Judgment:
D.K. Jain, J.
1. The Tribunal has, at the instance of the Revenue, referred to this Court under s. 256(1) of the IT Act, 1961 (for short the Act'), the following questions for opinion :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 62,500 was a capital receipt
2. If the answer to the first question is in the affirmative then was the Tribunal right in holding that the amount of Rs. 62,500 was not assessable under s. 45 of the IT Act, 1961, as capital gains ?'
2. The case relates to the asst. yr. 1971-72 for which the relevant previous year ended on 31st December, 1970. The assessed is an incorporated company engaged in the business of exhibition of cinematographic films. It signed agreements with the producers of three films namely, 'Saheli', 'Sagaai' and 'Aaye Din Bahar Ke' for their distribution, exhibition and exploitation in the territories of Delhi and UP. On 1st September, 1965, it entered into a partnership with eight partners and the firm was styled as 'Films Friends'. The business of the firm was to take over the above three films for the purposes of exploitation. As per the terms of partnership, the distribution and exploitation of the films was to be done exclusively by the assessee, who was to sign the agreement of exhibition with cinemas in its own name and also to deal with the producers. For such distribution the assessed was to receive 5 per cent. as commission on the collections of the films on screening. Subsequently the assessed signed agreements with the producers of three more films for their distribution, exploitation and exhibition in the above territories. The share of the assessed in the firm was to be 25 per cent. and the remaining 75 per cent. was to be distributed amongst other partners. Besides the above, the assessed also signed two more agreements with the producers of two films, namely, 'Saajan' and Aaya Sawan Joom Ke' for their distribution, exploitation and exhibition. For the exploitation of the said two films, the assessed entered into another partnership on 17th March, 1967, with ten other partners and that firm was styled as 'Film Enterprises'. In this firm also the assessed held 25 per cent. share and was also entitled to 5 per cent. commission on the collections of the films for the work performed on behalf of the firm. Subsequently, vide two separate sale deeds, both dt. 28th December, 1970, the assessed sold its interest in the above two firms to S/Shri B. N. Gupta and Vijay Sharma and received Rs. 30,500 for M/s Films Friends and Rs. 32,000 for M/s Film Enterprises by way of compensation for the unexpired period of the contracts with the producers of the afore noted films, taken over by the two firms, with the result that the assessed ceased to be a partner in the said two firms and the said two persons were admitted as new partners with 12 per cent. share in each of the said firms.
3. During the course of assessment proceedings for the relevant assessment year, the question arose about the taxability of the said amount of Rs. 62,500 in the hands of the assessee. On behalf of the assessed it was claimed that the receipt was of capital nature and it was not a receipt from carrying on of business or trade. It was also claimed that in view of s. 47(ii) of the Act, as it existed prior to its omission w.e.f. 1st April, 1985, the said amount could not be taxed as capital gains either. The AO did not agree with the assessed and held that the amount represented trading receipt in the hands of the assessed in lieu of profits of the unexpired period of contracts for distribution and exploitation of the films. He also rejected the stand of the assessed that the provisions of s. 47(ii) of the Act were attracted to the facts as in his opinion it was not a receipt on the distribution of capital assets on the dissolution of the firm. He held that what had been transferred by the assessed was its right of distribution of films for the unexpired period of contracts and accordingly brought the entire amount of Rs. 62,500 to tax as assessor's income.
4. On appeal, while agreeing with the AO, the AAC observed that the unexpired life of the films was held by the firm as business asset which could be exploited further in the market and, thereforee, the consideration received on their sale, formed part of the assessor's business receipts and, thereforee, it was business income.
Being dissatisfied with the decision of the AAC, the assessed took a second appeal to the Tribunal. Before the Tribunal, on behalf of the assessed it was reiterated that the amount received represented the capital receipt of the assessed inasmuch as it was a receipt for relinquishment of the assessor's interest in the two firms namely, M/s Films Friends and Film Enterprises. On the other hand, on behalf of the Revenue it was urged that the assessed in fact sold the film prints which formed part of the firm's stock-in-trade and thereforee, the receipt represented business receipt. It was also contended on behalf of Revenue that the assessed could not legally sell its right in the firm to an outsider and, thereforee, there was no question of any capital receipt. In the alternative it was submitted that in any case the receipt represented capital gain to the assessed as it had parted with its capital asset, as claimed, and s. 47(ii) had no applicability to the facts of the case.
