1. These bunch of appeals by the assessee are being disposed of by a common order for the sake of convenience. The appeals arise out of the separate orders of the CIT(Appeals)-VIII, Madras, dated 26-11-1992 for the assessment years 1988-89 and 1989-90 and dated 29-1-1993 for the assessment years 1986-87 and 1987-88. Two common issues are involved in these appeals. The first point is with regard to taxability of the royalty income from sale of lease rights of films. The next common ground in these appeals is with reference to the sale of lease rights to related concerns and the addition made in this connection.
2. The assessee is an individual and derives income from film distribution under the name 'Vijaya Pictures', Mayavaram and theatre income from M/s. Vijaya Theatres, Kumbakonam. We shall first take up the appeal of the assessee for the assessment year 1988-89 as the Assessing Officer has passed speaking order for the said assessment year and followed that order for other years. The facts relating to assessment year 1988-89 are also admittedly the same as in other assessment years, viz., 1986-87, 1987-88 and 1989-90.
3. During the course of assessment proceedings the Assessing Officer observed that the assessee has sold lease rights of 16 films (mentioned at page 2 of the assessment order). The assessee declared income of Rs. 1,73,600 on account of sale of lease rights of these films. The assessee as lessor sold the films to other parties (lessees) for a certain period as per agreements executed and in the agreements a fixed amount is shown as advance towards sale of lease rights for a particular number of years. The assessee was showing a part of the advance as her income. For instance if the distribution rights and exhibition and exploitation of the films are sold for five years for a consideration of Rs. 10,000, then the assessee was showing only a sum of Rs. 2,000 as her income in spite of the fact that she received Rs. 10,000 from the lessees, which the assessee was describing as advance against sale of lease rights of the films. The Assessing Officer considered that as soon as the lease agreement was signed by the assessee, she lost control over exhibition and exploitation rights of the films. So the leasehold rights have actually been transferred under agreements with the lessees during the period the agreement is in force. The advance received by the assessee was not at all refundable to the lessees even if the agreements were cancelled. The Assessing Officer came to the conclusion that the actual transfer of lease rights had taken place during the year and full consideration has also been received during the year and the assessee has got full rights over the lease consideration. The assessee has got no rights of distribution, exhibition and exploitation in the specified areas after signing of the agreements. The Assessing Officer pointed out that no basis was shown by the assessee according to which she could spread the income over a period of five years, i.e., current year and four years in future, for the period of agreement. The Assessing Officer, therefore, held that the entire amount received by the assessee from the lessees in the accounting year relevant to assessment year 1988-89 has to be considered as the income of the assessee during the year on accrual basis as well as on cash basis of accounting. For the reasons detailed in the assessment order for the assessment year 1988-89 the Assessing Officer considered the sale of lease rights in the hands of the assessee for the other assessment years under consideration also.
4. The assessee took up the matter before the CIT(Appeals) and the CIT(Appeals) confirmed the action of the Assessing Officer vide her appellate order dated 26-12-1992 for the assessment year 1988-89 which was followed by her while disposing of the assessee's appeals for the assessment years 1986-87, 1987-88 and 1989-90. The CIT(Appeals) came to the conclusion that the assessee on transferring the distribution, exhibition and exploitation rights of the films, has collected the entire value of the rights sold when the agreement was executed. The CIT(Appeals) examined the agreements executed by the assessee and on the basis of clauses 2 and 5 of the agreements she came to the conclusion that the assessee became the owner of the entire sale consideration at the time of receipt and had a legal claim over the sale proceeds. It was also noticed that the assessee followed mercantile system of accounting and it was not disputed that the right to receive the consideration arose at the time the lease agreements were executed, and the entire consideration was also realised at that time. The CIT(Appeals), therefore, held that the rights to receive the consideration having accrued when the agreements were executed, the entire sale consideration is assessable in the year of receipt. It was further held that merely because the payment was referred to as an advance in the lease agreements which was to be apportioned for each year of the lease, does not change the position that the entire receipt was a trading receipt and therefore, assessable in the year of receipt itself. The CIT(Appeals) also held that when the assessee had claimed the entire cost of purchase of distribution rights in the year of purchase as permitted under rule 9B of the Income-tax Rules, there was no justification for not accounting for the entire sale consideration when the distribution rights were in turn sold by the assessee. It was therefore, held that the entire sale consideration being assessable in the year of receipt, the method of accounting adopted by the assessee cannot be accept as correct and the addition representing receipts accrued and received at the time of sale was accordingly confirmed.
