14 March 1956
Supreme Court


Case number: Appeal (civil) 32 of 1954






DATE OF JUDGMENT: 14/03/1956


CITATION:  1956 AIR  492            1956 SCR  223

ACT:        Indian  Income  Tax Act, 1922 (XI of  1922),  s.  10-Whether        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.

HEADNOTE:        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 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 September  1941,        July  1942 and May 1945.  The said agreements  expressed  in        similar language contained similar provisions.        In  the  accounting year ending 31st March 1946 and  in  the        previous  years  the assessee bad 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 producers of the films;



      30        224        (ii) 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  &  Co.  Ltd. v.  Commissioners  of  Inland  Revenue        ([1945] 26 T.C. 406); and        (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 margarine dealers concerned in Van        Den Berghs Ltd. v. Clark (L.R. [1935] A.C. 431) was.        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 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 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.        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  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  cer-        tainly 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.I.R. 1932 P.C. 138; 6 I.T.C. 178),  Baja        Bahadur Kamakshya 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. C. 955), Kelsall Parsons  &        Co.  v.  Commissioners of Inland Revenue ([1938]  21  T.  C.        608), Glenboig Union Fireclay Co. Ltd. v. The  Commissioners        of Inland Revenue ([1922] 12 T.C. 427), Shadbolt        225        (H. M. Inspector of Taxes) v. Salmon Estate ([1943] 25  T.C.        52),  Johnson  (H.M. Inspector of Taxes) v. W.S.  Try,  Ltd.        ([1945] 27 T.C. 167), Commissioner of Income Tax, Bengal  v.        Shaw  Wallace  and Company (A.I.R. 1932 P.C. 138),  Van  Den        Berghs, Ltd. v. Clark (Inspector of Taxes) (L.R. [1935] A.C.        431; 19 T. C. 390; 3 I.T.R. (Suppl.) 17) and Barr Crombie  &        Co. Ltd. v. Commissioners of Inland Revenue ([1945] 26  T.C.        406), referred to.



      The  facts  of the case as taken from the  judgment  of  the        Hon’ble The Chief Justice 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 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 balance 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        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 enure for a period of five        years  from  the  date  of the 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 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   advance  could  not  be  recouped   from   the        realisations 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 would remain due with compound interest  at        twelve  per  cent. per annum calculated in the  manner  men-        tioned   in   clause  6.  The  assessee’s   commission   for        distribution and        226        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 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 assesses  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.        In  the  accounting year ending 31st March 1946 and  in  the        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  sixty-six        annas  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.

JUDGMENT:        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 32 of 1954.        227        On  appeal  from  the  judgment and  order  dated  the  26th        September 1951 of the Madras High Court in Case Referred No.        18 of 1949.        C.   K.  Daphtary, Solicitor-General of India (C.  N.  Joshi        and R. R. Dhebar, with him) for the appellant.        R.   Ganapathy Iyer, for the respondent. 1956.  March 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 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 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  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  Company(1) 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. 59 I.A. 206; A.I.R. 1932 P.C. 138; 6 I.T.C.        178.        228        Excess Profits Tax, Madras the Tribunal under section  66(1)        of  the  Indian 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.        [After stating the facts of the case which gave rise 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 Income-Tax, Bihar and Orissa(1), 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  (Inspector        of Taxes)(2) 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.T.R. 513, 521; L.R. 70 I.A. 180, 192.        (2)  L.R.  [1935] A.C. 431: 19 T.C. 390; 3  I.T.R.  (Suppl.)        17.        229        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.        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 an 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        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 Bros.,  Ltd.  v.  The  Com-        missioners of Inland Revenue(1) 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 assesse and the producers  of  the        films.  The agreements which were cancelled were by no means        agreements on which the whole trade of the assessee bad  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  & Co., Ltd. v. Commissioners of Inland  Revenue(2).        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,        231