5. The Tribunal felt that it was not a case of sale of stock-in-trade and if at all it was, the same being the property of the firm, in view of the principle laid down by the Supreme Court in the case of Addanki Narayanappa & Anr. vs . Bhaskara Krishnappa : [1966]3SCR400 , to the effect that a partner is not entitled to deal with any portion of the property of the firm as his own during the subsistence of the partnership nor can he assign his interest in a specific item of partnership property to any one; the assessed could not assign its share to any one. The Tribunal observed that the assessed had surrendered its right to share in the said two firms in favor of two outsiders and had received Rs. 62,500 as consideration thereof. Relying on a judgment of the Madras High Court in the case of A. K. Sharfuddin vs . CIT : [1960]39ITR333(Mad) , wherein it was held that the compensation received by one partner of a partnership from another partner for relinquishing all his rights in the partnership is compensation for loss of a capital asset and is not a trading receipt, the Tribunal held that even though in the present case the relinquishment was made in favor of outsiders, the compensation received by the assessed represented capital receipt in its hands and could not be taxed as its business income. The Tribunal also held that the said amount could not be brought to tax as capital gains in view of the judgment of the Gujarat High Court in the case of CIT vs. Mohan Bhai Pama Bhai (1973) 91 ITR 393 : TC 20R.866, inter alia, holding that when an assessed retires from a firm and receives an amount in respect of his share in the partnership, there is no transfer of interest of the assessed in the goodwill of the firm and no part of the amount received by him would be assessable to capital gains tax under s. 45 of the Act.
6. As noted above, on the application thereafter of the Revenue, the questions reproduced above, were referred.
Despite service, the assessed remains unrepresented. We have, however, heard Mr. Rajendra, learned counsel, for the Revenue. Mr. Rajendra has submitted that what the assessed has sold is its right of exploitation and distribution of the films, which was the stock-in-trade of the firm and, thereforee, the amount received by the assessed really represents the profits which it would have earned had the right for further exploitation of the films been not surrendered in favor of S/Shri B. N. Gupta and Vijay Sharma. He has thus contended that the amount received was in the nature of a revenue receipt in the hands of the assessee.
7. The question whether a receipt is capital or revenue in nature has invariably presented difficulties in solution despite the fact that attempts have been made time and again to enunciate various principles to distinguish a capital receipt from revenue receipt. But, as observed by the Supreme Court in CIT vs . Rai Bahadur Jairam Valji : [1959]35ITR148(SC) , and often repeated thereafter, it is not possible to lay down any single or exhaustive test as infallible or any single criterion as decisive for determination of the question. The authorities having some bearing on the question are valuable only as indicating the broad factors to be taken into consideration for reaching a conclusion. The character of a receipt cannot thus, be adjudged by applying some set principles. It has to be determined on a proper appreciation of guiding factors of each transaction with reference to facts and circumstances of each case, which may differ from case to case. Broadly stated, to determine the character of a receipt in such like cases what has to be seen is whether the venture in which an assessed is giving up its rights was by itself the profit-earning apparatus and such an action would disrupt the entire profit earning structure of the assessee. If that be so, anything received would partake the character of a capital receipt. But, where, however, the venture is only for the purpose of carrying on the existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt.
8. thereforee, the question which falls for consideration in the instant case is whether the two partnerships entered into by the assessed were ventures for only facilitating carrying on its existing business of film distribution or these were the structures of profit-making apparatus of the assessee. This question, obviously, cannot be answered by merely taking note of the terms of the sale agreements, dt. 28th December, 1970. It will be necessary to take into account the nature and the purpose for which the assessed had entered into the afore noted two partnership, in which it has now sought to relinquish its interest by way of sale to S/Shri B. N. Gupta and Vijay Sharma.
As noticed above, the assessed was engaged in the business of distribution and exhibition of cinematographic films, for which it was entering into independent agreements with the producers of each of the films separately. It is apparent from cl. 3 of the two deeds of partnership, the assessor's partnership with outsiders was for a limited purpose for the business under the rights of distribution acquired by it in respect of the films mentioned therein with the respective producers under the respective agreements.
The two covenants reflect the main object of the assessed joining hands with nine persons, viz., for raising finance from them to the extent of 3/4th of the total amount payable to the producers of the films by the assessee. As per the partnership deeds, despite substantial investment by the other partners, the distribution and exploitation of films was to be done exclusively by the assessed and it was only the assessed who was to deal with the producers and the exhibitors and none else. In a nutshell, the arrangement was only of financing by the other partners for which they were to get return on their investments in the form of profits of the firm and nothing more. They had absolutely no part to play in the distribution and exploitation of the films. Such arrangements are normal features in the film trade to raise finance.
