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

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.

p. 234

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:

p. 234

"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 for the distribution and exploitation of the said pieture by the distributors through their organization and the distributors have agreed to render such financial assistance by advancing to the producer altogether a sum of Rs. 57 ,000 on the terms and in the manner hereinafter appearing and to distribute and

pp. 234–235

• h 'd · · h h h • exp 1 01t t e sai picture t roug t eir orgamzation as requested by the producer ................ :-

p. 235, margin C

Ol. 1. The distributors shall advance to the producer a sum of Rs. 57,000 only altogether in the . manner hereinafter set out:

p. 235, margin C

(a) a sum of Rs. 7,000 only should be advanced on the executiou of these presents;

p. 235, margin C

(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;

p. 235, margin C

(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;

p. 235, margin C

(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;

p. 235, margin C

(e) a further sum of Rs. 12,000 should be advanced on the last shooting day of the picture;

p. 235, margin C

(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.

p. 235, margin C

Ol. 3. The distributors shall from the realisations of the i:Jaid picture made by them:

p. 235, margin C

(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;

p. 235, margin C

(b) pay themselves their distribution commiesion in respect of the said picture as hereinafter provided; (an) d h 1 h ·1 bl b 1

pp. 235–236, margin C

pay t emse ves t e ava1 a e a ance until the entire advance of Rs. 57 ,000 should be completely discharged and satisfied.

p. 236, margin C

Ol. 6. If the distributors should fail to realise the full amount due to them as aforesaid from the realisation of the said picture in the manner hereinbefore set out on or before the expiry of one and a half 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 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.

p. 236, margin C

Ol. 15. And it is hereby expressly agreed 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 trustees for the distributors.

p. 236, margin C

Ol. 19. In the event of the producer failing 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 the distributors for all the expenses with compound interest thereon at 12 per cent. per annum and the distributors shall have all rights as to the distribution, sale, etc., as aforesaid.

pp. 236–237, margin C

Ol. 20. On the expiry of the period of five years mentioned in this agreement, the distributors shall return to the producer all copies of films and balance stock of loan and saleable publicity materials o t e f h said picture, subject to usu,al wear and tear and subject to the distributors receiving back from the producer such unrealised amount, if any, as mentioned in clause (6) above".

p. 237, margin C

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.

p. 237, margin C

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.

p. 237, margin C

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 merely involve the work of distribution and exploitation of the pictures. The terms above set out were designed for the purpose of protectin-g the interests h . d d 'd bJ o t e assessee in so iar as it a vance cons1 era e sums to the producers for the purpose of producing the films. Apart from the commission which the assessee derived from the distribution and exploitati on of the pictures which would certainly be its revenue receipt in the course of the carrying on of its 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.

pp. 237–238, margin C

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 which it advanced to the producers for acquiring the same would necessarily be capital expenditure and

pp. 238–239, margin F

. db . . "t t t d" wou ld not b d be e Ite y It ID I s accoun s as ra Ing expenses which would be the position if what it acquired under the terms of the agreements was mere stock-in-trade of its business. The realisations which it made by distribution and exploitation of the

