1973 (8) TMI 9 - HC - Income Tax

Amounts received by film-distributor towards deposit and as advance from sub-distributor which is to be returned after adjustment against payment - Whether on the facts and in the circumstances of the case the Tribunal was legally justified in holding the amounts of Rs. 2, 400 and Rs. 11, 656 as capital receipts of the company ? - sum of Rs. 11, 656 which remained outstanding out of money received by the assessee under Clause 3 of the agreement Rs. 2 400 outstanding out of the deposit received under clause 2 was not a trade receipt but was borrowed money in the nature of a capital receipt. The Tribunal was therefore justified in holding the amounts in question as capital receipts of the assessee. The question referred to us is accordingly answered in the affirmative i.e. in favour of the assessee and against the revenue

Summary

Issues Involved:
1. Whether the amounts of Rs. 2,400 and Rs. 11,656 were capital receipts or trade receipts.
2. The implications of the statute of limitation on the nature of these receipts.

Detailed Analysis:

Issue 1: Nature of Receipts (Capital vs. Trade)
The primary question was whether the amounts of Rs. 2,400 and Rs. 11,656 were capital receipts or trade receipts. The relevant assessment year was 1959-60, and the facts revolved around an agreement dated August 6, 1946, between the assessee-company and its sub-distributor for the exhibition of films in Sind and Baluchistan territory. The sub-distributor paid Rs. 40,000 as a deposit under clause 2 of the agreement and Rs. 2,30,000 as an advance under clause 3. The Tribunal held that the amounts were capital receipts, a view contested by the revenue.

Clause 2 Deposit:
The Rs. 40,000 deposit was for the faithful performance of the agreement terms, repayable upon due performance. The Tribunal ruled that the Rs. 2,400 outstanding from this deposit was not a trading receipt but a security deposit, thus a capital receipt. The court agreed, stating that the deposit had no relation to the 85% realisations earmarked for the assessee and was a liability, not a trade receipt.

Clause 3 Advance:
The Rs. 2,30,000 advance was to be adjusted against 85% of the realisations from the films. The Tribunal viewed this as a loan, repayable by appropriation of the realisations, and not as an advance payment of the realisations. The court upheld this, noting that the assessee had received similar advances from producers for securing distribution rights, indicating a financing arrangement. The advances were independent of the realisations and were to be repaid after two years if the realisations failed. Thus, the Rs. 11,656 outstanding was also a capital receipt.

Issue 2: Statute of Limitation
The revenue argued that even if the amounts were initially capital receipts, they became trade receipts by operation of the law of limitation after three years. The court rejected this, citing that the statute of limitation affects the remedy but does not discharge the debt or extinguish the obligation. The liability remained, and the amounts did not convert into trade receipts by mere expiry of the limitation period.

Relevant Case Law:
The court referred to several cases to support its decision:
- Morley v. Tattersall: The nature of a receipt is fixed when received and does not change by subsequent treatment.
- Davies v. Shell Company of China Ltd.: Deposits for making good defaults are loans and part of trading structure, not trade receipts.
- K.M.S. Lakshmanier and Sons v. Commissioner of Income-tax: Differentiated between advance payments (revenue receipts) and security deposits (capital receipts).
- Punjab Distilling Industries Ltd. v. Commissioner of Income-tax: Additional sums described as security deposits were part of the sale consideration and thus trade receipts.
- Bijli Cotton Mills (P) Ltd. v. Commissioner of Income-tax: Unpaid balances from quota-holder margins were trust money, not assessee's income.
- Commissioner of Income-tax v. Sandersons and Morgans: Unclaimed balances in solicitors' accounts were not revenue receipts but held in fiduciary capacity.

Conclusion:
The court concluded that the amounts of Rs. 2,400 and Rs. 11,656 were capital receipts, not trade receipts. The Tribunal was justified in excluding these amounts from the assessee's income. The question was answered in the affirmative, in favor of the assessee and against the revenue, with no order as to costs.