LAKSHMINARAYANA FILMS vs COMMISSIONER OF INCOME TAX

P. Thangavel J.

At the instance of the assessee, the Income Tax Appellate Tribunal, Madras Bench ""C"", has referred the following question of law for the

assessment year 1975-76 u/s 256(l) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the income of Rs. 1,05,000 accrued to the assessee under the agreement dated 25-5-

1974 and 27-8-1974, during the previous year ended on 31-3-1975 ?

The assessee is a firm, which had leased out the dubbing rights of its picture ""Sri Rama Anjeneyayudham"" for Tamil and Malayalam to Jay Films

and Cine Link Service by agreements dated 25-5-1974 and 27-8-1974, for considerations of Rs. 60,000 and Rs. 45,000, respectively. The

assessee did not disclose any income arising from the abovesaid agreements for the assessment year 1975-76, relevant to the previous year ending

with 31-3-1975. An income of Rs. 25,80,800 had been returned in the assessment year 1975-76 from sale of the Telugu version. In 1976-77, the

assessee had shown an income of Rs. 45,000 from the sale of the Malayalam version and for the assessment year 1977-78 an income of Rs.

45,000 was shown from the sale of the Tamil version.

The Commissioner came to the conclusion that the assessee who had followed the mercantile system in respect of similar transaction for the

previous years, had switched over to the cash system in respect of the Tamil and Malayalam dubbing rights alone. He also found that such method

of accounting was not permissible and accordingly included the income from the agreements relating to dubbing rights of Tamil and Malayalam

entered into in the year 1975-76. Accordingly, the Commissioner set aside the assessment order u/s 263 of the Act and included a sum of Rs.

1,05,000 arising out of the agreements relating to the Tamil and Malayalam dubbing rights during the abovesaid assessment year and completed

the assessment.

Aggrieved by the abovesaid order of the Commissioner, the assessee preferred an appeal to the Income Tax Appellate Tribunal on the grounds

that the income included by the Commissioner as per the terms of the agreements referred to above, did not accrue in the previous year since the

agreements were executed by contracts and the total amount became due only when the assessee arranged to deliver the R.R. print, censor script,

song books, poster designs, etc., to the lessees for dubbing purposes, that if the assessee failed to carry out its part of the promise, the agreement

would be ineffective during that year and will have effect only in the year in which the assessee performed his promise and that the amount received

by the assessee has to be treated as advance and appropriated to the contract and treated as income in the relevant assessment year.

The Appellate Tribunal had come to the conclusion that the contract had become binding on the exchange of valid promises, one being the

consideration for the other, that performance of mutual promises immediately or simultaneously, is not a necessary

condition for the conclusion of the contract, as held in the case of Union of India (UOI) Vs. Chaman Lal Loona, , that the payment of the amount

payable to the assessee for the abovesaid concluded contract could be postponed and that, therefore, the income accrued as per the terms of the

agreements referred to above in the previous year was liable to be assessed. At the instance of the assessee, who is aggrieved at the abovesaid

conclusion of the Income Tax Appellate Tribunal, the abovesaid question of law is referred for the opinion of this court.

The assessee would contend that the amounts mentioned in the agreements dated 25-5-1974, and 27-8-1974, for leasing out the dubbing rights

of the abovesaid picture for Tamil and Malayalam, did not accrue in the previous year as the agreements were executed by contract and the

amount became due only when the assessee arranged to deliver the R.R. print, censor script, song books, poster designs, etc., to the lessees for

dubbing purposes, that the agreement would take effect only in the year in which the assessee will perform his promise, that the amount received

by the assessee under the abovesaid agreements would be treated as advance to be appropriated towards the contract at the time of performing

his promise and that the income accrued by virtue of the abovesaid contract cannot be treated as income during the assessment year 1975-76. On

the other hand, the revenue resisted the claim made by the assessee on the ground that the income had accrued in the previous year and, therefore,

the assessee is liable to be assessed during the assessment year 1975-76.

