Case: The Commissioner Of Income Tax And Excess Profits Tax Vs. The South India Pictures Ltd., Karaikudi

S.R. Das, CJ. (Venkatarama Ayyar, J. concurring)1. 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 31-10-1945. In the course of the proceedings for the assessment of the assessees income-tax for the year 1946-47 and the excess profits tax for the chargeable accounting period from 1-4-1945 to 31-3-1946, 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 Appellate Tribunal held that the case was governed by the decision of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace and Co. 1932 PC 138 (AIR V 19) (A) and that the sum received by the assessee was a capital receipt. Accordingly n 26-8-1948 the Tribunal reversed the decision of the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax and Excess Profits Tax, Madras the Tribunal under S. 66(1) Income-tax Act, 1922, referred to the High Court of Madras the question of law quoted above. The High Court agreed with the Income-tax Appellate Tribunal and answered the question in the negative. The present appeal is directed against this decision of the High Court.2. The facts are shortly as follows- The assessee 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 halls and in other cases the assessee used to advance monies to producers of films and secure the right of distribution of the films produced with the help of the monies 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 17-9-1941, 16-7-1942 and 10-5-1945.3. 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 retain the balance to be utilized for the purpose of press publicity in such way as it thought fit and proper and at its sole 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 (clause 1). 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 ensure for a period of five years from the date of release of the film. The assessee was given the right, at its sole discretion to distribute the films at such rates and on such terms and conditions and in such manner as it might deem fit (clause 2). The amount realized by the distribution of the film was to be utilized 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 realizations from the film after deducting its commission (clause 4) In case the full amount of advance could not be recouped from the realizations 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 could remain due with compound interest at twelve percent per annum calculated in the manner mentioned in clause 6.The assessees commission for distribution and exploitation of the film through its organization was by clause 8, fixed at 15 per cent of the net realizations. 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 thereon and to appropriate the balance towards the payment and discharge of the advance made by it (clause 9). The assessee was to submit to Jupiter Pictures a monthly statement of account and show all books of account to Jupiter Pictures (clauses 11 and 12). The assessee was given liberty to appoint sub-agents and sub-distributors at its sole discretion (clause 13). The amount advanced by the assessee was made immediately repayable in the event of the film being banned or not passed by the Board of Censors (clause 14). Clause 15 gave the assessee a charge by way of security on the negative and positive copies of the film for whatever amount might be due to the assessee on account of the advance made and in case the negative and positive copies were in possession of Jupiter Pictures the same were to be held by the latter as trustee of the assessee. The burden of insuring the negative copies of the film was placed on Jupiter Pictures at its own cost (clause 16). Jupiter Pictures agreed to indemnify the assessee against all claims or demands of any nature whatsoever by any person or agency in or upon the film and against all claims of any person or agency on account of any infringement of copyright (clause 17). If Jupiter Pictures failed to deliver the film within the time specified therein, the assessee was given the right, at its option, to complete the picture at its own cost and in such event Jupiter Pictures was to be liable to the assessee for all such expenses with compound interest thereon at 12 per cent. per annum and the assessee would have all the rights of distribution, sale, etc. as aforesaid (clause 19). The last clause provided that on the expiry of the period of 5 years the assessee would return to Jupiter Pictures all copies of the film and balance stock of loan and saleable publicity materials subject to wear and tear.4. In the accounting year ending 31-3-1946 and in the previous years the assessee had exploited its right of distribution of the three pictures. On 31-10-1945 the 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 the sum of Rs. 8,666-10-8 (rupees eight thousand six hundred and sixty-six annals ten and 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-s. (5-A) was, by the Finance Act of 1955, added to S. 10 of the Indian Income-tax Act, 1922.5. 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 Kamakshya Narain Singh v. Commissioner of Income-tax, B and O, 1943 PC 153 (157) (AIR V 30) (B) 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, 1935 AC 431 (C) that though in general the distinction between an income and a capital receipt was well recognized and easily applied, cases did arise where the item lay on the border line and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or had been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances.Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. The problem that confronts us has to be approached keeping in mind the different kinds of consideration taken into account in the different cases.6. The assessee before us is a company carrying on a business and it received the sum in question in connection with that business. We have, therefore, to ask ourselves as to what is the substance of the matter from the point of view of a businessman. The assessee contends that in receiving this 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 those films, that is to say for not carrying on its business. The sum was, according to the assessee, received by it in return for its ceasing to engage in the business of distributing those three films. We do not think that is 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 the distribution rights under agreements with the producers. For the purpose of this distribution business the assessee obviously had arrangements with the proprietors of different cinema halls. If any producer failed to deliver any film as agreed then the exigencies of the assessees business would certainly have required the assessee to treat that agreement as terminated by breach and to enter into another agreement for securing the distribution right in some other film so as to enable it to fulfill its engagement with the proprietors of the cinema halls by distributing the new film in the place of the one that had not been supplied. Likewise if a particular 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 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 expiration of the period of five years from the respective dates of release of the films and had only a part of