5. These findings of the first appellate authority have been challenged in various grounds of appeal taken by the assessee before us. In fact grounds 1 to 8 for the assessment year 1988-89 before the Tribunal relate to the addition of Rs. 6,51,402 as royalty income. The assessee has shown an income of Rs. 1,73,600 from the said transaction as against Rs. 8,25,002 worked out by the Assessing Officer. The assessee's counsel filed written submissions and income and expenditure account and balance sheets with relevant schedules and argued that on the strength of the recitals in the lease agreements the assessee offered the royalty income proportionately in the respective years in which the lease agreements were in existence. It was further argued that the advance receipt of lease rentals which have not matured on the date of closure of the accounts were carried forward as current liability. The learned counsel for the assessee further argued that in the balance sheets of the respective years the remaining portion of the lease rental which was not offered for taxation, was shown in the liabilities side under the head 'Current liabilities'. It is contended that this method of accounting the lease rentals had been accepted and followed by the assessee in many number of years. Reliance was also placed on the orders of the C-Bench of this Tribunal in the case of S.Gurunathan Chettiar (assessee's husband) [IT Appeal Nos. 649 to 652 (Mad.) of 1983, dated 12-5-1995] for the assessment years 1986-87 to 1989-90 and in the case of G.S.R. Krishnamurthy [IT Appeal No. 4141 (Mad.) of 1988 dated 18-2-1994]. The learned counsel for the assessee also relied on the decision of the Supreme Court in the case of CIT v.U.P. State Industrial Development Corpn. [1997] 225 ITR 703/92 Taxman 45, wherein it was held that principles of commercial accounting should ordinarily be applied in ascertaining the profit and gains. The learned counsel therefore, urged that the additions made towards royalty income be deleted.
6. The learned Departmental Representative, on the other hand, relied on the orders of the authorities below in support of his argument that advance received by the assessee on account of sale consideration of lease rights of the films are not 'advance' in the normal course but are in the nature of trading receipts assessable in the year of receipt. It is therefore, submitted that no interference is called for in this regard.
7. We have examined the rival submissions and have also carefully perused the orders of the authorities below. We have also considered the paper book filed by the assessee's counsel other than those papers which are written in Tamil. For the sake of convenience, we would discuss one of the agreements executed by the assessee with M/s. Sabari Enterprises, Vellore, to whom the assessee has sold the rights of exploitation, distribution and exhibition of the film 'Thiruvilayadal' for Rs. 2.10 lakhs for a period of five years by agreement dated 1-12-1987 for the area of Madras City, North Arcot, South Arcot and Chengleput District including Pondicherry, because all other agreements are on similar lines. In consideration of the lease rights of the film 'Thiruvilayadal' to lessees by the assessee, the lessees agreed to pay the assessee-lessor an advance of Rs. 2.10 lakhs and the same was paid in five instalments as mentioned in clause 2 of the lease agreement dated 1-12-1987. The terms of the agreement with M/s. Sabari Enterprises are reproduced below : "2. In consideration of the above lease rights conferred upon the lessors the lessees agree to pay the lessors as advance a sum of Rs. 2,10,000 (Rupees two lakhs ten thousand only) and the same shall be paid in and as advance by the lessees as follows : Rs. 10,000 (Rupees ten thousand only) in cash on signing of this agreement.
Rs. 50,000 (Rupees fifty thousand only) by Draft on or before 15-12-1987.
Rs. 40,000 (Rupees forty thousand only) by the Nedunquadi Bank Ltd., Vellore branch cheque No. 083350, dated 3-12-1987.
Rs. 1,00,000 (Rupees one lakh only) by T. N. B. Ltd. Vellore, cheque No. 083340, dated 15-1-1988 and the balance of Rs. 10,000 (Rupees ten thousand only) by T. N. B. Ltd. Vellore cheque No. 070257, dated 20-1-1988.
The above advance sum of Rs. 2,10,000 paid by lessees as advance and to be appropriated by the lessors as follows : 3. It is distinctly understood that the amount of consideration is only for grant of the rights of exploitation distribution of the said picture and the lessees have agreed to take out the prints of the said picture required by them entirely at their own cost.
4. The lessors agree to deliver letters to the laboratory to take three prints of cineascope and four prints of 35MM prints for the said picture at lessee's own cost. In case the lessees require any extra print or prints for the said picture, the lessors agreed to deliver lessees to the Laboratory to take such extra printor prints for the said picture, at lessees cost price plus a royalty of 15 per cent over the total cost subject always to the fact that the negative of the said picture is in good condition to make prints.
5. The lessees agree not to exploit the said picture any where outside the territory for which the rights hereinafter granted and have no rights to do so except in the territory which are granted by the agreement. In the event of the lessees violating this part of the agreement by distributing or exploiting the rights outside the territories, for which the rights hereinafter granted, the lessors will be at liberty to cancel this agreement, and repossess the prints and then forfeit all amounts paid by the lessees and to claim further damages, as the case may be.
