# THE COMMISSIONER OF INCOME TAX AND EXCESS PROFITS TAX, MADRAS v. THE SOUTH INDIA PICTURES LTD., KARAIKUDI

- **Citation:** [1956] 1 S.C.R. 223
- **Court:** Supreme Court of India
- **Decided:** 1956
- **Bench:** S. R. Das, Bhagwati, Venkatarama Ayyar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-and-excess-profits-tax-madras-v-the-south-india-1305
- **Pages:** 25

## Headnote

Indian Income Tax Act, 1922 .(XI of 1922), s. 10-Whethsr
money received by the Assessee in the accounting period-As a revenue
receipt or capital receipt-On the facts and in the circumstances of
the instant case.
The assessee-a. private limited company-carried on the busi·
ness of distribution of films. In some instances the assessee used to
produce or purchase films and then distribute the same for exhibi·
tion in different cinema halls and in other cases the assessee used to
advance monies to producers of films and secure the right of distri·
bution 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 the September 1941, July 1942 and May 1945.
The
said agreements expressed in similar language contained similar pro·
visions.
In the accounting year ending 31st March 1946 and in the pre·
vious years the assessee had exploited its rights of distribution of
the three pictures.
On 31st October 1945 the assessee and Jupiter
Pictures entered into an agreement cancelling the three agreements
relating to the distribution rights in respect of the three films and in
consideration of such cancellation the assessee was paid Rs. 26,000,
in all by the Jupiter Pictures during the accounting period as compensation. The question for determination was whether on the facts
and in the circumstances of the case the sum of Rs. 26,000, received
by the assessee from the Jupiter Pictures was a revenue receipt
assessable under the Indian Income Tax Act.
Held, per S. R. DAS C. J. and VENKATARAMA AYYAR J.,
(BHAGWATI J. dissenting) that the sum received by the assessee was
a revenue receipt (and not a capital receipt) assessable under the
Indian Income Tax Act inasmuch as:-
(i) 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 pro·
ducers of the films;
so
1956
March 14
224
SUPREME COURT REPORTS
[1956]
1956
(ii) the agreements which were cancelled were by no means
agreements on which the whole trade of the assessee bad for all
The Commissioner practical purposes been built and the payment received by the a.sessoj Income Tax and see was not for the loss of such a fundamental asset a.s was the ship
Excess Profits Tax, managership of the aesessee in Barr Crombie cf Oo. Ltd. v. OommisMadras
sioners of Inland Revenue ([1945] 26 T.O. 406); and
v.
The South India
Pictures Ud.,
Karaikudi
(iii) one cannot say that the cancelled agreements constituted
the framework or whole structure of the assessee's profit making
apparatus in the sense the agreement between the two mar13arine
dealers concerned in Van Den Berghs Ltd. v. Clark (L.R. [1935] A.O.
431) was.
It is not ~!ways easy to aecide whether a particular payment
received by a person is his income or whether it is to be regarded as
his capital receipt.
Income is a Word of the broadest connotation
and difficult and perhaps impossible to define in any precise general
formula.
Though in general the distinction between an income and
.a capital receipt was well recognised and easily applied, cases did
arise where the item lay on the border line and the problem bad to
be solved on the particular facts of each case. No infallible criterion
or test can be or has 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 cir·
cumstances.
BHAGWATI J. (dissenting): that in the instant case, the pictures,
if produced by the assessee itself would have been capital assets of
the assessee. What the assessee did was that instead of producing
the pictures itself it advanced monies to the producer

## Text

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\
S.C.R.
SUPREME COURT REPORTS
223
THE COMMISSIONER OF INCOME TAX AND
EXCESS PROFITS TAX, MADRAS
v.
THE SOUTH INDIA PICTURES LTD.,
KARAIKUDI.
[S. R. DAS, c. J., BHAGWATI and
VENKATARAMA AYYAR, JJ.]
Indian Income Tax Act, 1922 .(XI of 1922), s. 10-Whethsr
money received by the Assessee in the accounting period-As a revenue
receipt or capital receipt-On the facts and in the circumstances of
the instant case.
The assessee-a. private limited company-carried on the busi·
ness of distribution of films. In some instances the assessee used to
produce or purchase films and then distribute the same for exhibi·
tion in different cinema halls and in other cases the assessee used to
advance monies to producers of films and secure the right of distri·
bution 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 the September 1941, July 1942 and May 1945.