the period to run, a fact which may also be relevantly borne in mind. The cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better box-office collections.In the language of lord Hanworth, M. R. in Short Brs. Ltd. v. Commissioners of Inland Revenue (1927) 12 Tax Cas 955 (973) (D) 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 agreements which were cancelled were by no means agreements on which the whole trade of the assessee had for all practical purposes been built and the payment received by the assessee was not for the loss of such a fundamental asset as was the ship managership of the assessee in Barr, Crombine and Co. Ltd. v. Commissioners of Inland Revenue (1945) 26 Tax Cas 406 (E). Nor can one say that the cancelled agreements constituted the framework or whole structure of the assessees profit making apparatus in the sense the agreement between the two margarine dealers concerned in Van Den Berghs Ltd. v. Clark (C) was. Here were three agreements entered into by the assessee in the ordinary course of his business along with several similar agreements. These three agreements were by mutual consent put an end to. The termination of these three agreements did not radically or at al affect or alter the structure of the assessees business. Indeed the assessees business of distribution of films proceeded apace notwithstanding the cancellation of these three agreements.7. Learned counsel for the assessee has, as did the High Court, strongly relied on the decision of the Privy Council in Shaw Walaces case (A) (supra). In that case there was no fixed period within which the distributing agency was to continue, whereas in the case before us the agreement was only for a fixed period of five years out of which a considerable part had already expired. In Shaw Wallaces case (A) the entire distributing agency work was completely closed, whereas the termination of the agreements in question did not have that drastic effect on the assessees business at all. His business of distribution of films continued not withstanding the cancellation of these three agreements. In Shaw Wallaces case (A), therefore, it could possibly be said that the amount paid there represented a capital receipt. It is pointed out that in Shaw Wallaces case (A) there were other agencies also which were continuing. A reference to that case reported sub-nom Shaw Wallace and Co. v. Commissioner of Income-tax, Bengal 1931 Cal 676 (AIR V 18) (SB) (F) 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 emphasized 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 not doubt true in a sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondents other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field". If Shaw Wallace and Co. had other distributing agencies similar to those of the two oil companies then it would be difficult to reconcile the decision in that case with the later decisions in Kelsall Parsons and Co. v. Commissioners of Inland Revenue, (1938) 21 Tax. Cas. 608 (G), and other cases.8. It has been urged that the agreements did not create merely an agency for the distribution of the films but were composite agreements consisting partly of a financing agreement creating a security on the films for the monies to be advancedand conferring the right even to complete the films in case the producers failed to do so and partly of a distributing agency agreement giving the assessee the utmost latitude in the matter of the terms and conditions on which it could exploit and distribute the films. It was argued that the right acquired by the assessee under the agreements were in the nature of capital assets of the assessees business and the amounts received by the assessee were the prices or considerations for the sale or surrender of such capital assets or were received by way of compensation for the sterilization or destruction of those capital assets. Kelsall, Parsons and Cos case (G) and Short Bros, case (D) referred to above were sought to be distinguished on the ground that there the payments were made in respect of the cancellation of contracts directed to result in the making of the trading profits, whereas in the present case the cancelled agreements were directed to the acquisition of rights in the films which when worked were to yield profits.The terms of the agreements summarized above clearly show that they constitute a financing agreement and a distributing agency agreement.In so far as they were only financing agreements they gave the assessee a charge on the films to be product with monies advanced by it but gave it no right to distribute the films or otherwise work them for making income profits or gains. Therefore it can hardly be said that by the financing agreements the assessee acquired capital assets for carrying on its distributing agency business.In this respect the case differs from the case of Glenboig Union-Firelay Co. Ltd. v. Commissioners of Inland Revenue, (1922) 12 Tax Cas 427 (H), for in that case the lease of the fire clay fields authorised the assessee who was a manufacturer of fire clay goods to extract fire clay and manufacture fire clay goods and consequently was a capital asset of the assessees 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 the 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 to 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 terminated. In our opinion, in the events that had happened, the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed or sterilized but in the language of Rowlatt J. in Short Bros. case (D) (supra) the amount was simply received by the assessee in the course of its going distributing agency business from that going business. In our judgment, on the facts and in the circumstances of the present case, it falls within the principles laid down in Short Bros. case (D)and Kelsall Parsons and Co. s case (G) rather than within those laid down in Shaw Wallaces case (A) or, Van Den Berghs case (C) or Barr Crombiess case (E).9. Reference was made to S. 10 (5-A), Income-tax Act, 1922, and it was urged that the language of that sub-section impliedly indicated that the sum of Rs. 26,000 (rupees twenty-six thousand) was a capital receipt. We are unable to accept this suggestion. That sub-section was obviously introduced to prevent the abuse of managing agency agreements being terminated on payment of huge compensation and to nullify the application of the decision in Shaw Wallaces case (A) to such cases. But that sub-section does not necessarily imply that if that sub-section were not there the kind of payment referred to therein would have been treated as capital receipt in all cases.

Decision:
1[ds]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 the part of the agreements which constituted the distributing agency agreements which only wereare unable to accept this suggestion. That sub-section was obviously introduced to prevent the abuse of managing agency agreements being terminated on payment of huge compensation and to nullify the application of the decision in Shaw Wallaces case (A) to such cases. But that sub-section does not necessarily imply that if that sub-section were not there the kind of payment referred to therein would have been treated as capital receipt in all cases.