We have considered the rival submissions made by the assessee as well as the revenue. The fact remains that the assessee had leased out the

dubbing rights of its abovesaid picture for Tamil and Malayalam to Jay Films and Cine Link Service by agreements dated 25-5-1974, and 27-8-

1974, respectively. It is equally not in dispute that the assessee had shown an income of Rs. 25,80,000 in the return presented by the assessee for

the relevant assessment year regarding the sale of Telugu version of the abovesaid picture. A perusal of the agreement dated 27-8-1974, by Sri

Lakshminarayana Films, represented by its partner, Sri N. S. Moorthi, with Jay Films, represented by its managing partner, Sri A. T. Abraham,

would disclose that Jay Films had agreed to pay royalty of Rs. 45,000 for acquiring Malayalam dubbing rights of the abovesaid film and Sri

Lakshminarayana Films had agreed to lease out the abovesaid Malayalam dubbing rights of the abovesaid picture for the abovesaid royalty of Rs.

45,000 on 27-8-1974. It is also evident from a perusal of the abovesaid agreement that a sum of Rs. 10,000 was paid by demand draft dated 21-

6-1974, Rs. 7,500 was paid by cheque dated 26-7-1974, Rs. 7,500 was paid by cheque dated 26-7-1974 and Rs. 7,500 was paid by cheque

dated 27-8-1974, which the assessee had acknowledged. Another sum of Rs. 7,500 was also agreed to be paid by cheque on or before 27-8-

1974, the date of the agreement. There was a balance of Rs, 5,000 on the date of agreement, ''which Jay Films had agreed to pay at the time of

taking delivery of the prints from the assessee. If the abovesaid facts contained in the agreement dated 27-8-1974, are considered, it is evident that

the assessee had already received a sum of Rs. 40,000 out of Rs. 45,000 and agreed to receive the balance amount of Rs. 5,000 at the time of

delivery of the prints. It is also evident from one of the clauses of the agreement that the agreement with the abovesaid method of payment was

offered by Jay Films and the said offer was accepted by the assessee on 27-8-1974, itself. Therefore, there was offer and acceptance and the

same was completed on the date of the agreement dated 27-8-1974, so far as the dubbing rights of the abovesaid picture in Malayalam. Simply

because the assessee has not received the balance of Rs. 5,000 which was to be paid to the assessee at the time of the delivery of the print, it

cannot be said that there was no conclusion of the contract by offer and acceptance on 27-8-1974, since the offer of Jay Films was accepted by

the assessee on 27-8-1974, itself by postponing the payment of Rs. 5,000 to the time of delivery of the print.

The revenue has brought to the notice of this court the decision of Union of India (UOI) Vs. Chaman Lal Loona, . wherein the Apex Court was

pleased to hold as follows (head note) :

The distinction between the two classes of contracts, where the consideration is either executed or executory is that an executed consideration

consists of an act for a promise. It is the act which forms the consideration. No contract is formed unless and until the act is performed, e.g., the

payment for a railway ticket, but the act stipulated for exhausts the consideration, so that any subsequent promise, without further consideration, is

merely a nudum pactum. In an executed consideration the liability is outstanding on one side only ; it is a present as opposed to a future

consideration. In an executory consideration the liability is outstanding on both sides. It is in fact a promise for a promise, one promise is bought by

the other. The contract is concluded as soon as the promises are exchanged. In mercantile contracts this is by the most common variety. In other

words, a contract becomes binding on the exchange of valid promises, one being the consideration for the other. It is clear, therefore, that there is

nothing to prevent one of the parties from carrying out his promise at once, i.e., performing his part of the contract whereas the other party who

provides the consideration for the act of or detriment to the first may not carry out his part of the bargain simultaneously with the first party.