The
said agreements expressed in similar language contained similar pro·
visions.
In the accounting year ending 31st March 1946 and in the pre·
vious years the assessee had exploited its rights of distribution of
the three pictures.
On 31st October 1945 the assessee and Jupiter
Pictures entered into an agreement cancelling the three agreements
relating to the distribution rights in respect of the three films and in
consideration of such cancellation the assessee was paid Rs. 26,000,
in all by the Jupiter Pictures during the accounting period as compensation. The question for determination was whether on the facts
and in the circumstances of the case the sum of Rs. 26,000, received
by the assessee from the Jupiter Pictures was a revenue receipt
assessable under the Indian Income Tax Act.
Held, per S. R. DAS C. J. and VENKATARAMA AYYAR J.,
(BHAGWATI J. dissenting) that the sum received by the assessee was
a revenue receipt (and not a capital receipt) assessable under the
Indian Income Tax Act inasmuch as:-
(i) 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 pro·
ducers of the films;
so
1956
March 14
224
SUPREME COURT REPORTS
[1956]
1956
(ii) the agreements which were cancelled were by no means
agreements on which the whole trade of the assessee bad for all
The Commissioner practical purposes been built and the payment received by the a.sessoj Income Tax and see was not for the loss of such a fundamental asset a.s was the ship
Excess Profits Tax, managership of the aesessee in Barr Crombie cf Oo. Ltd. v. OommisMadras
sioners of Inland Revenue ([1945] 26 T.O. 406); and
v.
The South India
Pictures Ud.,
Karaikudi
(iii) one cannot say that the cancelled agreements constituted
the framework or whole structure of the assessee's profit making
apparatus in the sense the agreement between the two mar13arine
dealers concerned in Van Den Berghs Ltd. v. Clark (L.R. [1935] A.O.
431) was.
It is not ~!ways easy to aecide whether a particular payment
received by a person is his income or whether it is to be regarded as
his capital receipt.
Income is a Word of the broadest connotation
and difficult and perhaps impossible to define in any precise general
formula.
Though in general the distinction between an income and
.a capital receipt was well recognised and easily applied, cases did
arise where the item lay on the border line and the problem bad to
be solved on the particular facts of each case. No infallible criterion
or test can be or has 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 cir·
cumstances.
BHAGWATI J. (dissenting): that in the instant case, the pictures,
if produced by the assessee itself would have been capital assets of
the assessee. What the assessee did was that instead of producing
the pictures itself it advanced monies to the producers for the purpose of producing the pictures which it acquired for the purpose of
distribution and exploitation. Nonetheless, the pictures thus acquired
were capital assets of the assessee which it worked upon in carrying
on its business of distribution and exploitation1 the monies it spent
on the acquisition of the pictures were thus capital expenditure and
whatever monies were realised by it by working these capital assets
were its capital receipts except of course the commission which it
earned by distribution and exploitation of the pictures which certainly would be its trading receipts. Having regard to the terms of
these agreements it could certainly not be predicated of these
pictures that they were its stock-in·trade so as to constitute the
payment in question a trading receipt of the assessee.
Commissioner of Income-tax v. Shaw, Wallace & Co. ([1932]
L.R. 59 I.A. 206; A.LR. 1932 P.O. 138; 6 I.T.O. 178), Roja Bahadur
Kmnakshya Narain Singh of Ramgarh v. Commissioner of Income·
tax, Bihar and Orissa ([1943] 11 I.T.R. 513, 521; L.R. 70 I.A. 180),
Short Brothers, Ltd. v. The Commissioners of Inland Revenue ([1927]
12 T. 0. 955), K.Zsall Parsons & Co. v. Commissioners of Inland
Revenue ((1938] 21 T. C. 608), Glenboig Union Fireclay Co. Ltd. v.
The Commissioners a/Inland Revenue ((1922] 12 T.O. 427), Shadbolt
I
S.C.R.
