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PUNJAB & HARYANA HIGH COURT
S.K.Kapur and D.K.Mahajan JJ.
Commissioner Of Income-tax, Delhi And Rajasthan
Versus
Motor And General Finance Ltd.And Another.
Income tax Reference No. 33D of 1960,
Decided On : MARCH 15, 1965
INCOME TAX - Whether the sum received by the assessee (the Motor and General Finance Ltd.) and the sum received by the assessee (the Goodwill Pictures Limited) was a trading receipt or partook of the nature of a capital receipt? - Whether there was material on which the Tribunal could find that the business structure or an entire activity or organization of the assessee had disappeared?
Fact of the Case:
The assessee, Motor & General Finance Ltd., entered into a contract with Kardar Productions to finance the production of films. The agreement contemplated three groups of pictures, (A), (B) and (C). The first picture in group (A) was "Shahjahan" and in group (B) "Keemat". The said company financed to the the extent of Rs. 12 lakhs for the production "Shahjahan" and Rs. 4 lakhs for the production of "Keemat". The agreement provided that the company will act as the sole film distributing agent on commission basis for Delhi, U.P. and East Punjab. In consideration of financial assistance, management and control over the territorial agents, the company was to receive commission at the rate of 10 per cent. on all realisations over and above the commission that was to be paid to the territorial distributors pointed for the purpose. The agreement did not provide for any payment of interest to the company. The full responsibility for the recoupments of bad debts was of the company who had also to bear the entire distribution expenses. The distribution receipts, in the first instance, were to be received by the said company from the distributors and the company was to deduct 10 per cent. commission on distribution receipts plus the commission payable to the sub-distributors and was thereafter to retain the balance towards reimbursement of the advance for production of pictures. Balance over and above the aforesaid amounts were to be paid to the distributors. In the normal course of business the company entered into an agreement with sub-distributors. The first picture in group (A) and the first picture in group (B) "Shahjahan and "Keemat", respectively, were not successful and there being no provision under the agreement of 31st of August, 1946, for the application of the receipts from pictures in one group towards the short recoveries of the advance in another group, a supplementary agreement was entered into between the parties on the 7th of February, 1948. The effect of this agreement was that unrecovered amounts against "Shahjahan" and "Keemat" along with the commission were treated as separate block account and the said company could recover these amounts out of future realisations of "Shahjahan" and "Keemat" and from excess realisations of the other group of pictures. Two pictures in group (B), viz., "Natak" and "Dard" proved very successful and the parties expected that the exhibition receipts may amount to nearly Rs. 40 lakhs. At this stage Kardar Productions were approached by other distributors with more attractive terms with the result that they declined to hand over to the company their first picture in group (C) named "Dil-lagi", which was expected to be box-office hit. The said company filed a suit for specific performance against Kardar Productions and it was compromised by a consent decree, on the 30th December, 1948. Under the terms of the decree Kardar agreed to pay to the said company at sum of Rs. 5,43,812-5-6 "in respect of the amounts of advances and other moneys due and payable". The said company also accepted a sum of Rs. 3,50,000 in full settlement of commission in respect of pictures already delivered by the producers as well as in respect of pictures not so delivered, compensation for early termination of the companys agency agreement and damage, if any, which may be claimed by Goodwill Pictures. This amount also included compensation for termination of the agency in respect of pictures "Natak" and "Dard" for Delhi, U.P. and East Punjab. It may be mentioned here that immediately after the agreement of August, 1946, the company had entered into a sub-agency agreement with Goodwill Pictures. In view of the termination of the agreement between the producer and the company, the latter was not in a position to carry out its obligation under the contract with Goodwill Pictures and, consequently with a view to settle the matter with Goodwill Pictures, the company had to pay compensation to the tune of Rs. 75,000 for release from its obligation. The Goodwill Pictures agreed to receive the said sum of Rs. 75,000 as compensation for early termination of the agency.
Finding of the Court:
The Tribunal held that the sum of Rs. 2,75,000 received by the company and the sum of Rs. 75,000 received by Goodwill Pictures were trading receipts and not capital receipts. The Tribunal also held that there was material on which it could find that the business structure or an entire activity or organization of the assessee had disappeared.