If the principles laid down in the case cited above are taken into consideration in the light of the facts discussed above, so far as the dubbing rights

of the abovesaid picture in Malayalam, it is quite clear that the offer and acceptance of the contract was completed between the assessee and Jay

Films even on 27-8-1974, and the consideration except to an extent of Rs. 5,000 alone, had been passed on or before the date of the agreement

and the balance consideration of Rs. 5,000 was retained for payment at the time of the delivery of the print by the assessee to Jay Films. In view of

the above facts, the assessee ought to have brought the royalty of Rs. 45,000 accrued under the agreement dated 27-8-1974, in the return for the

assessment year 1975-76 as rightly held by the Income Tax Appellate Tribunal.

A perusal of the agreement dated 27-8-1974, would disclose that the dubbing rights of the abovesaid picture in Tamil was agreed to be leased out

for the royalty of Rs. 60,000 and also agreed to receive the abovesaid sum of Rs. 60,000 in the following manner: A sum of Rs. 10,000 was

received by the assessee even on 21-6-1974. A sum of Rs. 35,000 was agreement to be received on or before 31-3-1977, or the date of

delivery of Tamil prints for releasing in Tamil Nadu, whichever is earlier. A sum of Rs. 15,000 was agreed to be received on or before releasing of

the Tamil dubbing version in Ceylon and other overseas territories on or before 31-3-1978, whichever is earlier. A perusal of the abovesaid

agreement would disclose that there was an offer and acceptance between Cine Link Service and the assessee on 27-8-1974, for a royalty of Rs.

60,000 to release the dubbing rights of the abovesaid film in Tamil, but the payment of Rs. 50,000 was postponed to later dates as mentioned

above. Even though an advance of Rs. 10,000 was received on 21-6-1974, the payment of consideration for leasing out the dubbing rights

mentioned above was postponed to subsequent years. Therefore, it cannot be said that there was passing of the entire consideration, from Cine

Link Service in the previous assessment year relevant to the assessment year 1975-76.

Learned counsel for the assessee has brought to the notice of this court the decision in E.D. Sassoon and Company Ltd. Vs. The Commissioner of

Income Tax, Bombay City, . In this case S company were the managing agents of the U company and the S company were entitled to receive as

their remuneration, by way of commission of certain percentage on the annual net profits of the U company, which was due to them on March 31

of every year. On 1-12-1943, S company assigned to A their office as managing agents and all their rights and benefits under the managing agency

agreement and the consideration received by them was transferred by them to the capital reserve account. The accounts of the managing agency

commission payable to the managing agents for the calendar year 1943 were made up in 1944 and paid to A in 1944. The question was whether

in the assessment year 1944-45 A was liable to pay tax on the accrual basis on the whole of the commission or whether the tax was payable by A

and the S company on proper apportionment being made between them of the amount received by A. In the circumstances stated supra, it was

held by the Apex Court that the managing agency commission was not liable to apportionment between the S company and A in the proportion of

the services rendered as managing agents by each one of them but A was liable to pay tax on the whole commission. It is evident from the case

cited above that the commission payable for the service rendered in the calendar year 1943, was paid in the year 1944 and the same was held to

be assessable during the assessment year 1944-45.

Learned counsel for the assessee had also brought to the notice of the court the decision in The Commissioner of Income Tax, Madras Vs. A.

Gajapathy Naidu, in support of the case of the assessee. In that case, the assessee who supplied bread to a Government hospital under a contract

during the period 1-4-1948, to 31-3-1949, made certain representations to the Government after the close of the year that he had incurred loss.

The Government directed payment of the sum of Rs. 12,447 to the assessee by way of compensation for the loss sustained in respect of the supply

of bread, during the abovesaid period. That amount was received by the assessee in the accounting year 1950-51. There was a dispute as to the

year in which the abovesaid amount had accrued for the purpose of the assessment. It was held that the amount ought to be included in the profits

of the year 1950-51 relevant to the assessment year 1951-52 and that it could not be related back to the earlier year during which the assessee

actually supplied the bread to the hospital. Applying the principles laid down by their Lordships in the case cited supra, we are of the opinion that

the income had not accrued in favour of the assessee on the date of the execution of the agreement. The agreement clearly stipulates that a sum of

Rs. 35,000 should be paid on or before the delivery of the Tamil prints for release in Tamil Nadu on or before 31-3-1977, whichever is earlier.