9. On conspectus of these facts, we feel it difficult to hold that the two partnerships were the structure of the profit-earning apparatus of the assessee. In our view, these two ventures were for the limited purpose of carrying on assessor's existing business of film distribution and exploitation more effectually and effectively by taking the financial help of others. Though the deeds of partnership seek to reflect the acquisition of films for distribution and exploitation as joint ventures but in effect these were only entered into by the assessed for a limited purpose of obtaining and securing commercial assets in the form of the aforementioned films, which were undoubtedly, stock-in-trade of the assessed in the first instance and later of the two firms. Any compensation received for relinquishing interest in such an asset would be a revenue receipt.
10. It is in the light of this background that we have to consider the nature of the transaction which the assessed has entered into with S/Shri B. N. Gupta and Vijay Sharma. To appreciate the exact nature of the transaction between the assessed and S/Shri B. N. Gupta and Vijay Sharma, it will be useful at this stage to refer to some terms of one of the agreements dt. 28th December, 1970 :
'And Whereas as orally settled between the 'Sellers' and the 'Purchasers'. The 'Purchasers' are willing to take rights of the 'Sellers' for the said five pictures in the said firm 'Film Friends', the 'Sellers' have willingly agreed to retire from the partnership firm. The 'Purchasers' have further agreed to pay to the 'Sellers' compensation for the unexpired period of the contracts for all the five pictures above named and the 'Purchasers' have further agreed to associate themselves with other partners of the firm 'Film Friends' in place of 'Sellers'.
'And whereas in consideration of the 'Sellers' relinquishing their rights in favor of the 'Purchasers' for the unexpired period of the distribution contracts of these pictures the 'Purchasers' have agreed to pay to the 'Sellers' Rs. 30,500 (Rupees thirty thousand and five hundred only) by way of compensation for the unexpired period of the contracts :
It is evident from the above extracted terms of agreement that what the assessed had sold to S/Shri B. N. Gupta and Vijay Sharma was its interest/right of exploitation of the films for the unexpired period of distribution contracts with the producers of five films. In effect the assessed sold for consideration its interest in the commercial assets in two ventures limited to the distribution and exploitation of a few films and nothing more, which, we feel, does not amount to abandoning of any capital asset by the assessed as such so as to make the compensation received a capital receipt. The decision of the Madras High Court in A. K. Sharfuddin vs. CIT (supra), relied upon by the Tribunal, has no applicability on the facts of the instant case. In that case, while laying down a general proposition that compensation received by one partner of a partnership from another partner for relinquishing all his rights in the partnership is compensation for loss of a capital asset and is not a trading receipt, the Madras High Court had relied upon an earlier decision of that Court in Rangaswami Naidu vs . CIT : [1957]31ITR711(Mad) , which in turn had dealt with a case of a receipt of compensation for transferring a managing agency, that obviously was a payment for its extinction as it had resulted in putting an end to the entire profit earning apparatus of that assessee. That is not, as noticed above, the case in hand. The decision in A. K. Sharfuddin's case (supra) is thus, clearly distinguishable on facts.
11. Some support to this view is lent by a judgment of the Supreme Court in CIT/CEPT vs . South India Pictures Ltd. : [1956]29ITR910(SC) . In that case the assessed was primarily in the business of distribution of films. It was its practice to produce or purchase films and distribute the same for exhibition. In the course of the business, the assessed advanced monies to a film-producing concern and under the agreement with the concern acquired certain rights of distribution over three films produced by them. After exploiting the rights of distribution of those films for some time and after the monies advanced by the assessed had been fully repaid, an agreement was entered into by the assessed with the producers, cancelling the agreement relating to the distribution rights of the films, in consideration of which the assessed was paid a certain sum of money. The question that arose for consideration by the Supreme Court was whether that receipt was of a capital or revenue nature. By a majority view it was held that the compensation paid was not for preventing the assessed from carrying on its business but one paid in the ordinary course thereof to adjust the rights between the assessed and the producers of the films and that the agreement cancelled could not be deemed to be such a fundamental asset of the assessee, on which his whole trade had been built, so as to constitute the framework of the profit-making apparatus.
12. For the aforesaid reasons, we are of the opinion that the sum of Rs. 62,500 received by the assessed represents a revenue receipt in its hands and is, thereforee, liable to be assessed to tax. In the result, our answer to question No. 1 is in the negative, that is, in favor of the Revenue and against the assessee. The answer to question No. 1 being in the negative, it is not necessary to render any opinion on question No. 2. Since no one has appeared on behalf of the assessed there will be no order as to costs.