COMMISSIONER OF INCOME TAX Vs. BALAJI CHITRA MANDIR

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal referred the following question of law under s. 256(1) of the I.T. Act (for short "the Act") for the opinion of this court :

(2.) THE assessee is a partnership firm and the assessment relates to the year 1973-74. THE assessee was carrying on business in the exhibition of cinema films. On August 25, 1968, the assessee-firm leased the cinema hall to M/s. K. Bhakthavatsalam and another (hereinafter referred to as "the lessee") for a period of 151 weeks subject to the payment of weekly rent of Rs. 3,521. A sum of Rs. 40,000 was deposited by the lessee with the assessee as security under the agreement. Under clause 6 of the agreement, the amount of Rs. 40,000 shall be returned to the lessee one week before the date of termination of the agreement. If the assessee fails to repay the same, the lessee shall be entitled to continue the agreement till the amount of Rs. 40,000 is repaid. Clause 4 of the agreement provided that the less shall pay the weekly hire for each week in advance of the running week. Clause 18 of the agreement, which is relevant for the purpose of this reference, provides that, if the less should fail to pay the weekly hire, as agreed, for any week, the agreement shall stand cancelled and the advance (security deposit) of Rs. 40,000 shall be forfeited. It appears, the lessee committed a default in payment of the weekly lease amount for three weeks continuously commencing from February 7, 1969. THE assessee served a notice on the lessee calling for payment of the weekly rent in arrear. THE assessee also gave a notice to the lessee that, pursuant to the default committed in the payment of the weekly rent, the agreement stood cancelled the security deposit of Rs. 40,000 was forfeited. It appears, later on, the assessee filed a suit before the Fourth Additional Judge, City Civil Court, Hyderabad, contending that the agreement, which should have been, in the normal course, continued for 132 weeks or more, was terminated on account of the default committed by the lessees and pursuant to such termination, the assessee suffered a loss of Rs. 1,25,000. It may be mentioned that, subsequent to the termination of the lease, the assessee leased the cinema hall to Usha Films on March 20, 1969. In the plaint, the assessee seems to have stated that, in view of the forfeiture of security deposited of Rs. 40,000, no claim for any damages was being made a part from the claim for reimbursement of loss of Rs. 1,25,000 said to have been suffered by the assessee on account of the premature termination of the lease. Eventually, there was a compromise as a result of which the assessee received from the lessee an amount of Rs. 7,771 on account of unpaid weekly hire charges and it was further agreed that the amount of Rs. 40,000 kept with the assessee by the lessee as security deposit shall be forfeited.

