Satyanarayana Rao, J.-The two questions that were referred to us by the Income-Tax Appellate Tribunal under section 66(1) of the Indian Income-tax are as follows:

(1) Whether, on the facts and in the circumstances of the case, the film hire derived by the assessee under agreements which provided for fixed hire charges in respect of exhibition of films in Indian States is not exempt from Excess Profits Tax as profits accruing or arising in the Indian States within the meaning of the third proviso to section 5 of the Excess Profits Tax Act.

(2) Whether, on the facts and in the circumstances of the case, the films hire derived by the assessee under agreements which provided for hire at a percentage of the collections in respect of the exhibition of films in Indian States is not exempt from Excess Profits Tax as profit accruing or arising in the Indian States within the meaning of the third proviso to section 5 of the Excess Profits Tax Act.

The assessee is a public limited company whose registered office is at Salem and is incorporated in British India. It carried on the business of producing and distributing films. The films are distributed to exhibitors within, and also without, British India under two classes of contracts, specimen copies of which are annexed to the case stated by the Appellate Tribunal as A and B. The films are given on hire for exhibition either for a fixed sum agreed to be paid by the exhibitor, or for a percentage of the collections made by the exhibitor at the time of the exhibition of the picture. The assessee claimed that under the third proviso to section 5 of the Excess Profits Tax Act, the income he received by exhibiting films in the Indian States under both the types of contracts was exempt from liability to pay excess profits tax. This contention was upheld by the Tribunal, differing from the Appellate Assistant Commissioner. Hence this reference. The crucial question that falls to be determined is whether the whole of the profits accrued, or arose, in an Indian State or not.

It is obvious as found by the Appellate Tribunal, that in respect of contracts entered into on percentage basis the share of the profits due to the assessee was not payable until the picture was exhibited and collections were made in the presence of a representative of the assessee. The percentage was then paid to the representative of the assessee at the place where the picture was exhibited, i.e., in the Native State. So far as the lump sum contracts are concerned it is also found that the assessee did not part with the picture until the amount was paid to him at the time of the delivery of the picture in the Native State, either by sending the railway receipt by V.P.P. or by tendering the film directly to the exhibitor, or perhaps even by sending the railway receipt to a bank for collection. Whichever method was adopted by the assessee, it leaves no room for doubt that until the picture was delivered to the exhibitor, the exhibitor did not pay a single pie to the assessee. On these facts it was contended strenuously on behalf of the department by Mr. Rama Rao Sahib, the learned counsel for the Income-tax Commissioner that, as the contracts which are the source of the profits were entered into in British India, it must be held that in respect of both the types of contracts, the profits accrued in British India and not in a Native State. Having regard to the terms of the contracts and the findings of the Appellate Tribunal it is difficult, if not impossible, to accept this contention. Under the contract, the assessee gets practically nothing except an obligation on the part of the exhibitor to receive the film when tendered to him and to exhibit it subject to the conditions of the contract. Money does not become payable and the assessee had no right to demand any payment before the film was actually delivered to the exhibitor. In these circumstances nothing accrues to the assessee until the film was put in the possession of the

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