1965 (3) TMI 5 - HC - Income Tax

Trading receipt or capital recipt - Agreement that the company will act as the sole film distributing agent on commission basis - ordinary conduct of business of financing must necessarily include not only making of the contract but also the modifications or alterations thereof - so sum received by the assessee was a trading receipt not in nature of a capital receipt

Summary

Issues Involved:
1. Whether the sums received by the assessees were trading receipts or capital receipts.
2. Whether there was material on which the Tribunal could find that the business structure or an entire activity or organisation of the assessee had disappeared.

Issue-Wise Detailed Analysis:

Issue 1: Nature of the Receipts (Trading vs. Capital)

The primary issue revolves around whether the sums of Rs. 2,75,000 received by Motor & General Finance Ltd. and Rs. 75,000 received by Goodwill Pictures Ltd. were trading receipts or capital receipts. The court examined the nature of the agreements and the circumstances under which these amounts were received.

The company had amended its memorandum of association in 1947 to include the business of film finance and entered into a contract with Kardar Productions to finance film production. The agreement provided that the company would act as the sole film distributing agent for certain regions and receive a commission. However, the first two films financed under this agreement, "Shahjahan" and "Keemat," were unsuccessful, leading to a supplementary agreement in 1948. This supplementary agreement allowed the company to recover unrecovered amounts from future film receipts.

When Kardar Productions declined to hand over a potentially successful film, "Dil-lagi," the company filed a suit for specific performance, which was settled by a consent decree. Under the decree, Kardar Productions agreed to pay the company Rs. 5,43,812-5-6 for advances and other dues, and Rs. 3,50,000 for commission, early termination of the agency agreement, and damages. The company paid Rs. 75,000 to Goodwill Pictures as compensation for the termination of its sub-agency agreement.

The Income-tax Officer and the Appellate Assistant Commissioner initially treated these amounts as trading receipts. However, the Income-tax Appellate Tribunal held them to be capital receipts, stating that the company and Goodwill Pictures had divested themselves of their rights to distribute films, resulting in the disappearance of a business structure.

The court, after reviewing various precedents, concluded that the agreements with Kardar Productions were commercial contracts made in the ordinary course of the company's financing business. The termination of these contracts was a normal incident of the business and did not affect the company's profit-making apparatus. Thus, the sums received were trading receipts and not capital receipts.

Issue 2: Disappearance of Business Structure

Given the conclusion on the first issue, the second issue about the disappearance of the business structure or entire activity of the assessee became moot. The court determined that the contracts with Kardar Productions were ordinary commercial contracts and their termination did not impair the trading structure of the company. Therefore, the amounts received were considered trading receipts, and the second question did not require further consideration.

Conclusion:
The court held that the sums of Rs. 2,75,000 received by Motor & General Finance Ltd. and Rs. 75,000 received by Goodwill Pictures Ltd. were trading receipts. The termination of the contracts was a normal business incident and did not result in the disappearance of the business structure. Consequently, the amounts were taxable as income.