p. 239

. d pictures woul be d undoubte d tra d e receipts an , therefore, income, profits or gains and no part of the same would go to its capital account. The monies 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. There was thus a sharp distinction between the capital account and the trading account, the amounts advanced towards the production of the pictures being capital expenditure and the repayments of these advances as and when made being capital receipts, as distinct from the monies spent by it in the distribution and exploitation of the pictures b"eing trading expenses and the commission realised by it from such distribution and exploitation being trading receipts. As in the cases of mining leases and other species of proprietary rights obtained by an assessee being capital assets available to the assessee for working upon the same and earning income, profits or gains, so in the case of these pictures which it acquired by advancing monies to the producers to be available to it for distributing and exploiting the same, what it would be acquiring under the terms of the agreements would be capital assets and if an agreement was subsequently entered into by it either transferring these capital assets or surrendering them for value, whatever payment would be realised out of the same would be capital receipts and not trading receipts. The nomenclature of that receipt as commission for distribution and exploitation under the agreements would not make any difference to the position nor would the fact that, at the time when the said three agreements were cancelled, no part of the monies which had been advanced at the commence~ ment remained outstanding and the only activity of the assessee qua these pictures was then confined to the distribution and exploitation of the same. agreements were composite agreements an w at have got to look to is what were the rights in these pictures which the assessee had acquired under terms of the agreements. It had a species of prietary rights in these pictures all throughout period of t e agreements not only in respect advances which it had made for producing the same but also in respect of all other claims under the terms of the agreements and the nature of those rights would not be changed by the accident of the amount of the advances being repaid to it at a particular period of time during the currency of the agreements. If it acquired capital assets those assets tinued in its possession as such a.II throughout period of the agreements and it would not be legitimate at any intermedi~te period of time to see what was the position obtaining at that time for the pose of converting what were acquired as capital assets at the dates of the agreements into stock-intra.de of its business of distribution and exploitation of the pictures.

pp. 239–240

If this be the true position on the construction the agreements it follows that what was done by assessee on the 31st October 1945 was to surrender these capital assets to the producers for a consideration. These capital assets qua the agreemen.ts of the 17th September 1941, 16th July 1942 and 10th May 1945 were to endure up to 16th September, 1946, 15th July 1947 and 9th May 1950 respectively. A of Rs. 8,666-10-8 was fixed as the consideration for the surrender of each and the capital assets which been acquired were all of them surrendered by assessee to the producers with effect from the October 1945. The payment thus received by assessee could only be a capital receipt being the price of the surrender of the capital assets and could be considered a trading receipt at all.

p. 240, margin D

It is well recognised that the problem of discriminating between an income recAipt and a capital receipt and between an income disbursement and a capttal disbursement is not always easy to solve. Even though the distinction is well recognised and easily applied in general, cases do arise from time to time where the item lies on the border line and the task of assigning it to income or capital becomes one of much refinement. "While eac case is found h to turn upon its own fac~, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem ............................................ The nature of a receipt may vary according to the nature of the trade in connection with which it arises. The price of the sale of a factory is ordinarily a capital receipt, but it may be an income receipt in the case of a person whose business it is to buy and sell factories'~ (Per Lord Macmillan in Van Den Berghs, Ltd. v. Clark (H. M. Inspector of Taxes)(1) ). It may also be borne in mind that the provisions of the Indian Income-tax Act are not in pari materia with those of the English Income-tax Statutes so that the decisions on the English Acts are in general of no assistance in construing the Indian Acts (Vide the observations of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co.( and in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income tax, Bihar & Orissa(

pp. 240–241, margin D

The authorities which were cited at the Bar may, however, be shortly referred to.. Counsel for the appellant particularly relied upon the decisions in Short Brothers, Ltd. v. The Commissioners of Inland Revenue(!) and Kelsall Parsons & Co. v. Commissioners of Inland Revenue( in support of the position that the cancellation of the agreements in the present case and the receipt of Rs. 26,000 by the assessee was in the ordinary course of business in order to adjust the relations between the producers and the assessee and was simply a receipt in the course of a going business from that going business and nothing else. It was submitted that it was an essential h ' b · t · o t e assessee s usmess o enter mto agreements the nature in question and that it was an ordinary incident of its business that such agreements may altered or terminated from time to time. It therefore a normal incident of the business such that of the assessee that the agreementl!il might modified and in parting with the benefits of agreements the assessee could not be said to be ing with something which could be described enduring asset of its business.

