1989 (2) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Accrual of Distribution Commission
2. Effect of Subsequent Agreement on Accrued Income
3. Validity of Tribunal's Decision

Issue-wise Detailed Analysis:

1. Accrual of Distribution Commission:
The assessee, a private limited company engaged in film distribution, followed the mercantile system of accounting. For the assessment year 1967-68, the Income-tax Officer included a sum of Rs. 53,741 as commission income from film distribution, based on an agreement dated April 22, 1966. The assessee argued that a subsequent letter dated January 10, 1968, modified the terms of the original agreement, converting distribution rights into outright purchase rights, thus affecting the accrual of commission. However, the court found that under clauses 9 and 10 of the original agreement, the distribution commission became determined and quantified as and when collections were made from the distribution and exploitation of the pictures. The court cited the Supreme Court decision in CIT v. K. R. M. T. T. Thiagaraja Chetty and Co. [1953] 24 ITR 525, stating that the quantification of commission is not a condition precedent to its accrual.

2. Effect of Subsequent Agreement on Accrued Income:
The letter dated January 10, 1968, was argued to be a confirmation of an understanding to convert distribution rights into outright purchase rights. However, the court noted that a pucca agreement incorporating these terms was envisaged but not executed. The letter also stated that the conversion would be effective from the date of release of the pictures, which was after the close of the accounting year on April 13, 1967. The court held that the letter could not retroactively affect the distribution commission that had already accrued under the original agreement. The court emphasized that the letter was an attempt to efface the effect of the accrued commission income after the close of the accounting year, which could not be countenanced.

3. Validity of Tribunal's Decision:
The Tribunal had directed the Income-tax Officer to compute the income or loss based on trading results, considering the letter dated January 10, 1968, as reflecting the position before the close of the accounting year. The court disagreed, stating that the Tribunal's decision was based on conjectures and surmises relating to the exhaustion of the potentialities of the pictures and the avoidance of loss in investment. The court found that the Tribunal had not properly considered the terms of the original agreement and the system of accounting followed by the assessee. The court concluded that the distribution commission had accrued to the assessee during the accounting year in question and that the letter dated January 10, 1968, did not affect this accrual. The court answered the question referred to it in the negative and in favor of the Revenue, awarding costs to the Revenue.

Conclusion:
The court held that the distribution commission income had accrued to the assessee during the accounting year 1967-68 based on the original agreement dated April 22, 1966. The subsequent letter dated January 10, 1968, did not retroactively affect this accrual. The Tribunal's decision to compute income or loss based on trading results was found to be erroneous, and the court ruled in favor of the Revenue.