SUPREME COURT REPORTS
225
(H. M. Inspector of Taxes) v. Salmon Estate ((1943) 25 T.C. 52),
1956
Johnson (H.M. Inspector of Taxes) v. W.S. Try, Ltd. ([1945) 27
T.C. 167), Commissioner of Income Tax, Bengal v. Shaw Wallace The Commissionef'
and Company (A.I.R. 1932 P.C. 138), Van Den Berghs, Ltd. v. Clark of Income Tax and
(Inspector of Taus) (L.B. [1935) A.C. 431; 19 'l'. C. 390; 3 I.T.R. Excess Profits Tax,
(Suppl.) 17) and Barr Crombie it Go.' Ltd. v. Commissioners of Inland
Madras
Revenue'([l945] 26 T.C. 406), referred to.
v.
The South India
The facts of the case as t11<ken from the judgment
Pictures Ud.,
of the Hon'ble The Chief Justice are shortly as
Karaikudi
follows:-
The assesses 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 the 17th September 1941, 16th July
1942 and 5th 'May 1945.
The said several agreements were expressed in similar language
and. contained similar provisions. The assessee bound itself to
advance a certain sum in instalments specified therein and retain
the ha.lance to be utilised 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
e.ssessee 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 enure for a period of five years from the date of the release
of the film. The assesses was given the right, at its sole discretion,
to distribute the films at such rates and on such terms and condi·
tions and in such manner a.s it might deem fit (clause 2).
The
amounts realised by the distribution of the films was to be utilised
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 realisations from the film after
deducting its commission (clause 4). In case the full amount of ad·
vance could not be recouped from the realisations of the film on or
before the expiry of one and half yea.rs from the date of the first
release of the film Jupiter Pictures would be liable to pay to the
a.ssessee whatever balance would remain due with compound inte·
rest at twelve per cent. per annum calculated in the manner men·
tioned in clause 6.
The a.ssessee' s commission for distribution and
226
SUPREME COURT REPORTS
(1956)
1956
exploitation of the film through its organisation was, by clause 8,
fixed at 15 per cent. of the net realisations. In case of sale of disThe Commissioner trict or territorial rights of the film made by consent of both parties
of Income Tax and the assesses a.lone would be entitled to put through such sales and
Excess Profi'ts Tax, receive the proceeds and would be entitled to a commission of ten
Madras
per cent. thereon and to appropriate the balance towards the payv.
ment and discharge of the advance made by it (clause 9).
The
Th• South India assessee was to submit to Jupiter Pictures a monthly statement
Piclures Ltd.,
of e.ccount- and show all books of account to Jupiter Pictures
Karaikudi
(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 lti 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 &ssessee against all claims
or demands' of any nature whatsoever by any person or agency in or
upon the film and against all claims of an7 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 asses- 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 asses- 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 Pictul'l!!I &II copies of the film and balance stock of
Joan and saleable pqblicity materials subject to wear and tear.
In the accounting year ending 31st March 1946 and in t!Ul previous years the assessee had exploited its right of distribution of the
three pictures. On 31st October 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 sixtysix annas
ten and pies eight) for each of the three pictures aggregating in all
to Rs. 26,000 (rupees twentysix thousand).
It is this sum of
Rs. 26,000 (rupeee twentysix 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.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 32 of 1954.
'
S.C.R.
SUPREME COURT REPORTS
227
1956
On appeal froI,D the judgment and order dated
the 26th September 1951 of the Madras High Court The Commissioner
in Case Referred No. 18 of 1949.
of Income Tax and
,
. .
.
l ,/ I d. (G N Excess Profits Tax,
0. K. Daphtary, Solicitor-Genera
oJ
n ia
·
.
Madras
Joshi and R.H. Dhebar, with him) for the appellant.
v
R. Ganapathy Iyer, for the respondent.
The South India
Pictures Ud.,
956 M
h
Karaikudi
l
..
a.re 14.
DAS C.J.-In the year 1945 the respondent company (hereinafter called the "assessee") received a
payment of a sum of Rs. 26,000 (rupees twentysix
thousand) from Jupiter Pictures Ltd. of Madras (hereinafter referred to as Jupiter Pictures) pursuant to
the ternis of an agreement between the assessee and
Jupiter Pictures dated the 31st October 1945. In the
course of the proceedings for the assessment of the
assessee's income-tax for the year 1946-47 and the
excess profits tax for the chargeable accounting
period from 1st April 1945 to 31st March 1946, the
followiJJ.g question arose:-
" Whether on the facts and in the circumstances
of the case, the sum of Rs. 26,000 received by the
aseessee 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
ot: calculating the tax. The Appellate Assistant Commissioner upheld this decision. On further appeal by
the assessee the Income-Tax Appeflate Tribunal held
that the case was governed. by the decision of the
Judicial Committee in Commissioner of Income-Tax
v. Shaw Wallace and Company(') and that the sum received by the assessee was a capital receipt. Accordingly on 26th August 1948 the Tribunal reversed the
decision of the Appellate Assistant Commissioner. At
the instance of the Commissioner of Income-Tax and
(1) !1932] L.R. 69 I.A. 206; A.LR. 1932 P.C. 138; 6 I.T.C. 178.
