it acquired capital assets those assets continued in its possession as such all throughout the period of the agreements and it would not be legitimate at any intermediate period of time to see what was the position obtaining at that time for, the purpose of converting what were acquired as capital assets at the dates of the agreements into stock-in-trade of its business of distribution and exploitation of the pictures. If this be the true position on the construction of tire agreements it follows that what was done by the assessee on the 31st October, 1945, was to surrender these capital assets to the producers for a consideration. These capital assets qua the agreements of the 17th September, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of a going business from that going business and nothing else. It was submitted that it was an essential part of the assessee's business to enter into agreements of the nature in question and that it was an ordinary incident of its business that such agreements may be altered or terminated from time to time. It was therefore a normal incident of the business such as that of the assessee that the agreements might be modified and in parting with the benefits of the agreements the assessee could not be said to be parting with something which could be described as an enduring asset of its business. This position would have been tenable if the agreements in question were merely distributing agreements without anything more. It would then have been an essential part of the assessee's business to enter into such agreements and also it would have been a normal incident of its business to modify or terminate the same and to adjust the relations between the parties. 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. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of the part" (page 465). In Van Den Berghs Ltd. v. Clark (H. M. Inspector of Taxes) it was held that the payment in question was the payment for the cancellation of the assessee's future rights under the agreements which constituted a capital asset of the assessee and that it was accordingly a capital receipt. Justice Finlay, whose judgment was ultimately restored by the House of Lords, observed at page 413 : "The ground is not very easy to express, but the ground upon which I desire to put this part of the case is this, that the true view here is that the agreement which was cancelled was just a capital asset of the company and, if that is right, it seems to me to follow that, distinguishing such cases as Short Brothers, one ought to hold that the sum received was not an income receipt at all". Lord Macmillan, after discussing the various 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or a trading asset by the assessees. Justice Macnaghten, whose judgment in the King's Bench Division was the final judgment in Shadbolt (H. M. Inspector of Taxes) v. Salmon Estate, remarked at page 57 that "it was not disputed that in the course of such a trade as this, the trade of building houses for sale, the land on which the houses were built was part of the stock-in-trade of the business and was not a capital asset. The land being thus a part of their stock-in-trade, the payment in question for the bit sold by the assessees would have been a trading receipt and the right to build on the plots was likewise a trading asset." In Johnson (H.M. Inspector of Taxes) v. W. S. Try Ltd., also, the judgment of the same learned Judge was the final judgment on the point in issue. The following observations of the learned Judge at page 172 are very instructive : "Although in most cases land belonging to a trading company was part of its capital assets, in the case of a 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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