1956 Supreme(SC) 25

SUPREME COURT OF INDIA
14th March, 1956
S.R. DAS, C.J.I. BHAGWATI AND VENKATARAMA AYYAR,JJ.
Commissioner of Income-Tax and Excess Profits Tax, Madras, Appellant
Versus
South India Pictures Ltd. Karaikudi, Respondent.
Civil Appeal No. 32 of 1954
Advocates Appeared
Mr. C. K. Daphtary, Solicitor-General of India (Mr. G. N. Joshi and Mr. R. H. Dhebar, Advocates, with him), for Appellant; Mr. R. Ganapathy Iyer, Advocate, for Respondent.

Headnote:Sections 10 (2) (xv)-Capital and revenue receipts-Distinction-Distributor of films entering into agreement with producer for financing production and acquiring right of distribution -Consideration for cancellation of agreement - Whether assessable as income.

       The assessee, the respondent company, 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 the same for exhibition in different cinema houses and in other cases the assessee used to advance money to producers of films and secure the right of distribution of the films produced with the help of the money so advanced by the assessee. In the course of such business it advanced monies to Jupiter Pictures for the production of three films, and acquired the right of distribution of these three films, under three agreements in writing dated the 17th September 1941, 16th July 1942, and 10th May 1945.

       The said several agreements were expressed in similar language and contained similar provisions. The assessee bound itself to advance a certain sum in installments specified therein and retained the balance to be utilised for the purpose of press publicity in such way as it sought fit and proper and at its own discretion. Jupiter Pictures in its turn bound itself to arrange for the delivery to the assessee of twelve copies of the film to be produced after it would be passed by the Board of Censors. The territories within which the assessee was to have the right of distribution and exploitation of the film was specified in clause 2 and such right was to enure for a period of five years from the date of the release of the film. The assessee was given the right, at its sale discretion, to distribute the films at; such rates and on such terms and conditions and in such manner as it might deem fit. The amount realised 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 and after the entire amount of advance is discharged in paying to Jupiter Pictures the net realisation from the film after deducting its commission. In case the full amount of advance could not be recouped from the realisation 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 annum. There were similar other terms covering the sale of district or territorial rights of the film and the amount of commission payable to the assessee. The agreements also provided that the negative and positive copies of the pictures should constitute the security for whatever amount might be due to the assessee not only in respect of the amounts advanced by it to the producers but also in respect of other claims arising under the agreements. The negative and positive copies of the pictures, if in possession of the producers or anyone on their behalf would only be held by them as trustee of the assessee and the assessee was invested with a species of proprietary rights over he same. The copies of its film and all the publicity materials were to be returned by the assessee to the purchasers after the expiry of the period of five years mentioned in the agreements subject to its receiving from the producer all unrealised amounts under the agreement.

       In the accounting year ending 31st March 1946 and in the previous years the assessee had exploited its rights of distribution of the three pictures. On 31st October 1945 assessee and Jupiter Pictures entered into an agreement cancelling the three several agreements relating to the distribution rights in respect of the three films and in consideration of such •cancellation Jupiter Pictures agreed to pay to the assessee towards commission a sum of Rs. 26,000/- which was paid during the accounting wear under reference.

       The question that arose for consideration was whether this payment of Rs. 26,000 constituted a capital receipt or a revenue receipt. 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 Income Tax. This decision was upheld by the Appellate Assistant Commissioner hut on further appeal by the assessee the Income Tax Appellate Tribunal held that the sum received by the assessee was a capital receipt. At the instance of the Commissioner of Income Tax and Excess Profits Tax, Madars the Tribunal under section 66(1) of the Indian Income Tax Act, 1922, referred to the High Court of Madras the following question :-

       "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 High Court agreed with the Income Tax Appellate Tribunal held answered the question in the negative.