228
SUPREME COURT REPORTS
(1956]
1956
Excess Profits Tax, Madras the Tribunal under secTh C
I
.
tion 66(1) of the Indian Income-Tax Act, 1922
e omm sssoner
J'.'
•
of Inco.,,. Tax and re1erred to the High Court of Madras the question of
Excess Profits Tax, law quoted above. The High Court agreed with the
Madras
Income-Tax Appellate Tribunal and answered the
v.
question in the negative. The present appeal is
The South India d
d
h
Pictures Ud.,
irecte against t is decision of the High Court.
Karaikudi
[After stating the facts of the case which gave rise
·-
Das C.].
to the present point in controversy and which have
been stated above His Lordship proceeded as follows:]
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-section (5-A) was, by the Finance Act of 1955,
added to section 10 of the Indian Income Tax Act,
1922.
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 Raja Bahadur Kamakshya
Narain Singh of Ramgarh v. Commissioner of IncomeTax, Bihar and Orissa('),· is a word of the broadest
connotation and difficult and perhaps impossible to
define in any precise general formula.
Lord Macmillan said in Van DenBerghs, Ltd. v. Clark (Inspector
of Taxes)(') 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 has 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
(1) [1943) 11 I.'l'.R. 513, 521; L.R. 70 I.A. ISO, 192.
(2) L.R. (1935) A.O. 431: 19 T.C. 390; 3 I.T.R. (Suppl.) 17.
S.C.R.
SUPREME COURT REPORTS
229
plot of land may ordinarily be a capital receipt but
1956
if the business of the recipient is to buy and sell
h
bl
h
The Comtuissioncr
lands, it may well be his income.
T e pro em t at ,, 1
T
,
h d k
.
.
. d o1 ncome ax an"
confronts us has to be approac e
eepmg m mm
Excess Profits Tax,
the different kinds of consideration taken into account
Madras
in the different cases.
v.
The assessee before us is a company carrying on a
The Sot1th bidia
business and it received the sum in question in conPictttres Ltd.,
Karaikudi
nection with that business. We have, therefore, to
ask ourselves as tow hat is the substance of the matter
Das c.J.
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.
'I'he 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 assessee's 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 fulfil 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 of
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
230
SUPREME COURT REPORTS
[1956)
1956
box-office collection. The termination of the agreement in each of the circumstances hereinbefore menTh e Commissioner
of lttcome Tax and tioned could well be said to have been brought about
Excess Profits Tax, in the ordinary course of business and money paid
Madras
or received by the assessee as· a result of or in conv.
nection with such termination of agreements would
The 80"'" India certainly be regarded as having been so paid or
P~:;;;k~~··
received in the ordinary course of its business and
Das C.J.
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 Han worth, M. R. in Short Bros., Ltd. v. The Commissioners of Inland Revenue(') 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, Crombie & Go., Ltd. v. Commissioners of Inland Revenue("). Nor can one say that
the cancelled agreements constituted the framework
or whole structure of the assessee's profit making
apparatus in the sense the agreement between the
two margarine dealers concerned in Van Den Berghs
{1) [1927) 12 T.C. 955, 973
(2) [1945] 26 T.C. 406.
S.C.R.
SUPREME COURT REPORTS
231
Ltd. v. Clark (Inspector of Taxes) (supra) was. Here
1956
were three agreements entered into by the assessee in Th c
..
th
d.
f h' b .
l
'th
l
e omm1sswner
e or inary course o
IS us1ness a ong WI
severa of Income Tax and
similar agreements. These three agreements were by Excess Profits Tax,
mutual consent put an end to. The termination of
Madras
these three agreements did not radically, or at all
v.
affect or alter the structure of the assessee's business.
