Movie Distributors v. Commissioner of Income-tax — 1990 DIGILAW 630 (KAR)

JUDGMENT M.P. Chandrakantaraj Urs, J.—These two cases, namely, Income Tax Reference Cases Nos. 221 and 222 of 1983 are disposed of by the following common order as they have come before us on a reference made by the Income Tax Appellate Tribunal, Bangalore Bench (hereinafter referred to as "the Tribunal"), together with the statement of cases which are not different from each other except that they relate to different assessment years. The first of the cases relates to the assessment year 1978-79 and the second to the succeeding assessment year, the question formulated to be answered by us is : "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the receipt of Rs. 52,000 by the assessee during the screening in part payment of the compensation in terms of the agreement dated October 30, 1974, was not a capital receipt ?" 2. The question read as extracted above does not correctly convey the question arising on the facts of the case which we will set out hereinafter. The question reformulated by us should read : "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the receipt of Rs. 52,000 by the assessee during the relevant year was not a capital receipt ?" 3. The assesses-petitioner is a registered firm carrying on the business of financing and distributing films. It had entered into an agreement on April 10, 1974, with M/s. Aparna Theatres Private Limited, a company incorporated under the Companies Act, 1956, having its registered office at Bangalore, carrying on the business of exhibiting motion pictures. Under that agreement, the assesses-firm was required to give an interest-free deposit of Rs. 5 lakhs payable in phases as set out in clause 6 of the agreement over a period of one year or more depending on when the theatre construction which had been undertaken by the company in question was completed. In consideration of such deposit being made, the assesses-firm was given the right to supply motion picture films exclusively to be screened at the theatre to be constructed by M/s. Aparna Theatres Private Limited from the date the first film was screened for a period of 10 years at 28 shows per week. In consideration of such deposit being made, the assesses-firm was given the right to supply motion picture films exclusively to be screened at the theatre to be constructed by M/s. Aparna Theatres Private Limited from the date the first film was screened for a period of 10 years at 28 shows per week. It was further agreed between the parties that the theatre was to be in the exclusive control and management of the first party, namely, M/s. Aparna Theatres Private Limited. The assessee was to receive all excess receipts from the shows conducted in excess of the amounts stipulated as the income of the exhibitor. It was so provided for in sub-clauses (a),(b),(c), and (d) of clause 4 of the agreement. In case the realisation from each show fell short of the exhibitor's weekly fixed share for any week, the assesses-firm was required to pay the deficiency to the exhibitor failing which, the exhibitor would be entitled to deduct the deficiency out of the subsequent amounts payable to the distributor, i.e., the assesses-firm, or out of the advance payable to the distributor or the assesses-firm. In any event, even before the construction of the theatre was completed, the agreement of April 10, 1974, was superseded by another agreement dated October 30, 1974, between the same parties, namely, M/s. Aparna Theatres Private Ltd., and the assesses-firm, under the terms of which the assesses-firm was to receive Rs. 52,000 per annum or Rs. 1,000 per week for relinquishment of its rights to seek specific performance of the agreement to April 10, 1974, between the same parties. In the first of the relevant assessment years, Rs. 52,000 received was shown as taxable income. But, on the revised return, the said sum was claimed to be a capital receipt and, therefore, not taxable. The assessing authority did not accede to the contention of the assessee that it was a capital receipt. Therefore, he assessed the same to tax as a revenue receipt. Aggrieved by the same, an appeal was preferred to the Appellate Assistant Commissioner. Not having succeeded before him, the assesses-firm went up in appeal to the Tribunal. The Tribunal, by its composite order, disposed of Appeals Nos. ITA 302 and 303 of 1980, dated April 29, 1982. Therefore, he assessed the same to tax as a revenue receipt. Aggrieved by the same, an appeal was preferred to the Appellate Assistant Commissioner. Not having succeeded before him, the assesses-firm went up in appeal to the Tribunal. The Tribunal, by its composite order, disposed of Appeals Nos. ITA 302 and 303 of 1980, dated April 29, 1982. On an application made by the assesses-firm, a reference with the statement of case was made to us as set out earlier in the course of this order. 4. The facts themselves are not in dispute. Mr. K. R. Prasad, learned counsel appearing for the assesses-petitioner, strenuously contended that, having regard to the principles laid down by the Supreme Court in a number of decisions, the receipt of Rs. 52,000 was no more than compensation paid for the relinquishment of the exclusive right of the firm to have its films screened in the theatre for a period of ten years and that privilege was a capital asset and payment for that capital asset should be treated as a capital receipt and, therefore, not taxable. On the other hand, the Tribunal, relying on the decision of the Supreme Court in the case of Commissioner of Income Tax, Nagpur Vs. Rai Bahadur Jairam Valji and Others, AIR 1959 SC 291 , came to the conclusion that it was a revenue receipt. 