(3.) TWO questions fall for consideration in the present case and they are (1) whether the assessee entered into the lease agreement dated August 25, 1968, in the course of its regular business; and (2) whether the sum of Rs. 40,000 being the security deposit forfeited is a capital receipt or a revenue receipt. As far as the first question is concerned, we have no difficulty in coming to the conclusion that the lease agreement was entered into by the assessee-firm in the course of its business, namely, exhibition of cinema films. It is not the assessee's case that it discontinued the business and gave the cinema hall on lease. On the contrary, the authorities through out proceeded on the basis that the lease of the cinema hall constituted the assessee's business and the income arising therefrom to the assessee on the lease of the cinema shall fell to be assessee under the head "Business". The assessability of the sum of Rs. 40,000 in the assessee's hands was also examined by the authorities below on the same basis. it must, therefore, be held that the lease agreement dated August 25, 1968, was entered into by the assessee with the lessee in the course of its business and the assessability or otherwise of the sum of Rs.40,000 falls to be examined with reference to the undisputed position that the forfeiture was made under the agreement entered into in the normal course of the assessee's business. The question whether a particular receipt is a capital receipt or a revenue receipt is the subject-matter of consideration in a number of cases. Courts have held that the distinction between these two is well marked although the decision in each case will turn upon its own facts. As observed by the Supreme Court in CIT v. Jairam Valji [1959] 35 ITR 148, various rules have been enunciated by the court as furnishing a key to the solution of the question through it is not possible to lay down any single test as in fallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. The observations of the Supreme court in the above case indicate that generally payment are made in the settlement of the right under a trading contract or trading receipts and are assessable as revenue. Where the circumstances of any case indicate that compensation is paid to a person for cancellation of a contract which does not effect the trading structure of his business nor deprive him of what, in substance, is source of income, termination of the contract being a normal incident to the business, and such cancellation leaves him free to carry on his trade, the receipt is revenue. Where, however, by the cancellation of an agreement, the trading structure of the assessee is impaired or such cancellation results in loss of what may be regard as the source of the assessee's income, the payment made to composite for cancellation of the agreement is normally capital receipt (please see the decision of the Supreme Court in Kettelwell Bullen andamp; Co. Ltd. v. CIT [1964] 53 ITR 261. Obviously realising this clear distinction, leaned counsel for the assessee Sri. M. J. Swamy, contended that the agreement dated August 25, 1968, entered into by the assessee with the lessee in the present case constituted the source or the profit-making apparatus and by the cancellation of such an agreement the trading structure of the assessee is impaired. Learned counsel conteded that the termination the agreement resulted in loss of the source of the assessee's income and the sum of Rs. 40,000 forfeited by the assessee must be regarded as compensation for the termination of such agreement and should, therefore, be held to be capital receipt. Leaned counsel relied on a number of decisions. We shall refer to some of these decisions, but we must observe that all the cases referred to by the learned counsel relate to the agency contracts providing the source and the profit-making apparatus from which income was derived. In all those cases, compensation received by the assessees on account of termination of contracts was held by the courts to be capital in nature, because the termination of the contracts resulted in the destruction of the very source producing income. In our opinion, cases touching on this aspect do not provide any assistance in the present case. The capital asset producing the income is not, in our opinion, the agreement entered into by the assessee, but the cinema hall, which is the capital assets. The agreement is not the real source of the income derived by the assessee, but the source is the cinema theatre itself. The agreement did not constitute the profit-making apparatus; the cinema hall is the profit making apparatus. The agreement only a means to manage the cinema hall producing the income and providing the profit-making apparatus. In agency contracts, there is no other capital asset de hors the agreement. The agreement itself was the source from which income, profit and gains spring up and if the compensation is paid to a person of account of the termination of the agency contact producing income, it could be legitimately the said that the receipt of compensation related to the extinction of the source and the profit-making apparatus and, in that sense, is a capital receipt. In the present case, it is not possible to accept the contention that the termination of the agreement dated August 25, 1968, resulted in the destruction of the source producing the income or that there was any injury to the profit-making apparatus and consequently the sum of Rs. 40,000 forfeited by the assessee is relatable to capital asset. As we observed earlier, the capital asset is the cinema theater itself which continued to exist as it was prior to the termination of the contract and also continued to produce income even after the termination of the contract and also continued to produce income even after the terminate of the agreement. Basically, therefore, we are unable to appreciate the contention of the learned counsel that the agreement itself constituted the source of the profit-making apparatus and it must, therefore, be held that the sum of Rs. 40,000 appropriated by the assessee by forfeiting the security deposit was capital in nature. We shall briefly refer to the decision relied on by the learned counsel for the assessee. Our attention has been invited to a decision of this court in Kimtee andamp; Sons. v. CIT [1978] 115 ITR 190. That was a case of managing agency agreement. On account of the premature resignation of the managing agent which was demanded, the arbitrators determined that the assessee in that case should be paid damages of Rs. 93,515 towards composition for the loss of managing agency commission. This court held that the sum of Rs. 93,515 towards compensation for the loss of managing agency commission. This court held that the sum of Rs. 93,515 was not income in character but was capital and all the same held that the provisions of s. 28(ii) of the Act applied and the compensation received for the loss of managing agency had to be deemed to be profits or gains from the business and was, therefore, liable to income-tax. As pointed out earlier, this is a case where the agreement of managing agency constituted the source and when that source was destroyed, compensation was paid. We are unable to accept the contention of the learned counsel that, based on principles enunciated by this court in the above case, the agreement between the assessee and the lessee must be viewed as the apparatus which leads to the business rather than the business itself. Indeed, the apparatus is the cinema hall and the business carried by the assessee in working the cinema hall led to the assessee entering into agreement. Reference may be made to the decision of the Bombay High Court in CIT v. Kantilal Shah [1979] 118 ITR 647 (Bom). This again is a case of an agreement to finance a manufacturing firm and there was no independent capital asset. In the particular facts of that case, the Bombay High Court held that the assessee, who was a lady, had no income from business and had income only from other sources. She had not entered into such agreement previously. The financing agreement possessed some unusual features. On a cumulative consideration of all the facts and circumstances of the case, the Bombay High Court came to the conclusion that the financing agreement was not a contract or arrangement in the course of the regular business of the assessee and, in that view, held that the termination of the contract amount to premature determination of a capital asset which had been a source of income for the issues and any amount received for such premature determination must be regarded as a capital receipt. This case is totally distinguishable. We have already found that the agreement was entered into by the assessee in the course of its business. Learned counsel also invited our attention to the decision of the Bombay High Court in CIT v. Khushalbhai Patel [1979] 118 ITR 656. The assessee in that case entered into two finance contract with the Western Oil Distributing Co. Ltd. Under these agreements, the assessee-firm agreed to finance the company such sum or sums of money as the company from time to time required for purposes of its business. In the mean time, some differences and difficulties arose between the assessee-firm and the company. The assessee did not accept the suggestions of the company for variation of the contracts with regard to payment of interest, etc., and consequently the company field a suit for certain reliefs. Ultimately, a consent decree was passed whereunder the company paid the assessee as and by way of compensation for termination of the agreements a sum of Rs. 3,00,000. The question was whether the sum of Rs. 3,00,000 was income or not. The Bombay High Court held that it was a capital receipt, because compensation was paid for the loss of source producing the income. We do not see how the above decision could be of any assistance to the present case. Learned counsel also relied on the decision in Gooptu Estates Limited v. CIT [1929] 4 ITC 146, Sabine (H.M.Inspector of Taxes) v. Lookers Ltd. [1956-60] 38 Taxe Cases 120, Burmah Steam Ship Company Limited v. IRC [1930] 16 Tax Cases 67, CIT v. Motiram Nandram [1940] 8 ITR 132 (PC) and Ukhara Estate Zamindaries (P.) Ltd. v. CIT . We do not consider it necessary to deal with those cases in detail as, in our opinion, the facts of those cases were clearly distinguishable from the facts of the present case. In all those cases, the agreements, which constituted the source and profit-making apparatus were terminated and compensation were received by the assessee which were held to be capital receipts. Besides the agreements, there was no other capital asset producing the income in those cases. We have already observed that, in the present case, the real capital asset was the cinema hall and it was that capital that was producing the income. That capital asset remained intact. It is, therefore, not possible to accept the contention that, in the termination of the agreement dated August 25, 1968, the assessee lost the source producing income or that the profit-making apparatus was destroyed.