The South India
Pictures Ltd.,
Indeed the assessee's business of distribution of films
Karaikudi
proceeded apace notwithstanding the cancellation of
these three agreements.
Das C.J.
Learned counsel for the assessee has, as did the
High Court, strongly relied on the decision of the
Privy Council in Shaw Wallace's case (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 Wallace's case the
entire distributing agency work was completely
closed, whereas the termination of the agreements in
question did not have that drastic effect on the
assessee's business at all. His business of distribution
of films continued notwithstanding the cancellation
of these three agreements. In Shaw Wallace's case,
therefore, it could possibly be said that the amount
paid there represented a capital receipt. It is pointed
out that in Shaw Wallace's case there were other
agencies also which were continuing. A reference to
that case reported sub-nom Shaw Wallace & Go. v.
Commissioner of Income Tax, Bengal(1) will show that
Shaw Wallace and EJo. 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 emphasised
(1) [1931] 5 I.T.C. 211.
31
232
SUPREME COURT REPORTS
(1956]
1956
by Sir George Lowndes towards the end of his judgTh Com • .
ment where he said:-
o/ r~ome ".;.':,."':,.';
,','It is contended for t~e appellant that the "busiExcess Profits Tax, ness of the respondents did m fact go OII throughMaaras
out the year, and this is no doubt true in a sense.
•·
They had· other independent commercial interests
The SouthlKd;a which they continued to pursue, and the profits of
Pictures Ud.,
h
h
b
h
Karaikudi
w ich ave een taxed int e ordinary course without objection on their part. B\lt it is clear that the
Das c.J.
sum in question in this appeal had no connection with
the continuance of the respondent's 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 & Go.
v. Commissioners of Inland Revenue(') and other cases.
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 advanced and 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 rights acquired by the assessee under
the agreements were in the nature of capital assets
of the assessee's 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
& Go.' s case and Short Bros.' case 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
(I) [1938} 21 T.C. 608.
S.C.R.
SUPREME COURT REPORTS
233
of rights in the films which when wor~ were to
'956
yield profits. The terms of the agree:rfietlts sumThe Commissionc,.
marised above clearly show that they constitute of Income Tax and
a financing agreement and a distributing agency Excess Profits Tax,
agreement. In so far as they were only financMadras
ing agreements they gave the assessee a charge
v.
The South India
on the films to be produced with moneys advancPictures ua ..
ed by it but gave it no right to distribute the films
Karaikudi
or otherwise work them for making income, profits
or gains. Therefore, it can hardly be said that
Das C.J.
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 Fireclay Go. Ltd. v.
Commissioners of Inland Revenue(1), 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 assessee's
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 that 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 so 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 (supra) the amount was simply received
(1) (1922] 12 T.C. 427,
234
SUPREME COURT REPORTS
(1956)
1956
by the a!lll~ssee in the course of its going distributing
The Commi•sioner ~gency lWsiness from that .going b?siness. In our
of Income Ta• and Judgment, on the facts· and m the circumstances of
E<eessPro/itsTt1x, the present case, it falls within the principles laid
Madrt1s
down in Short Bros.' and Kelsall Parsons & Go.' s cases
v.
rather than within those laid dbwn in Shaw Wallace's
The Soulh India
TT
D
B
Pictures Ud.,
case or ran
en · ergh's case or Barr Grombie's case.
Karaikudi
Reference was made to section 10 (5"A)" of the
Indian 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 twentysix 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 Wallace's case to such cases.
But
that sub-section does not necessariiy 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.
For the reasons stated above the referred question
should in our opinion have been answered in the
affirmative and we answer it accordingly. The appeal
is, therefore, allowed with costs throughout.
BHAGWATI J.-I had the privilege of reading the
judgment just delivered by my Lord the Chief Justice
but I regret I cannot agree with the same.
The facts leading up to the present appeal have
been fully set out in that judgment anditisnotnecessary to repeat the same.
The relevant portions of
the agreement dated the 17th September 1941 which
is the sample of the three agreements entered into
between the Jupiter Pictures and the assessee may
be, however, set out herein:
"Whereas the producer has taken on hand the
production of a Tamil talkie picture 'Kannagi' hereinafter called the said picture ........ and whereas forthe
purpose of the said production the producer has approached the distributors for financial assistance and
-
S.C.R.
SUPREME COURT REPORTS
235
for the distribution and exploitation of the said pie7956
ture by the distributors through their organization Th c
. .