      Ltd. v. Clark (Inspector of Taxes) (supra) 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 all affect or alter the structure of        the assessee’s business.  Indeed the assessee’s business  of        distribution  of films proceeded apace  notwithstanding  the        cancellation of these three agreements.        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 & Co. v. Commissioner  of        Income  Tax, Bengal(1) 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 emphasised        (1)  [1931] 5 I.T.C. 211.        31        232        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  no  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  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 all Parsons & Co. v.Commissioners        of  Inland  Revenue(1) 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 & Co.’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        (1)  [1938] 21 T.C. 608.        233        of  rights  in  the films which when worked  were  to  yield        profits.   The  terms  of the  agreements  summarised  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 produced with moneys 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 Fireclay Co. 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 bad 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  consti-        tuted  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 bad 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        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.’ and        Kelsall Parsons & Co.’s cases rather than within those  laid        down in Shaw Wallace’s case or Van Den Bergh’s case or  Barr        Crombie’s case.        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 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        Wallace’s case 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.        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.        WHAGWATI 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 and it is not necessary 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 for the purpose  of  the  said        production the producer has approached the distributors  for        financial assistance and        235        for the distribution and exploitation of the said picture 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  exploit  the  said  picture  through  their        organization as requested by the producer.................        Cl. 1. The distributors shall advance to the producer a  sum        of Rs. 57,000 only altogether in the manner hereinafter  set        out:        (a)  a  sum  of  Rs. 7,000 only should be  advanced  on  the        execution 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 advanced as  soon        as a further 10,000 feet of 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  of the film delivered to the distributors;  and  the        balance  of Rs. 3,000 to be retained by the distributors  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        proper and at their sole discretion.        Cl.  3. The distributors shall from the realisations of  the        said 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 commis-        236        sion in respect of the said picture as hereinafter provided;        and



      (c)  pay  themselves the available balance until the  entire        advance  of Rs. 57,000 should be completely  discharged  and        satisfied.        Cl.  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 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.        Cl.  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        the  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.        Cl. 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  hereinbefore provided before the  said  period,        namely 1-5-1942, the producer shall become liable to pay  to        the  distributors at the letters’ 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        case  the producer shall be liable to the  distributors  for        all the expenses with compound        237        interest  thereon  at  12  per  cent.  per  annum  and   the        distributors  shall have all rights as to the  distribution,        sale, etc., as aforesaid.        Cl. 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 of the said picture, subject to        usual  wear  and  tear  and  subject  to  the   distributors        receiving back from the producer such unrealised amount,  if        any, as mentioned 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        merely involve the work of distribution and exploitation  of        the pictures.  The terms above set out were designed for the        purpose  of protecting the interests of the assessee  in  so        far  as it advanced considerable sums to the  producers  for        the  purpose  of  producing  the  films.   Apart  from   the        commission which the assessee derived from the  distribution        and  exploitation 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 all 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 all 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 assessee to the producers  after        the  expiry  of the period of five years  mentioned  in  the        agreements  subject to its receiving from the producers  all        unrealised amounts under the agreements.        What  is  it  that  the assessee  was,  acquiring  from  the        producers  under  the  terms of these  agreements?   Was  it        acquiring capital 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        239        which  it advanced to the producers for acquiring  the  same        would  necessarily be capital expenditure and would  not  be        debited  by  it in its accounts as  trading  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  pictures  would  be  undoubted  trade        receipts  and,  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 being 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-        32        240        ment  remained  outstanding  and the only  activity  of  the        assessee  qua  these  pictures  was  then  confined  to  the        distribution  and exploitation of the same.  The  agreements        were composite agreements and what we have got to look to is        what  were the rights in these pictures which  the  assessee        had  acquired under the terms of the agreements.  It  had  a        species   of  proprietary  rights  in  these  pictures   all        throughout the period of the agreements not only in  respect        of  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 full 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  continued  in  its  possession  as  such  all        throughout the period of the agreements and it would not  be        legitimate  at any intermediate period of time to  see  what        was  the position obtaining at that time for the purpose  of        converting what were acquired as capital assets at the dates        of  the  agreements into stock-in-trade of its  business  of        distribution and exploitation of the pictures.        If  this  be the true position on the  construction  of  the        agreements it follows that what was done by the assessee  on        the 31st October 1945 was to surrender these capital  assets        to the producers for a consideration.  These capital  assets        qua  the  agreements 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  sum        of  Rs.  8,666-10-8 was fixed as the consideration  for  the        surrender  of  each and the capital assets  which  had  been        acquired were all of them surrendered by the assessee to the        producers  with  effect  from the 31st  October  1945.   The        payment  thus  received  by the assessee  could  only  be  a        capital  receipt  being the price of the  surrender  of  the        capital assets and could not be considered a trading receipt        at all.        It  is  well recognised that the problem  of  discriminating        between an income receipt and a capital receipt        241



