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TMI Blog1973 (8) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... -distributor to pay a sum of Rs. 40,000 as deposit for the faithful performance of the terms and conditions of the agreement, which was to be adjusted at the rate of Rs. 5,000 against each of the eight pictures. Under clause 3, the sub-distributor was to pay a sum of Rs. 32,500 as advance against each of the costume pictures and Rs. 25,000 as advance against each of the social pictures. The sub-distributor accordingly paid Rs. 40,000 to the assessee-company under clause 2, and Rs. 2,30,000 under clause 3 of the agreement. Clause 5 of the agreement read as follows : " 5. That in consideration of the distributor paying advance against each picture and further exploiting at his own expense, the distribution of the said pictures in the contracted territory, the company shall allow to the distributor it commission of 15% of the entire realisations of each of the above 8 pictures. As and when the advance amount mentioned above plus commission of 15% are realised, the distributor will remit to the company the balance 8 5% of further realizations so as to reach the company by the 7th of each succeeding calendar month along with a statement of runs and account of each picture at various ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% of the realisations, which were receivable by the assessee. The assessee, according to the Tribunal, had paid similar advances to the producers in respect of these films, for securing the distribution rights, which was a normal feature of such transactions. In its own turn while giving sub-distribution rights for smaller territories, the assessee-company had demanded and received such advances from the sub-distributor. The character of this payment, according to the Tribunal, was a loan, repayable by appropriation by the sub-distributor, of 85% of the realisations payable to the assessee-company. It was further held that the amounts received as deposits and loan could not subsequently acquire the character of a revenue receipt. The additions made by the Income-tax Officer were, therefore, excluded. It was out of this order of the Tribunal that the above mentioned question was said to have arisen and which was then referred to us for opinion. Mr. B. N. Kirpal, the learned counsel appearing for the revenue, contended before us that the amounts received by the assessee-company, both under clause 2 and clause 3 of the agreement, were trade receipts and, therefore, the income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel on both sides. The first two cases brought to our notice are judgments of the English Court of Appeal. In Morley v. Tattersall , the court held "that the quality and nature of a receipt for income tax purposes is fixed once and for all when the subject of the receipt is received". Unclaimed balances from the amounts realised on the sale of customer's horses in auctions held by Tattersall, in that case, were considered by the said firm as customers' money in the firm's bands required to be paid as and when demanded. On receipt, the said sums were passed into the general funds of the firm, shown in its balance-sheet as the proper liability item. For domestic reasons of their own, the partners after some years carried the said balances in the balance-sheet to their personal accounts. The court was of the view that that did not alter the reality of the position. It was held that at the time of transferring the balances to their own accounts, the partners "could not imprint upon some existing asset the quality different from what it had possessed before". There was no existing asset at all at that time as it was a liability. By writing down the liability item in the balance-sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the due performance of the contracts by the customer so long as his dealing with them continued. Price was to be paid by the customer in full, i.e., without any adjustment out of the deposit which carried interest. The Supreme Court held that the amount deposited by the customer was no longer to have any relation to the price fixed for the goods to be delivered. The price was to be paid in full against delivery without any adjustment out of the deposits. It was only at the end of the business connection that an adjustment was to be made towards any possible liability arising out of the customer's default. The transaction was held to have all the essential elements of a contract of loan and the deposits were considered as borrowed money and not trade receipt. In Punjab Distilling Industries Ltd. v. Commissioner of Income-tax, the assessee sold country liquor to licensed wholesalers. To relieve difficulty, during the war, of procuring empty bottles the Government devised a scheme whereby the distiller was entitled to charge the wholesaler a fixed price for the bottles which he was bound to re-pay when the empty bottles were returned. In addition to the fixed price, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents who had advanced to it money in connection with cases entrusted to it some years back. The Income-tax Officer added the said amount to the assessable income of the assessee. The Calcutta High Court held that the amount in question was not a revenue receipt. When the money was received, it was not received as a trading receipt, but was received by the assessee in its capacity of an agent of the client and that also in a fiduciary capacity. The assessee remained liable to account for this money to his client. In Bijli Cotton Mills (P) Ltd. v. Commissioner of Income-tax, certain quota-holders were granted specific quota of yarn to be supplied by the manufacturers and which they then sold in the market. Subsequently, the manufacturers were required to sell their stocks directly to wholesalers, excluding the quota-holders altogether. In order to prevent the hardship to the quota-holders, the Textile Commissioner required the manufacturers to recover from the wholesalers controlled price of the yarn, and to pay to the quota-holders to whom they would have originally sold the yarn, a part of the said price, which represented the excess over the mill price, the sale being for this pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey are still useful just to be borne in mind, while examining any given facts. Let us now examine in some detail the facts of the present case. The sum of Rs. 40,000 deposited by the sub-distributor, under clause 2 of the agreement, was clearly money for the faithful performance of the terms and conditions of the agreement and had no relation to the 85% realisations which were earmarked for the assessee. It had ultimately to be paid back to the sub-distributor and was a liability of the assessee. This amount cannot be said to be of the nature of a trade receipt. The sum of Rs. 2,400 outstanding out of this deposit, therefore, is an item in the capital account and cannot be treated as in the revenue account. The position of the balance of Rs. 11,656 which remained outstanding out of the advance of Rs. 2,30,000 received under clause 3 of the agreement is, however, not so easy to determine. The nature and effect of the provision which allowed the sub-distributor to adjust 85% of the realisation against its advances has to be examined in the light of other provisions of the agreement and the surrounding circumstances. Does the said provision mean that the advances are mere advance pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and character changed subsequently not by any act of the parties, but by operation of the law of limitation after the expiry of three years. The assessee became entitled to retain the same as its own money after the expiry of the period of limitation, as the sub-distributor could not recover it. He tried to distinguish Tattersall's case and submitted that in that case there had been no change whatsoever in the character of the money held, as the statute of limitation had rot commenced to run. But, after the period of limitation had expired, the balance money in the hands of the assessee, in our case, according to him, assumed a different character and instead of remaining a liability became a trade receipt. He relied for support on the judgment of the King's Bench Division in Jay's--The Jewellers Ltd. v. Commissioners of Inland Revenue , where Tattersall's case was distinguished. The contention of the learned counsel cannot be accepted. He was unable to cite any other case in India or in England, where Jay's case was followed or approved. The decision in Jay's case was based principally on the special wording of section 17 of the Pawn Brokers Act, 1872, which provided that a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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