.
.
e om11uss1oner
and the distributors have agreed to render such finan- o/ Income Tax and
cial assistance by advancing to the producer altoge- Excess Profits Tax,
ther a sum of Rs. 57 ,000 on the terms and in the
Madras
manner hereinafter appearing and to distribute and
v.
1 • h
'd ·
· h
h h
•
The South India
exp 01t t e sai picture t roug
t eir orgamzation
Pictures Ud.,
as requested by the producer ................ :-
Karaikudi.
Ol. 1. The distributors shall advance to the producer a sum of Rs. 57,000 only altogether in the
BhagwatiJ •
. manner hereinafter set out:
(a) a sum of Rs. 7,000 only should be advanced
on the executiou of these presents;
(b) a further sum of Rs. 5,000 should be advanced as soon as 5,000 feet of film shall have been
completed and roughly edited, rushprint thereof
shown;
(c) a further sum of Rs. 10,000 should be ad•
vanced as soon as a further 10,000 feet o'f film shall
have been completed;
(d) a further sum of Rs. 10,000 should be advanced as soon as a further 15,000 feet of film shall
have been completed;
(e) a further sum of Rs. 12,000 should be advanced on the last shooting day of the picture;
(f) a further sum of Rs. 10,000 should be advanced as soon as the picture is passed by the Board
of Censors and 12 copies Qf the film delivered to the
distributors; and the balance of Rs. 3,000 to be retained by the distl"ibutors to be utilised for the purpose of Press Publicity in regard to the said picture
to be made by the distributors on behalf of the producer from time to time. The distributors may utilise
the said sum for publicity as they think fit and pro~
per and at their sole discretion.
Ol. 3.
The distributors shall from the realisations of the i:Jaid picture made by them:
(a) pay themselves all amounts spent by them
for publicity in respect of the said picture such an
expenditure having been incurred only after obtaining the consent of the producer;
(b) pay themselves their distribution commie-
236
SUPREME COURT REPORTS
[1956]
1956
sion in respect of the said picture as hereinafter proThe Commissioner vided; (an) d
h
1
h
·1 bl b 1
.
of Income T x
d
c pay t emse ves t e ava1 a e a ance until
Excess Prof~s ~:x, the entire advance of Rs. 57 ,000 should be completely
Madras
discharged and satisfied.
v.
Ol. 6. If the distributors should fail to realise
The south India the full amount due to them as aforesaid from the
Rictures Ud.,
realisation of the said picture in the manner hereinKaraikudi
before set out on or before the expiry of one and a half
Bhagwati J.
years from the date of the first release of the said
picture, the producer shall be liable to pay to the
distributors whatever balance may be then due by
them with compound interest at 12 per cent. per
annum the said interest to be calculated on the said
balance amount from the date of expiry of the said
one and a half years and the said payment to be made
before the expiry of one month therefrom.
Ol. 15. And it is hereby expressly agreed by
and between the distributors and the producer that
until the entire amount of Rs. 57,000 to be advanced
by the distributors should be repaid and discharged
in full and all other claims of the distributors arising
hereunder completely satisfied the negative and positive copies of the said picture shall constitute the
security for whatever amount may be due to tpe distributors and shall, if in the possession of the producer
or any one on his behalf, be held by them only as
trustees for the distributors.
Ol. 19. In the event of the producer failing to
deliver the said copies of the said picture duly passed
by the Board of Censors as herein before provided before the said period, namely 1-5-1942, the producer
shall become liable to pay to the distributors at the
latters's option such amount as has been advanced
by the distributors to the producer including monies
spent by the distributors in respect of publicity with
interest thereon at 12 per cent. per annum. But if the
said picture be not delivered within two months
thereafter, viz., on or before 1-7-1942 the distributors
may at their option complete the picture at their own
cost and in such oase the producer shall be liable to
the distributors for all the expenses with compound
S.C.R.
SUPREME COURT REPORTS
237
interest thereon at 12 per cent. per annum and the
7956
distributors shall have all rights as to the distribuTh c
. .