6. The lessees hereby agree not to make any duplicate negatives from the positive prints supplied to them nor reproduce the sound track in any other manner than the reproduction of the same in the usual manner in the regular exhibition theatres in the territory leased herein. The lessees further agree that they shall not cut or alter or interfere with the prints supplied to them.
7. The lessees agree not to sub-lease transfer or allienate the rights of the said picture to any other party or parties firm or company without prior consent of the lessors in writing.
8. At the expiry of the period of this agreement as calculated herein the lessees shall cease to have any rights whatsoever over the picture and the lessees shall return to the lessors and positive prints in their possession in whatever condition they might then be under paid parcel in the event of any default in returning the print the lessees hereby agree to pay Rs. 300 per print for each day of such default in addition to any loss claimed by the lessors.
9. The essence of this agreement is the prompt payment of instalment of cheques by the lessees as mentioned in clause 2 supra and if at any time the lessees fail to make payment and dishonour the cheques in full the lessors shall have rights without the prejudice to any of the rights cancel the agreement and make other arrangements for the exploitation of the said picture in the said territories and the lessors shall forfeit all payments made by them towards consideration amount and the lessees should have to compensate any loss suffered by the lessors. This agreement is valid only after the payments and cheques is fully settled and honoured by the lessees." The assessee has accounted for only Rs. 50,000 as income for the assessment year 1988-89 out of the total amount of Rs. 2.10 lakhs received by her as above, which is styled as 'advance' in the agreement. The only issue to be considered is whether the assessee's claim is correct by declaring a sum of Rs. 50,000 out of the total receipts of Rs. 2.10 lakhs in respect of the film 'Thiruvilayadal' as income for the assessment year 1988-89 or, whether the entire amount of Rs. 2.10 lakhs is includible in her total income for the assessment year under consideration.
8. Under section 4 of the Income-tax Act, 1961, income-tax shall be charged for any assessment year in accordance with and subject to the provisions of the said Act in respect of the total income of the previous year of every person. Section 5 of the Income-tax Act laid down the scope of 'total income'. Section 5(1) provides : "5(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India." It is clear from the provisions of section 5(1) reproduced above, that whatever income is received or deemed to be received in India by an assessee, or on behalf of an assessee, or whatever income accrues or arises or is deemed to accrue or arise to him in India by an assessee, is taxable in that year.
9. In the case of CIT v. Stanton & Stavely (Overseas) Ltd. [1984] 146 ITR 405/[1983] 13 Taxman 162 (Cal.), the brief facts of the case were that the assessee entered into an agreement with Indian Iron & Steel Ltd. (IISCO for short) on 9-10-1956. Under that agreement the assessee was entitled to receive commission from IISCO. It was claimed by the assessee that though the amounts were described as commission in the agreement between the assessee and IISCO, the amounts received were actually in the nature of royalty and fees covered by the exemption provided in Rule 1(ix) and Rule 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964, and were liable to be excluded from the total income of the assessee in computing the chargeable profits for the assessment years 1965-66 to 1969-70. The Tribunal after reading various clauses in the agreement, came to the conclusion that the amount received by the assessee represented fees for rendering certain technical services envisaged in sub-clauses (ii), (iii) and (iv) of clause 2 and also royalties payable to the assessee by IISCO in respect of the rights and privileges to be afforded by it as per terms of the agreement. In that case the Tribunal referred to the meaning of the expression "royalty" and to Wharton's Law Lexicon (14th edn.) where the terms have been explained as a payment to patentee by agreement on every article made according to his patent or to an author by a publisher on every copy of his book sold or to the owner of minerals for the right of working the same on every ton or other weight raised.
The Tribunal also referred to the Law Dictionary by Mozely & Whitley's which had been relied upon by the Departmental representative, where 'Royalty' had been described as a pro rata payment to a grantor or lessor on the working of the property leased or other wise on the profits of the grant or lease. The term was used especially with reference to the patents, mines, copyrights, etc. The nature of royalty came up for consideration before the Judicial Committee as mentioned at page 414 in Stanton & Stavely (Overseas) Ltd's case (supra) and at pages 522-523 of the report, Lord Wright, observed as follows :- "The royalty is 'in substance a rent; it is the compensation which the occupier pays the landlord for that species of occupation which the contract between them allows' . . ." After examining the various decisions, the Tribunal came to the conclusion that certain amounts were received by the assessee on account of technical services to be rendered by way of consultancy or by way of training to the employees of the IISCO. The Tribunal was of the opinion that the amount received in respect of certain services could be called fees for rendering technical services. Commission, on the other hand, would take in payments like broker's remuneration, agent's remuneration, or payments, according to the Tribunal. The Tribunal found that the receipts in question would be more appropriately covered by the term 'royalties' and 'fees' rather than by the expression 'commission'. On a reference, the Hon'ble Calcutta High Court held that it cannot be said that the Tribunal came to an improper or unreasonable or illegal conclusion or violated any principle of law in construing the provisions. Their Lordships pointed out that the nomenclature given by the parties in an agreement, which is not defined in the Act, would not be conclusive while interpreting the document.