pp. 241–242

This position would have been tenable if the ments in question were merely distributing ments without anything more. It would then been an essential part of the assessee's business enter into such agreements and also it would been a normal incident of its business to modify terminate the same and to adjust the relations ween the parties. In neither of these cases was any question of any capital asset having depreciated in value or become of less use for the purpose assessee's business. Rowlatt, J. observed in Brothers, Ltd. v. The Commissioners of Inland Revenue (supra) at page 968 that the money was not received in respect of the termination· of any part assessee's business nor was it received in respect any capital asset as was the sum in the Glenboig's case('). Lord Fleming also emphasized this aspect the matter in Kelsall Parsons and Go. v. Commissioners of Inland Revenue (supra) at page 622 that there no finding that in consequence of the termination, any capital asset was depreciated in value or became of less use for the purpose of the assessee's business. If the assessees in those cases had by virtue agreements in question acquired capital assets which they could work in order to earn income, profits gains, the payments received on termination said agreements would certainly not have been held to be trading receipts but capital receipts and not liable to tax.

p. 242, margin F

Reliance was placed on behalf of the assessee the decisions in Glenboig Union Fireclay

p. 243

R (l) d Commissioners of In l arm evenue an Berghs Ltd. v. Clark (H.M. Inspector of Taxes) for showing that, if the capital asset of· the was sterilized or destroyed, the payment capital receipt. L d B or uc k master, in Gl en Fireclay Go. Ltd. v. The Commissioners Revenue (supra) at page 463, expressed the that "it made no difference whether it be regarded the sale of the asset out and out, or whether treated as a means of preventing the acquisition profit that would otherwise be gained. In either the capital asset of the company was to that sterilized and destroyed and it was in respect action that the sum had been paid". Lord also, at page 464 stated that "the mining leases were capital assets of the company, the company's were to acquire profits by working under and by virtue of the titles and rights they hold under the leases and the payment to the assessee for abstaining from seeking a profit". Put it in another way: "The work the area in which the working was abandoned was part of the capital asset consisting the right to work the whole area demised. abandonment extended to the whole area quent profit by working would, of course, impossible but it would be impossible to contend the compensation would be other than capital. was the price paid for sterilising the asset otherwise profit might have been obtained. true of the whole must be equally true of the part" 465). In Van Den Berghs Ltd. v. Clark (H. Inspector of Taxes) (supra) it was held that ment in question was the payment for the tion of the assessee's future rights under ments which constituted a capital asset of see and that it was accordingly a capital Justice Finlay, whose judgment was ultimately tored by the House. of Lords, observed at "The ground is not very easy to express, but the ground upon which I desire to put this part of the

pp. 243–244, margin D

h" th t th t · h · th h Case IS t IS, a e rue :VIeW ere IS at t e agreement which was cancelled was just a capital asset of the Company and, if that is right, it seems to me to follow that, distinguishing such cases as Short Brothers('), one ought to hold that the sum received was

p. 244

JI" L d M f not an income receipt at a . or acmillan, a for discussing the various authorities which according to him were useful as illustrations and as affording indications of the kind of considerations which may be relevantly borne in mind in approaching the problem, construed. the agreements in question as not ordinary commercial contracts made in the course of the carrying on of the assessee's trade. The agreements in the facts and circumstances of the case before him related to the whole structure of the assessee's profit-making apparatus, they regulated the· assessee's activities, defined what they might and might not do and affected the conduct of their business and he had difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organization of a trader's activities could be regarded as an income disbursement or an income receipt. He expressed ~he opinion that the asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was a capital asset. They provided a means of making profits but they themselves did not yield profits. .

p. 244

Applying the same ratio here, could it not be said that the pictures which were acquired by the assessee from the producers were capital assets of the assessee, the object of the assessee being to acquire profits by distributing and exploiting the pictures under and by virtue of the titles and rights which the assessee acquired under the agreements or that they provided the means of making profits though they themselves did not yield profits? That being the true position on the construction of the agreements, the only result would be that the pictures constituted capital assets of the company and the payment in question was one for the cancellation of the assessee's rights under agreements and was accordmgly a capital receipt.