5. In the light of the other citations or decisions relied upon by learned counsel for the assesses-firm as well as the Revenue, it would be useful to set out certain passages from the decision in Commissioner of Income Tax, Nagpur Vs. Rai Bahadur Jairam Valji and Others, AIR 1959 SC 291 , as well as other cases. They are as follows (headnote) : "In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. The question must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for, these questions between capital and income, trading profit or non-trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts. When once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. There is a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In an agency contract the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary courts of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt." 6. Therefore, this court, in understanding the question posed and rendering an answer to it, must not lose sight of the fact that whether a receipt is capital in character or revenue in character, the facts of the case should be taken notice of and the question determined in accordance with such facts. Therefore, this court, in understanding the question posed and rendering an answer to it, must not lose sight of the fact that whether a receipt is capital in character or revenue in character, the facts of the case should be taken notice of and the question determined in accordance with such facts. No single test as such may be laid down to determine whether a receipt is capital or revenue unless it clearly falls within the scope of what constitutes taxable income. 7. However, Mr. K. R. Prasad, learned counsel, relied upon the decision of the Supreme Court in Kettlewell Bullen and Co. Vs. Commissioner of Income Tax, Calcutta, AIR 1965 SC 65 . In the said case, a tax Bench of the Supreme Court consisting of Subba Rao, Shah and Sikri JJ., as they were then, contended that the right to screen was similar to the right of managing agency the termination of which had come to be compensated in Kettlewell Bullen and Co. Vs. Commissioner of Income Tax, Calcutta, AIR 1965 SC 65 and which in turn was held to be a capital receipt in accordance with the law having regard to the fact it was not a contract or agreement entered into in the course of the business of the managing agency, but entered into to terminate such agency. In fact, in that case, the Kettlewell Bullen and Co., Ltd., was having six managing agencies and the receipt which was the subject-matter of the decision was in respect of the compensation paid for the termination of one of those his agencies. It was, in that circumstance, that the Supreme Court ruled that such receipt was a capital receipt, as the agency was a capital asset of the company. Mr. K. R. Prasad, learned counsel, therefore, commended to us that the same principle should be extended in deciding the question in so far as the assesses-firm was concerned, as the assesses-firm had acquired the privilege for consideration to screen the films distributed by it exclusively for a period of ten years in the theatre which was to be constructed and, therefore, what was given as compensation under the second agreement was no more than a compensation paid for the loss of that privilege. Following that decision of the Supreme Court, the High Court of Judicatures at Madras in the case of Commissioner of Income Tax Vs. Following that decision of the Supreme Court, the High Court of Judicatures at Madras in the case of Commissioner of Income Tax Vs. South India Flour Mills Private Ltd., (1970) 75 ITR 147 Mad held that, in cases where the assesses-company had relinquished its right of receiving commission for a period of seven years against the amount of advance it had made under an agreement with a Delhi company which was to erect a factory at Madras and in consideration whereof the assesses-company was to be paid interest as well as commission for a period of seven years and for reasons best known when that agreement was cancelled when the assesses-company had advanced a sum of Rs. 5,36,000 as against the agreed sum of Rs. 11.5 lakhs, the Delhi company agreed to repay that sum with interest at the stipulated rate and also compensation by a subsequent agreement. The entire amount together with compensation of Rs. 25,000 was paid by a stipulated date and the sum of Rs. 25,000 so received as compensation was held to be a capital receipt, inter alia, on the ground that the mills, by setting up for themselves an apparatus to earn profits, engaged themselves in an activity which was not akin to or related to their usual business and which activity had to be shelved and the totality of the new undertaking given up in consideration of the lump sum payment, the sum and substance of the transaction was that the profit-making apparatus had been compulsorily dissolved and the ultimate receipt was capital in nature and hence the Tribunal's conclusion was right. In fact, Mr. K. R. Prasad, learned counsel, commended to us that the agreement in the Commissioner of Income Tax Vs. South India Flour Mills Private Ltd., (1970) 75 ITR 147 Mad was very much akin to the agreement in question with which we are concerned and, therefore, this court should have no hesitation to hold that the payment of compensation at Rs. 52,000 per annum should, in fact, be held as a capital receipt for giving up screening films exclusively in the theatre that was to be constructed. 