      and   between   an  income  disbursement   and   a   capital        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        each  case  is  found to turn upon its own  facts,  ’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.(2) and in Raja Bahadur  Kamakshya        Narain Singh of Ramgarh v. Commissioner of Income tax, Bihar        & Orissa(3)).        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(4) and Kelsall Parsons&  Co.        v.  Commissioners  of Inland Revenue(5) 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        (1)  [1935] 19 T.C. 390, 428, 431.        (2)  [1932] L.R. 59 I.A. 206, 212.        (3)  [1943] L.R. 70 I.A. 180, 188.        (4)  [1927] 12 T.C. 955.        (5) [1938] 21 T.C. 608.        242        going  business from that going business and  nothing  else.        It  was  submitted  that it was an  essential  part  of  the        assessee’s  business to enter into agreements of the  nature        in  question  and that it was an ordinary  incident  of  its        business  that such agreements may be altered or  terminated        front , time to time.  It was therefore a normal incident of        the  business  such  as  that  of  the  assessee  that   the        agreements  might  be  modified  and  in  parting  with  the        benefits of the agreements the assessee could not be said to        be  parting, with something which could be described  as  an        enduring asset of its business.        This  position would have been tenable if the agreements  in        question   were  merely  distributing   agreements   without        anything more.  It would then have been an essential part of        the  assessee’s business to enter into such  agreements  and        also it would have been a normal incident of its business to        modify  or  terminate the same and to adjust  the  relations        between  the parties.  In neither of these cases  was  there        any  question  of any capital asset  having  depreciated  in        value  or  become  of  less  use  for  the  purpose  of  the        assessee’s   business.   Rowlatt,  J.  observed   in   Short        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 of  the  assessee’s        business nor was it received in respect of any capital asset        as was the sum in the Glenboig’s case(1).  Lord Fleming also        emphasized this aspect of the matter in Kelsall Parsons  and        Co.  v. Commissioners of Inland Revenue (supra) at page  622        that  there  was  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 bad by virtue  of        the  agreements  in question acquired capital  assets  which        they  could work in order to earn income, profits or  gains,        the payments received on termination of the said  agreements        would  certainly not have been held to be  trading  receipts        but capital receipts and as such not liable to tax.        (1)  [1922] 12 T.C. 427.        243        Reliance  was  placed  on  behalf of  the  assessee  on  the        decisions   in   Glenboig  Union  Fireclay   Co.   Ltd.   v.        Commissioners  of Inland Revenue(1) and Van Den Berghs  Ltd.        v.  Clark  (H.M. Inspector of Taxes)  (supra),  for  showing        that, if the capital asset of the assessee was sterilized or        destroyed,  the  payment would be a capital  receipt.   Lord        Buckmaster,  in  Glenboig  Union Fireclay Co.  Ltd.  v.  The        Commissioners  of  Inland  Revenue  (supra)  at  page   463,        expressed the opinion that "it made no difference whether it        be regarded as the sale of the asset out and out, or whether        it  be treated as a means of preventing the  acquisition  of        profit that would otherwise be gained.  In either case,  the        capital  asset of the company was to that extent  sterilized        and destroyed and it was in respect of that action that  the        sum had been paid".  Lord Wrenbury also, at page 464  stated        that "the mining leases were capital assets of the  company,        the company’s objects were to acquire profits by working the        mines  under  and by virtue of the titles and  rights  which        they  hold under the leases and the payment was made to  the        assessee for abstaining from seeking to make a profit".  Put        it in another way: "The right to work the area in which  the        working  was to be abandoned was part of the  capital  asset        consisting of the right to work the whole area demised.  Had        the  abandonment extended to the whole area  all  subsequent        profit  by working would., of course, have  been  impossible        but it would be impossible to contend that the  compensation        would  be  other than capital.  It was the  price  paid  for        sterilising the asset from which otherwise profit might have        been  obtained.  What is true of the whole must  be  equally        true  of the part"’ (Page 465).  In Van Den Berghs  Ltd.  v.        Clark  (H.  M. Inspector of Taxes) (supra) it was held  that        the payment in question was the payment for the cancellation        of  the assessee’s future rights under the agreements  which        constituted a capital asset of the assessee and that it  was        accordingly  a  capital  receipt.   Justice  Finlay,   whose        judgment  was  ultimately restored by the  House  of  Lords,        observed at page 413:        (1)  [1922] 12 T.C. 427.        244         The ground is not very easy to express, but the ground upon        which  I desire to put this part of the case is  this,  that        the true view here is that the 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(1), one ought to hold that the  sum        received was not an income receipt at all".  Lord Macmillan,        after discussing the various authorities which according  to        him  were  useful  as illustrations  and  as  affording  in-        dications   of  the  kind  of  considerations  which   maybe