pp. 244–245

The distinction between capital assets on hand and the stock-in-trade on the other was to be supported by reference to the decisions in bolt (H. M. Inspector of Taxes) v. Salmon Estate(1) Johnson ( H. lnspectorof Taxes) v. W. S. Try These were cases of assessees which carried business of building and selling houses or building and development business and in the course business acquired plots of land which they utilised for the purpose of constructing buildings thereupon, which buildings together with the plots of which they stood were sold by them for a consideration. The question which arose was whether quisition of the plots of land on which the buildings were thus·constructed was the acquisition of a asset or a trading asset by the assessees. Macnaghten, whose judgment in the King's Division was the final judgment in Shadbolt Inspector of Taxes) v. Salmon Estate (supra) remarked at page 57 that "it was not disputed that course of such a trade as this, the trade of building houses for sale, the land on which the houses were built was part of the stock-in-trade of the business and was not a capital asset. The land being part of their stock-in-trade, the payment in question for the bit sold by the assess~es would have trading receipt and the right to build on the was likewise a trading asset". In Johnson Inspector of Taxes) v. W. S. Try Ltd. (supra), also, the judgment of the same learned Judge was the judgment on the point in issue. The following observations of the learned Judge at page 172 are very instructive: "Although in most cases land belonging to a trading company was part of its capital in the case of a company engaged in ribbon development the land which is acquired for the purposes such development is not part of its capital. a case the land forms part of its stock-in-trade, as much as the materials which it buys for the purpose of erecting the buildings on it. The cost of the land must come into its trading account as a trading expense. If it sells the land the price must come into its trading account as a trading receipt. And, likewise, compensation for injurious affection must also, in my opinion, be regarded as a trading receipt".

pp. 245–246, margin C

In the instant case also, 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'IWhich it worked upon in carrying on its business of distribution and exploitation, 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.

p. 246

Both the Income-tax Appellate Tribunal and the High Court relied upon the decision of the Privy Council in Commissioner of Income-tax, Bengal v. Shaw Wallace Go. (supra), and were of the opinion that the present case was covered by that decision. On the facts of the case as set out in the above a.ppeal it does not appear to be clear whether the t.wo selling agencies there were the only selling agencies which had been acquired and worked by Shaw Wallace & Co., and it is debatable under the circumstances whether the authority of that decision is not shaken by the decisions in Short Brothers' case (supra) and Kelsall Parsons Go.'s case (supra). It is sufficient to observe that the agreements in the case of Shaw Wallace & Co. were not deemed to constitute capital assets of the assessee and that aspect of the question was not at all considered by the Privy Council. It is not, therefore, necessary t? express any ?J.:>llll~n on the correctness or otherwise of that dec1s10n m this case. ,

pp. 246–247

Having regard to all the circumstances adverted to above, it is, therefore, clear t h at t e h payment o f Rs. 26,000 received by the assessee from the producers was in consideration of the surrender by the assessee of the capital assets which it had acquired from the producers under the three agreements in question and constituted a capital receipt not liable to tax for the assessment year 1946-47. The answer given by the High Court to the referred question was, therefore, correct and I would dismiss the appeal with costs.

p. 247, margin C

ORDER.

p. 247, margin C

BY THE CouRT:-In accordance with the Judgment of the majority, the appeal is allowed wjth costs throughout. VEMIREDDY SATYANARAYAN REDDY AND THREE OTHERS

p. 247, margin C

v.

p. 247, margin C

THE STATE OF HYDERABAD. [VIVIAN BOSE and CHANDRASEKHARA AIYAR JJ.]

p. 247, margin C

of-A ting-Whether of of accused-What

p. 247, margin C

There is no warrant for the extreme proposition that if a man sees the perpetration of a crime and does not give information of it to anyone else, he might well be regarded in law as an accomplice and that he could put in the dock with the actual criminals.

p. 247, margin C

A person may be present, and, not aiding and abetting, be neither principal nor accessory; as, if happens to present at a murder and takes no part in it, nor endeavours to prevent it, or to apprehend the murderer, this course conduct will not Itself ren· der him either principal or accessory.

p. 247, margin C

10th Edition, 1846, referred to. aa

p. 247, margin C