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TMI Blog1981 (11) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... cing a Kannada film called " Sakthi Sakthi ". While the film was in the process of production, the producer, who wanted finances for completing the picture, approached the assessee and offered to entrust it with the exclusive rights of distribution in certain areas in Karnataka State. The assessee agreed to advance a sum of Rs. 2,80,000 to be spent only towards the production of the said picture. A sum of Rs. 85,000 was to be paid in full settlement of the amounts due to another distributor. The balance was to be paid on different occasions. For instance, a sum of Rs. 40,000 was to be paid on signing the agreement, another sum of Rs. 25,000 after fifteen call sheets were shot, another sum of Rs. 25,000 after completing thirty call sheets, which would complete the picture, and the balance of Rs. 80,000 was to be retained towards the cost of prints and publicities. There were certain other provisions which are usually to be found in such agreements and which are not of any significance to us. It is enough for our purpose to refer to those clauses which are material. Clause 5 provided for a distribution commission calculated at 35 per cent. on the net realisation of the picture. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.43 for the completion of the picture. The net realisation up to April 12, 1964, included the realisations for the earlier year, viz., Rs. 2,99,366.68. The ITO, included in the assessment for the assessment year 1964-65, the said amount of Rs. 91,888, being the commission calculated at 35 per cent. of the net realisation during the year ended April 12, 1964. Similarly, he included the amount of commission at 35 per cent. out of the realisations for the assessment years 1965-66 and 1966-67 and brought the amounts to tax. The amounts so brought to tax for those two years came to Rs. 22,152 and Rs. 7,770. In making these assessments the ITO rejected the assessee's claim that it could expect to earn the commission only after the capital was realised and that so long as the amount of realisation fell short of the said capital, the assessee could not be taxed on the commission. The assessee appealed against the assessments for all these years to the AAC who confirmed the assessments. The matter was further taken to the Tribunal, and the Tribunal, for the reasons stated in its order dated 7th May, 1974, held that the amount was not liable to be taxed in these years. In the view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , came to Rs. 66,298.48 and Rs. 22,187.48. From these figures it would be clear that the picture had no successful run. Apparently, because of the difficulties, the producer is stated to have become a sanyasi. But the assessee had to take over the production of the picture only because he had made substantial advances and had to look to the realisations for the purpose of recovering the amounts so advanced. The way in which the picture was received by the public could, in the circumstances, have shown to the assessee that even the amounts advanced could not have been realised. The question of realisation of the commission or the interest that is contemplated by the agreement would thus be a very doubtful one. It is in the background of these facts that we have to examine the relevant authorities. The Bombay High Court in H. M. Kashiparekh Co. v. CIT [1960] 39 ITR 706, enunciated the principle of " real income " applicable to the taxation of income. In that case, the assessee maintained its accounts on the mercantile system of accounting. It was the managing agent of paper mill. Under the managing agency agreement it was under a duty to forgo one-third of its commission if its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are statutorily fixed for specified purpose." The passage from the decision of the Bombay High Court, extracted above, was reproduced in CIT v. S. Arumugham Pillai [1969] 73 ITR 382 (Mad), and was followed in a later decision of this court in CIT v. Motor Credit Co. P. Ltd. [1981] 127 ITR 572. This was a case of a limited company carrying on business as financiers for purchase of motor vehicles under a hire purchase scheme. Money had been advanced to two firms carrying on bus transport business. The routes of these two firms were taken over by the State Transport Corporation. The firms defaulted in making the payments of the hire purchase instalments and, consequently, the buses were seized. The assessee was advised that there was no prospect of recovering even the principal amount. It did not, therefore, credit interest on the outstandings from the two firms even though what it followed was the mercantile system of accounting. The ITO, however, included the accrued interest on the outstandings due from those firms. The AAC and the Tribunal deleted the amount from the assessment, and, on a reference, this court held that the Tribunal was correct in its conclusion that though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o create any estoppel as against the assessee and in favour of the Department. The liability to taxation is based on the statute and an assessee is not liable to be taxed because of his mistake. In the present case, if strictly the principle of mercantile system of accounting is to be stressed, then the assessee could have made an entry crediting the amount of commission as its income, and simultaneously or at the close of the year debiting it as a loss of the said income, because the assessee had no hope of recovering the said amount. The result would be that the entries would have cancelled themselves out and there would be no scope for taxation. It is true as contended by the learned counsel for the Commissioner that there have been receipts as and by way of realisation on the exhibition of the film. But, in the context in which the assessee was placed, where he had not only advanced a huge sum of Rs. 2,80,000, but also further sums totalling in all Rs. 4,37,828 he had to take into account even the principal amount advanced not being realisable. The slow process by which the realisation came in does establish the bona fides of the assessee. Thus, as against sum of Rs. 4,37,828 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the said case and we do not find the principle of that decision to be applicable here. The decision of the Calcutta High Court is James Finlay Co. v. CIT [1982] 137 ITR 698. The assessee in that case had advanced moneys to two parties and the amount receivable as interest was credited to the suspense account, since the assessee followed the mercantile system of accounting. According to the assessee, there was an extreme unlikelihood of the loan being recovered. The High Court held that having regard to the system of accounting followed by the assessee, the amount was liable to be taxed. It is in this context that the principle of real income was considered and it was pointed out that in examining any transaction the court would have more regard to the reality and speciality of the situation rather than the theoretical or doctrinaire aspect. It would lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding the statutory language. However, while considering the facts, it was pointed out that the agreement did not provide for giving up the interest and that there was no claim of waiver of interest at all. The waiver ..... X X X X Extracts X X X X X X X X Extracts X X X X
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