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1957 Supreme(P&H) 179
PUNJAB & HARYANA HIGH COURT
A.N.Bhandari and Mehar Singh JJ.
Motor And General Finance Ltd.
Versus
Commissioner Of Income Tax
Income Tax Case No. 4-D of 1955,
Decided On : DECEMBER 24, 1957
The question whether a particular receipt is a revenue receipt or a capital receipt is a question of law.
Headnote:
INCOME TAX - Reference to High Court - Question of law - Whether compensation received by companies for cessation of activity as distributors of films was capital receipt - Whether finding of Tribunal that business structure or entire activity or organisation of companies had disappeared was supported by evidence - Held, question of law arose - Tribunal directed to state case and refer questions of law to High Court.
Fact of the Case:
The Commissioner of Income-tax sought to refer two questions of law to the High Court under Section 66(1) of the Indian Income-tax Act, 1922. The questions related to whether compensation received by two companies for cessation of their activity as distributors of films was a trading receipt or a capital receipt, and whether there was material on which the Tribunal could find that the business structure or an entire activity or organisation of the companies had disappeared.
Finding of the Court:
The High Court held that the findings of the Tribunal that the compensation received by the companies was in respect of the cessation of their activity as distributors of films and that it was a clear case of disappearance of a business structure and a clear case of disappearance of an entire activity or an entire organisation were completely unsupported by evidence. The Court further held that the question whether a particular receipt is a revenue receipt or a capital receipt is also a question of law.
Issues: Whether the findings of the Tribunal that the compensation received by the companies was in respect of the cessation of their activity as distributors of films and that it was a clear case of disappearance of a business structure and a clear case of disappearance of an entire activity or an entire organisation were supported by evidence.
Ratio Decidendi: The High Court held that the findings of the Tribunal were not supported by evidence and that the question whether a particular receipt is a revenue receipt or a capital receipt is a question of law. Therefore, the Court held that a question of law arose and directed the Tribunal to state the case and refer the questions of law to the High Court.
Final Decision: The High Court accepted both the petitions and required the Tribunal to state the case and to refer to this Court the two questions of law which have been propounded by the Commissioner of Income-tax.
A.N.Bhandari, J.
1. These two petitions under Section 66 (2) of the Indian Income-tax Act raise the question whether the Appellate Tribunal should be required to state a case and to refer to this Court certain questions of law which are said to have arisen out of its order dated the 19th July, 1954.
2. The petitioner in these cases is the Commissioner of Income-tax while the respondent in one case is the Motor and General Finance Limit- ed, Delhi, and the respondent in the other ease is M/s. Goodwill Pictures Limited, Delhi. The first Company, as its name implies, finances motor and other businesses, while the second Company carries on the business of distribution and exhibition of cinema films.
3. The first Company commenced its business with the purchase and sale of motor vehicles on hire-purchase basis, but later extended it to the purchase and sale of land and to the acquisition of films on hire-purchase system. In the accounting year 1945-48 the Company made the following addition to the Object Clause of its Memorandum of Association : --
"To carry on the business of film finance, whether by system of hire-purchase, co-partnership, profit sharing, royalty and/or on percentage commission or any other form; and to act as producers, distributors, exhibitors of cinema films, and to carry on business of cinematograph trade and industry in all its branches."
4. On the 31st August, 1946 the first Company entered into an agreement with Kartlar Productions of Bombay and acquired rights, in lieu of an advance of Rs. 36,00,000/-, to distribute throughout the world seven pictures, one of which was under production and six of which were to be produced in future. They were to receive 10 per cent on all realisations in respect of the seven pictures in addition to the commission that was to be paid to the territorial distributors appointed by them. On the 21st September, 1948 the two Companies entered into an agreement with each other whereby the first Company appointed the second Company as the solo distributing agents on commission basis for Delhi, United Provinces, and East Punjab in respect of pictures of Kardar Productions.
The Producer delivered two pictures to the first Company in 1947 and two, namely "Natak" and "Dard" in 1948. The first two were not very successful, but the last two turned to be box-office hits, yielding an income of about Rs. 40,00,000/-. The Producer failed to deliver the remaining pictures to the first Company and the latter were unable to perform their part of the contract with the second Company. The first Company later brought a suit for specific performance against the Producer which ended in the passing of a compromise decree on the 30th December, 1948.
According to this decree the Producer was to pay to the first Company a sum of Rs. 5,43,812/5/6 in respect of the amounts of advances and other monies due and payable and a sum of Rs. 3,50,000/- in full satisfaction of the settled account of commission in respect of the pictures already delivered by the Producer to the first Company as well as in respect of the pictures not yet delivered and compensation for early termination of the agency agreement and damages, if any, which might be claimable by the second Company from the first Company or the Producer for nondelivery of "Dillagi" and for termination of the agency in respect of the pictures "Natak" and "Dard" for the East Punjab Circuit of the Indian Dominion.
5. On the 26th February, 1949 the first Company agreed to pay and the second Company to receive a sum of Rs. 75,000/- as compensation for the early termination of their agency. After the first Company had paid a sum of Rs. 75,000/-to the second Company out of a sum of Rs. 3,50,000/- received by them from the Producer, the first Company credited a sum of Rs. 2,75,000/-to the reserve account instead of profit and loss account. The Income-tax Officer came to the conclusion that the sum of Rs. 2,75,000/- in the hands of the first Company and t