8. We find some difficulty in acceding to that contention. 52,000 per annum should, in fact, be held as a capital receipt for giving up screening films exclusively in the theatre that was to be constructed. 8. We find some difficulty in acceding to that contention. Admittedly, the business of the assesses-firm is distribution of films, as is clear from the preamble as well as from the fact which has not been denied at any time that it was not so. The distribution of films, normally, is based on the commissioner the distributor obtains from the exhibitor and the commissioner he receives from the producer. In some cases, a distributor may also be financing the production of that film. But the screening facility he obtains from his contract with the exhibitor is in the course of his business as a distributor of films. Whether he obtains for a short duration in the normal course of distributing several films or for a long period of ten years, as in the instant case, the distributor contracted for a long duration of the exclusive use of a theatre for exhibiting his or its films it did so in the course of its business. Therefore, the first of the agreements can, undoubtedly, be only an agreement entered into in the course of its business as a distributor of films. When that agreement was superseded or cancelled by yet another agreement by which its right to seek specific performance of the terms of the first agreement was compensation he received in the nature of income acquired in the course of its business in respect of which it had entered into the earlier agreement (sic). We see from the respective dates of agreement that, even before the sum of Rs. 1 lakh had come to be paid before the end of the year 1974, the agreement was cancelled and a new agreement came into being in 1974. Therefore, by no stretch of imagination could it be considered that what was agreed to be repaid in instalments of Rs. 1,000 per week over a period of ten years was not return of that capital invested by way of interest-free deposits but something earned in the course of its business by negotiating a contract fixing the place for exhibiting its films. 1,000 per week over a period of ten years was not return of that capital invested by way of interest-free deposits but something earned in the course of its business by negotiating a contract fixing the place for exhibiting its films. If that distinction is borne in mind, we cannot have any hesitation to answer the question in the affirmative, in favour of the Revenue and against the assessee. 9. For this conclusion, we are fortified by the decision of the Supreme Court in the case of COMMISSIONER OF INCOME TAX AND EXCESS PROFITS TAX MADRAS Vs. SOUTH INDIA PICTURES LTD., (1956) 29 ITR 910 SC, wherein the income of a film distributor was considered in somewhat identical circumstances. A plea was taken therein that the films over which the distributor had acquired rights to exhibit them himself under certain circumstances came to be surrendered on payment of his dues in the sum of Rs. 26,000. He claimed that payment by the producer to release three sets of prints which were in the possession of the distributor was for surrender of a capital asset and, therefore, it was a capital receipt. But the Supreme Court negatived that contention and held that the entire agreement had been entered into in the course of distributing films and that the income derived out of that agreement was in course of carrying on the business and as such it was a revenue receipt. Having regard to the nature of the transaction involved, we have to accept the decisions cited for the Revenue by Mr. Chanderkumar as laying down the correct proposition of law in the facts and circumstances of the case. 10. We find support for the view we have taken by the tests suggested by Wheatcroft in his book The Law of Income Tax, Surtax and Profits-tax in the 12th Edition of the said book, at page 1240, under the heading the "Tests of a trading receipt". The learned author has stated as follows : "To determine whether a particular receipt of a trader should be included in the computation of his profits under Case I of Schedule D, four main tests should be applied. First, does it arise from the trade in question ? Unless it does, it will be excluded. Secondly, is it a revenue or a capital receipt ? In the latter event it will also be excluded. First, does it arise from the trade in question ? Unless it does, it will be excluded. Secondly, is it a revenue or a capital receipt ? In the latter event it will also be excluded. Thirdly, is it taxable by deduction or under some other Schedule ? If so, it will again be excluded, otherwise it would be taxed twice. Finally, is there a special statutory provision which brings into account an item which these tests would exclude, or excludes from the account an item which these tests would bring in ?" 11. Therefore, if regard be had to the intention of the first agreement which was in the course of the business of the exhibitor and the distributor or to use the language of the author in the course of the trade pursued by the parties to the agreement, then any income which is an end product of that agreement would be a trade receipt and as such would constitute trading income and, therefore, the need for applying any other test would vanish. 12. For the above reasons, we answer the question reformulated by us in the affirmative and in favour of the Revenue. 13. Order accordingly.