.
e ommtsseoner
tion, sale, etc., as aforesaid.
of Income Tax and
Ol. 20. On the expiry of the period of five years Excess Profits Tax,
mentioned in this agreement, the distributors shall
Madras
return to the producer all copies of films and balance
v.
f h
The South India
stock of loan and saleable publicity materials o t e
Pictures Ud.,
said picture, subject to usu,al wear and tear and
Karaikudi
subject to the distributors receiving back from the
producer such unrealised amount, if any, as mentioned
Bhagwati J.
in clause (6) above".
The said three agreements were dated 17th September 1941, 16th July 1942 and 10th May 1945, each
having a period of five years to run ending with 16th
September 1946, 15th July 1947 and 9th May 1950
respectively.
The only question which falls to be determined by
us herein is whether the payment of Rs. 26,000
received by the assessee from the Jupiter Pictures on
the cancellation of the said three agreements on the
31st October 1945 is a capital receipt or income,
profits or gains liable to tax in the assessment year
1946-47.
The assessee was no doubt carrying on the business
of distributors which involved as a necessary corollary
the acquisition of films for the purpose of distribution. Those films could either be produced by it or
could be acquired by it from the producers who
hired them out to it for the purpose of distribution. There was, however, an activity in this business of distributors which consisted of advancing
monies to the producers to enable the producers to
produce the films and the agreements which were entered into between the producers and the assessee as
distributors were composite agreements incorporating therein the terms in regard to the financial assistance as also the distribution and exploitation of the
films thus produce by the producers with the financial assistance rendered to them by the assessee. They
were not mere agreements for distribution and exploitation of the pictures which by themselves would
not require any investment of capital but would
238
SUPREME COURT REPORTS
(1956]
1956
merely involve the work of distribution and exploitation of the pictures. The terms above set out were
~:1
• CammTissionerd designed for the purpose of protectin-g the interests
o, ncomo ax an
f h
.
s:
•
d
d
'd
bJ
Excess Profits Tax o t e assessee in so iar as it a vance
cons1 era e
Madras
' sums to the producers for the purpose of producing
v.
the films. Apart from the commission which the
The Soi.th India assessee derived from the distribution and exploitaPictures Ud.,
ti on of the pictures which would certainly be its reveKaraikudi
nue receipt in the course of the carrying on of its
Bhagwati J.
business as distributors, it was entitled under the
terms of the agreements to repay itself the amounts
of the advances which it made for the production of
the pictures as also the interest thereon and the agreements also provided that the negative and positive
copies of the pictures should constitute the security
for whatever amount might be due to the assessee
not only in respect of the amounts advanced by it to
the producers but also in respect of a.II other claims
arising under the agreements. The negative and positive copies of the pictures if in possession of the producers or any one on their behalf would only be held
by them as trustees of the assessee and the assessee
was invested with a species of proprietary rights over
the same. If the pictures were not delivered within
the specified period the assessee was at liberty to
complete the same and in such a case the producers
were liable to it for all the expenses with compound
interest at 12 per cent. per annum and a.II the rights
as distributors were to fasten upon the same. The
copies of the films and all the other publicity materials were to be returned by the a.ssessee to the producers after tbe expiry of the period of five yea.rs
mentioned in the agreements subject to its receiving
from the producers a.II unrealised a.mounts under the
a.greemen ts.
What is it that the a.ssessee was acquiring from the
producers under the terms of these agreeJl).ents? Was
it acquiring capita.I assets which it would work upon
by way of distribution and exploitation in order to
earn its income, profits or gains or was it acquiring
stock-in-trade of its business as distributors? If it
was capital assets which it thus acquired the monies
S.C.R,
SUPREME COURT REPORTS
239
which it advanced to the producers for acquiring the
1956
same would necessarily be capital expenditure and Th Com ..
ld
b d b. db . . "t
t
t
d"
•
m•ss1ontr
wou
not e e Ite
y It ID I s accoun s as ra Ing of Income Tax nd
expenses which would be the position if what it Excess Profits ;ax,
acquired under the terms of the agreements was
Madras
mere stock-in-trade of its business. The realisations
v.
which it made by distribution and exploitation of the The South India
d
d
d
.
d
Pictur•s Ltd.,
pictures woul be undoubte
tra e receipts an ,
Karaikudi
therefore, income, profits or gains and no part of the
same would go to its capital account. The monies
BhagwatiJ,
which it had advanced for the production of the
pictures would, however, as and when realised, be
credited by it in its accounts as capital receipts and
they would certainly not be liable to be treated as
trading receipts.