      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 the 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.        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        (1)  [1927] 12 T.C. 955.        245        of  the company and the payment in question was one for  the        cancellation  of the assessee’s rights under the  agreements        and was accordingly a capital receipt.        The  distinction between capital assets on the one hand  and        the  stock-in-trade on the other was sought to be  supported        by reference/to the decisions in Shad bolt (H.  M. Inspector        of Taxes) v. Salmon Estate (1) and Johnson (H.  M. Inspector        of  Taxes)  v.  W.  S. Try Ltd. (2).  These  were  cases  of        assessees  which  carried on the business  of  building  and        selling  houses or building and development business and  in        the  course of their business acquired plots of  land  which        they  utilised  for, the purpose of  constructing  buildings        thereupon,  which buildings together with the plots of  land        on  which they stood were sold by them for a  consideration.        The question which arose was whether the acquisition of  the        plots  of land on which the buildings were thus  constructed        was  the acquisition of a capital asset or a  trading  asset        ,by  the assessees.  Justice Macnaghten, whose  judgment  in        the King’s Bench Division was the final judgment in Shadbolt        (H.   M.  Inspector  of  Taxes)  v.  Salmon  Estate  (supra)        remarked  at page 57 that "it was not disputed that  in  the        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 thus a part of their  stock-in-trade,        the  payment in question for the bit sold by  the  assessees        would have been a trading receipt and the right to build  on        the plots was likewise- a trading asset".In Johnson  (H.        M. Inspector of Taxes) v. W. S. TryLtd. (supra),  also,        the  judgment  of  the  same learned  Judge  was  the  final        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 assets, in the case of  a  company        engaged in ribbon development the land which is acquired for        the purposes of such development is not part of its capital.



      In  such a case the land forms part of its  stock-in-trade.,        just        (1) [1943] 25 T.C. 52.        (2) [1946] 27 T.C. 167.        246        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".        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 which 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.        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  &  Co.        (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 appeal it does not appear  to  be  clear        whether the two 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  & Co.’s case (supra).  It is sufficient to  observe        that  the agreements in the case of Shaw Wallace & Co.  were        not deemed to constitute capital        247        assets  of the assessee and that aspect of the question  was        not  at  all considered by the Privy Council.   It  is  not,        therefore,   necessary  to  express  any  opinion   on   the        correctness or otherwise of that decision in this case.        Having regard to all the circumstances adverted to above, it        is, therefore, clear that the payment of 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.                                 ORDER.        BY  THE  COURT:-In  accordance  with  the  Judgment  of  the        majority, the appeal is allowed with costs throughout.