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TMI Blog2007 (10) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... apital receipt or a revenue receipt. The large volume of precedents of the High Courts and the Supreme Court on the point underscores the difficulty in easily answering what appears to be a fairly simple question. The precedent volume grows larger with this judgment. 2. First, the facts. The Assessee took on lease two cinema halls, "Capital" and "Minerva" at Ambala. Since 1952 it was exhibiting films in them and earning a part of its income from that activity. The cinema halls were owned by one Lala Beli Ram Sarin. The last time the lease was renewed was in 1968 for a term of six years and three months from 1 st December, 1968 to 28 th February, 1975 on a consolidated sum of Rs.72,000/- per year. From a copy of the lease deed which has been included in the paper book it appears that the lease was of not only the cinema halls. It included the stalls, godowns and cinema equipments. The lease deed acknowledged that the Assessee had renovated the cinema halls and that future repairs would be at the cost of lessee subject to the condition that the lessee would inform the lessor in advance of his proposal to carry out repairs, renovations and additions. The lessee was to hand over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1977. 3.Rs.40,000/- for period from 1st March, 1977 to February 28, 1978. 4.Rs.40,000/- for period from 1st March, 1978 to February 28, 1979. 5.Rs.40,000/- for period from 1st March, 1979 to February 28, 1980." It was further undertaken by the landlord as under : "In case I do not pay this money to you on or before 1 st April, 1975, you are at liberty to file a suit for its recovery in the Courts at Delhi. I agree to give you proper receipt for all the machinery, equipment, furniture, etc. and also receipt for having taken possession of the said cinema premises. I confirm that with the signing of the said receipt for the machinery, equipment, furniture etc., I have no claim against you for anything whatsoever and this handing over of the cinemas in the manner provided above is in full and final settlement." 5. It is not in dispute that during the Assessment Year 1975-76 the sum of Rs.1,24,000/- was in fact paid to the Assessee and the balance of Rs.2,00,000/-was paid in five equal instalments in the succeeding years i.e. from the Assessment Year 1976-77 onwards. In the accounts prepared for the year ending on 28 th February, 1975 the Assessee showed the sum of Rs.1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given rise to the present rerferences to this Court. 9. The question that has been referred to us at the instance of the Revenue, is : "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that even though Rs.3,24,000/- was a revenue receipt, the entire of it did not become assessable in the assessment year 1975-76 only Rs.1,24,000/- became assessable and that the remaining sum of Rs.2,00,000/- accrued to the assessee company to terms of the aforesaid agreement at the expiry of the following accounting periods:- (i) For the period from 1st March, 1975 to February 28, 1976 Rs.40,000 (ii) For the period from 1st March, 1976 to February 28, 1977 Rs.40,000 (iii) For the period from 1st March, 1977 to February 28, 1978 Rs.40,000 (iv) For the period from 1st March, 1978 to February 28, 1979 Rs.40,000 (v) For the period from 1st March, 1979 to February 28, 1980 Rs.40,000" 10. The two questions referred to us at the instance of the Assessee are: "(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,24,000/- realised by the assessee by way of compensation fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (Del), Bombay Burma Trading Corp. Ltd v. CIT, Bombay (1971) 81 ITR 777 (affirmed by the Supreme Court in (1986) 161 ITR 386), Bawa Shivcharan Singh v. CIT, Delhi (1984) 149 ITR 29 (Del), B.G. Shah v. CIT (1986) 162 ITR 23 (Bom), H.L. Sidappa v. CIT (1980) 126 ITR 641 (Kar) and K. Eapen Jacob v. Commissioner of Income Tax (1987) 166 ITR 199 (Mad), Mr. Monga contended that the sum of Rs.3,24,000/- had to be necessarily treated as a capital receipt which is not taxable. According to Mr.Monga, the mere fact that there were other cinema halls elsewhere from which the Assessee was earning income by exhibiting films did not change the character of the compensation received by the Assessee; it continued to remain a capital receipt. 13. Without prejudice to the above contention, Mr. Monga submits that the sum of Rs.1,24,000/- alone is liable to be treated as revenue receipt in the hands of the Assessee for the relevant Assessment Year 1975-76. He points to the letter dated 21 st February, 1975 in which it is clearly indicated that it is only the sum of Rs.1,24,000/- which has been offered as compensation for the business loss and that the remaining sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived was a capital receipt or a revenue receipt. 