The agreement stipulates that the assessee had no right to receive the amount till the performance contemplated in the agreement is performed on

or before 31-3-1977, whichever is earlier. Until then, the assessee had no right to receive the sum of Rs. 35,000 and it cannot be said that the right

to receive a sum of Rs, 35,000 accrued in favour of the assessee on the date of the execution of the agreement, and the right to receive the money

would depend upon the performance of the conditional obligation or the date that is contemplated in the agreement. So also, the second instalment

of Rs. 15,000 would accrue in favour of the assessee on or before the release of the said Tamil dubbing version in Ceylon and other overseas

territories on 31-3-1978, whichever is earlier and until that contingency happens, the assessee had no right to receive the amount. The agreement

also states that the payment on the days mentioned is the essence of the agreement. The above clause clearly gives an indication that if the delivery

contract is fulfilled in the manner indicated in clause 1 of the agreement, the assessee had the right to receive the money and there was no right to

receive the money on the date of execution of the agreement. Though the payment depends upon the delivery of Tamil prints in Tamil Nadu or the

release of the said Tamil dubbing version in Ceylon and other overseas countries, the agreement also stipulates that the payment should be made

on or before a particular date whichever is earlier. Let us visualise the case of the assessee delivering the Tamil prints and on that date, the right in

favour of the assessee to receive the payment would accrue and before delivery of. the Tamil prints, if he seeks the right for payment of money in a

court of law, he would have no claim. Similarly, if he enforces his right for payment before 31-3-1977, without delivery of prints, he would be non-

suited. Therefore, the agreement contemplates the performance on the part of the assessee and unless the assessee performs its part of the

obligation stipulated in the agreement, the assessee had no right to receive the amount. The agreement is no doubt a valid agreement in the sense

that the consideration for the agreement can be past consideration or future consideration, but on that account, it cannot be assumed that the right

to receive the payment had accrued in favour of the assessee on the date of the agreement. The clauses found are similar to service agreements and

unless the service contemplated in the agreements is fulfilled, the right to receive the money would not arise. The assessee in the instant case, has

undertaken to perform its obligation in the agreement either by delivery of Tamil prints or the release of the Tamil dubbing version in Ceylon or any

other overseas countries and then only, the right to receive the money contemplated in clause 1 of the agreement would accrue in favour of the

assessee. Therefore, the money received After 31-3-1975, viz., on or before 31-3-1977 and 31-3-1978, cannot be said to be an income accrued

during the year ending on 31-3-1975, relevant to the assessment year 1975-76, though the contract was executed on 27-8-1974. It is not the

case of the revenue that the assessee had performed its part before 31-3-1975. Therefore, we are of the opinion that the inclusion of the royalty of

Rs. 50,000 payable by Cine Link Services to the assessee in the assessment year 1975-76 cannot be sustained. In so far as the sum of Rs. 10,000

is concerned, the assessee had the right and received the amount on 21-6-1974.

Accordingly, we answer the question of law referred to us as follows:

The royalty of Rs. 45,000 paid to the assessee for leasing out the dubbing rights of the abovesaid picture in Malayalam had accrued as income to

the assessee under the agreement dated 27-8-1974, during the previous year ended with 31-3-1975. The royalty of Rs. 50,000 paid to the

assessee for leasing out the dubbing rights of the abovesaid picture in Tamil had not accrued as income to the assessee under the agreement dated

27-8-1974, during the previous year ended with 31-3-1975. In the circumstances of the case, there will be no order as to costs.