       Held (by majority,1 Bhagwati J. dissentimg) : The sum of Rs. 26,000/- received by the assessee from Jupiter Pictures Ltd., was a revenue receipt under the Indian Income-tax Act.

       Section 10(5-A) of the Indian Income-Tax Act, 1922 is not applicable in the present case.

       Per Das C.J., and Venkatarama Ayyar J.: - The assessee is a company carrying on a business and it received the sum in question in connection with that business. It is therefore to be considered what is the substance of the matter from the point of view of a businessman. The assessee contends that in receiving the sum it was not carrying on its business which was to distribute films, but that it received this amount as and by way of compensation for not distributing these films, that is to say, for not carrying on its business. The sum was, according to the assesee, received by it in return for its ceasing to engage in the business of distributing those three films. That is not the intrinsic business of the matter. Here was the assessee whose business was to distribute films, purchased or produced by itself or in respect of which it secured distribution rights under agreements with the producers. For the purpose of this distribution business the assessee obviously had arrangements with the proprietors of different houses. If any producer failed, to hand over any film as agreed then the exigencies of the assesees business would certainly have required the assessee to treat that agreement as terminated by breach and to enter into another agreement for

       1. Reversing A. I. R. 1952 Mad. 231.

       securing the distribution rights for some other film so as to enable it to fulfil its engagement with the proprietors of the cinema halls by distributing the new films in the place of the ones that have not been supplied. Like. wise if a particular film secured by the assessee failed to attract public enthusiasm business exigencies might well have required the assesseee to enter into an agreement 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 rights in mother film, likely to bring a better box-office collection. The termination of the agreement in each of the circumstances hereinbefore mentioned would 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 would certainly be regarded as having been so paid or received in the ordinary course of business and therefore a trading distribution or trading receipt. The sum paid to the assessee was not truly compensation for not carrying on its business but was a sum paid in ordinary course of business to adjust the relation between the assessee and the producers of the films. The termination of these three agreements did not radically or at all affect or alter the structure or the assessees business. Indeed, assessees business of distribution of films proceed apace notwithstanding the cancellation of these three agreements.1

       Per Bhagwati J. (dissenting) : "What is it that the assessee was acquiring from the producers under the terms of those 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 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 receipt is, as distinct from the monies spent by it in the distribution and expl9itation 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 species of proprietary rights obtained by an assessee being capital assets available to the assessee for working upon the same and earning Income, profits or gains, so in the case of these pictures which it acquired by advancing monies to the producers to be available to it for distributing and exploiting the same what it would be acquiring under the terms of the agreements would be capital assets and if an agreement was

       1.Short Bros., Ltd. v. The Commissioner of Inlaud Revenue, (1927) 12 T. C. 955, 973; Kelsall Parsons & Co. v. Commissioners of Inland Revenues (1938) 21 T. C. 608 applied. Shaw Wallace & Co. v. Commissioner of Income-tax, Bengal (1931) 5 I. T. C. 211 ; Van Den Berghs Ltd. v. Clark (Inspector of Taxes) L. R. (1935) A. C. 431 ; 19 T. C. 390 and Barr. Crombie & Co. Ltd. v. Commissioner of Inland revenue, (1945) 26 T. C. 406 held not applicable.

       subsequently entered into by it either transferring these capital assets of surrendering them for value, whatever payment would be reaslied out of the same would be capital receipts and not trading receipts. The nomenclature" of that receipt as commission for distribution and exploitation under the agreements would not make any difference to the position nor would the fact that, at the time when the said three agreements were cancelled, no part of the monies which had been advanced at the commencement remained outstanding and the only activity of the assessee qua these pictures was then confined to the distribution and exploitation of the same. The agreements were composite agreements and what we have got to look to is what were the rights in these pictures which the assessee had acquired under the terms of the agreements. It had a species of proprietary rights in these pictures throughout the period of the agreements not only in respect of advances which it had made for producing the same 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 these 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 the 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 the consideration .... 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 as a trading receipt at all."