17. In Commissioner of Income Tax v. South India Pictures Ltd. (1956) 29 ITR 910 (SC), the Assessee was carrying on the business of distribution of films. For this purpose it had entered into three agreements for advancing moneys to certain motion picture producers towards production of three films and acquiring the rights of distribution thereof. After the Assessee had exploited to a certain extent its right of distribution of three films, the agreements were cancelled and the producers paid an aggregate sum of Rs.26,000/- to the Assessee towards commission. In the relevant accounting year the Assessee had distribution rights in respect of 11 films including 3 films for which it had advanced moneys to the producers. The question then arose whether the sum of Rs.26,000/- was a revenue receipt in the hands of the Assessee. By a 2:1 majority, the Supreme Court held that the sum paid to the Assessee was in the ordinary course of business and that the termination of the agreement did not radically affect or alter the structure of the Assessee"s business. It clarified that the amount was not received by the Assessee as the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on the business of distribution and exhibition of films in other cinema halls located in the cities of Jagraon, Yamuna Nagar and Moga. In the circumstances, following the dictum in Shamsher Printing Press it must be held that the compensation amount received by the Assessee towards the business loss was in fact a revenue receipt. 20. Reliance was placed by the learned counsel for the Assessee on the decision of the Andhra Pradesh High Court in Chunduri Venkata Reddi. [1959] 35 ITR 87. It was held by the High Court in that case that the test for determining whether a sum of money is a capital receipt or a revenue receipt was as under (ITR, page 96) : "The amount should have been paid for parting with something which could be described as an enduring asset of the business. The cessation of the business or the cancellation of the agreement should affect the profit-making structure. To quote the words "it should materially destroy or cripple the structure of the profit-making apparatus." 21. The decision in Chunduri Venkata Reddi, [1959] 35 ITR 87 apart from reiterating the well settled law does not particularly help the case of the Assessee since it is distingu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id to the Assessee company is not income." The contention of the Revenue that the continuation of the business of the Assessee company would disable it from claiming the sum received as capital receipt was negatived by the Court. It was observed as under (ITR, page 581) : "The significant point to be noticed is that there was no complete cessation of the business of the assessee even upon the termination of the two agencies of the assessee. Therefore, even if the revenue is right in saying that the business of the assessee-company in the present case continued despite the divesting of its management as a result of the said Ordinance and the said Act, it is to be seen whether the compensation paid was income or whether it was for the divesting of a part of its profit-making apparatus. The compensation paid cannot be said to be in respect of the profits or gains of any business carried on by the assessee-company nor can it be profit earned by a process of production according to the test laid down by the Privy Council." 24. The above decision was peculiar to the facts of the case. The important distinguishing feature in the present case is that the correspondence between the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had been extinguished so as to render the amount of compensation received for the said purpose a capital receipt. The sum of Rs.1,24,000/- received by the assessee in the Assessment Year 1975-76 was a revenue receipt and not a capital receipt. The two questions referred at the instance of the assessee are therefore answered in the affirmative, that is, in favour of the Revenue and against the assessee. 29. We take up next for discussion, the question referred at the instance of the Revenue: whether the entire sum of Rs.3,24,000/- became assessable to tax in the Assessment year 1975-76 as contended by the Revenue or only a sum of Rs.1,24,000/- should be assessed to tax since that was the amount received during the assessment year ? 30. The correspondence between the landlord and the assessee unambiguously states that a sum of Rs.1,24,000/- has been paid towards his loss of business. The further sum of Rs.2 lakhs does not bear any such particular description in order to determine whether such sum accrued in that very Assessment Year 1975-76. This coupled with the fact that the Assessee had in fact offered to tax the sum of Rs.40,000/- in every succeeding Assessment Year i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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