Issues: 1. Whether the sum of Rs. 2,75,000 (net) received by the assessee (the Motor and General Finance Ltd.) and the sum of Rs. 75,000 received by the assessee (the Goodwill Pictures Limited) was a trading receipt or partook of the nature of a capital receip? 2. Whether there was material on which the Tribunal could find that the business structure or an entire activity or organization of the assessee had disappeare?
Ratio Decidendi: The court held that the payments received by the assessee were trading receipts and not capital receipts. The court applied the test of fixed capital versus circulating capital and held that the payments were related to the circulating capital of the assessee and, consequently, not a capital receipt. The court also held that the cancelled contract must be held, in these circumstances, to be ordinary commercial contract made in the course of carrying on the companys trade and not such as can be said to affect the whole structure of the profit-making apparatus of the company.
Final Decision: The court answered the first question in favour of the Commissioner of Income-tax and held that the two sums of Rs. 2,75,000 received by the company and Rs. 75,000 received by Goodwill Picture were trading receipts. The court also answered the second question accordingly.
S.K.KAPUR, J.
1. The reference in this case made under section 6(2) of the Indian Income-tax Act is with respect to two assessees, namely, Messrs. Motor & General Finance Ltd., (hereinafter referred to as the company) and Messrs. Goodwill Pictures Ltd. Delhi (hereinafter referred to ask Goodwill Pictures.) The relevant assessment years are 1950-51 for Motor and General Finance Ltd., and 1949-50 in the case of Goodwill Pictures Ltd. The following two questions of law have been referred to this court :
"(1) Whether, on the facts and circumstances of the case, the sum of Rs. 2,75,000 (net) received by the assessee (the Motor and General Finance Ltd.) and the sum of Rs. 75,000 received by the assessee (the Goodwill Pictures Limited) was a trading receipt or partook of the nature of a capital receip ?
(2) Whether there was material on which the Tribunal could find that the business structure or an entire activity or organization of the assessee had disappeare ?"
2. Till 1946, the memorandum of association of the company did not authorize it to engage in the business of distribution or production of motion pictures. Till then the said company was carrying on business of general financing. In 1947, however, the memorandum of association was amended and a new clause, which reads as under, was inserted :
"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 a producers, distributors, exhibitors of cinema films and to carry on business of cinematograph trade and industry in all its branches."
3. After the afore-mentioned amendment in the memorandum of association, the said company entered into a contract with Kardar Productions of Bombay and undertook to finance the production of films by them. The agreement contemplated three groups of pictures, that is, groups (A), (B) and (C). At the time of the agreement the pictures to be produced in groups (A) and (B) were ascertained while the pictures in group (C) were still under contemplation. The company was, however, to provide a finance of Rs. 12 lakhs for each group. The first picture in group (A) was "Shahjahan" and in group (B) "Keemat" and the said company financed to the the extent of Rs. 12 lakhs for the production "Shahjahan" and Rs. 4 lakhs for the production of "Keemat". The agreement, inter alia, provided that the company will act as the sole film distributing agent on commission basis for Delhi, U.P. and East Punjab. In consideration of financial assistance, management and control over the territorial agents, the company was to receive commission at the rate of 10 per cent. on all realisations over and above the commission that was to be paid to the territorial distributors pointed for the purpose. The agreement did not provide for any payment of interest to the company. The full responsibility for the recoupments of bad debts was of the company who had also to bear the entire distribution expenses. The distribution receipts, in the first instance, were to be received by the said company from the distributors and the company was to deduct 10 per cent. commission on distribution receipts plus the commission payable to the sub-distributors and was thereafter to retain the balance towards reimbursement of the advance for production of pictures. Balance over and above the aforesaid amounts were to be paid to the distributors. In the normal course of business the company entered into an agreement with sub-distributors. Some other important terms of the contract were :
(a) The agents have no responsibility in regard to the financial results arising from the success or failure of any picture, such responsibility rest solely in the producer;
(b) The producer shall at his own cost incur all pre-release and release publicity expenses and given publicity contribution to the various territorial agents in accordance with their agreement;
(c) The pictures which
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