Therefore, in the aforesaid case, the Hon'ble Calcutta High Court confirmed the finding of the Tribunal that the amounts described as commission in the agreement between the assessee and IISCO were in the nature of royalties and fees for the technical services and not commission, though the word 'commission' was used in the agreement between the parties.
10. Similarly, in the case of Eklingji Trust v. CIT [1986] 158 ITR 810/26 Taxman 9 it was held by the Hon'ble Rajasthan High Court that the name given to the transaction by the parties concerned does not necessarily decide the nature of the transaction. In such a situation, the question always is what is the real character of the receipt, not what the parties call it.
11. Keeping in view the ratio laid down in the aforesaid decisions and the provisions of sections 4 and 5 of the Income-tax Act, 1961, it has to be examined whether the amount of Rs. 2.10 lakhs received by the assessee was deposit or advance against the exploitation, distribution and exhibition rights of the film 'Thiruvilayadal' granted to M/s.
Sabari Enterprises for a period of five years. In the agreement dated 1-12-1987 the said amount of Rs. 2.10 lakhs was shown as 'advance' by the lessees. As held by the Calcutta High Court in the case of Stanton & Stavely (Overseas) Ltd. (supra), the nomenclature given by the parties in an agreement, which is not defined in the Act, would not be conclusive while interpreting the document. In this connection we are reminded of the observation of the Hon'ble Supreme Court in the cases of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 and McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 as under : "... It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of the transaction." "It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay's case [1981] 2 WLR 449 [1982] AC 300, Burmah Oil [1982] Simon's Tax Cases 30 and Dawson's case [1984] All ER 530; 2 WLR 226 (HL), to expose the devices for what they really are and to refuse to give judicial benediction." 12. The assessee received total amount of Rs. 2.10 lakhs from M/s.
Sabari Enterprises and this amount is neither refundable by the assessee nor can be claimed by the lessees from the assessee under any circumstances. As per agreement, in the event of the lessees violating any part of the agreement by distributing or exploiting the rights of the firm outside the territories for which the rights were granted, the lessors will be at liberty to cancel the agreement and repossess the prints and forfeit all amounts paid by the assessee and to claim further damages as the case may be. The sum of Rs. 2.10 lakhs is neither advance or a deposit but is a price paid by the lessees towards the cost of exploitation, distribution and exhibition rights of the film 'Thiruvilayadal' for five years. By virtue of agreement dated 1-12-1987 with the lessees, the assessee acquired the right to receive and had actually received the sum of Rs. 2.10 lakhs during the period 1-12-1987 to 20-1-1988, which is relevant to the assessment year 1988-89. The bifurcation of this amount for different periods as mentioned in para 2 of the agreement dated 1-12-1987 has no meaning except a crude untenable device to avoid tax, because such a device has no foundation at all. Since the amount of Rs. 2.10 lakhs is neither refundable by the assessee nor the assessee is bound to pay any interest on that sum to the lessees and the amount was received by the assessee for grant of the rights of exploitation, distribution and exhibition of the picture, we hold that the said sum of Rs. 2.10 lakhs is the assessee's income which has accrued to her and which has been received by her in the accounting year relevant to the assessment year 1988-89 and is correctly includible in her total income for the assessment year 1988-89. In view of the provisions of section 5(1) of the Income-tax Act, the amount of Rs. 2.10 lakhs is chargable to tax under section 4 of the Income-tax Act, 1961. Apportionment of the said sum of Rs. 2.10 lakhs for five years as per clause 2 of the agreement dated 1-12-1987 has no meaning because the terms of the agreement cannot override the provisions of the Income-tax Act enacted by the Legislature.
13. The learned counsel for the assessee has relied on the orders of the Tribunal, C-Bench, Madras in the cases of G. S. R. Krishnamurthy (supra), S. Gurunathan Chettiar (supra). But we found that the abovementioned legal position was not brought to the notice of the Tribunal in those cases and therefore, the true legal nature of the receipt could not be considered by the Tribunal. The cases relied on by the assessee's counsel are therefore, clearly distinguishable in View of the legal position explained above. The amount of Rs. 2.10 lakhs received from M/s. Sabari Enterprises, Vellore is also not in the nature of royalty because the term 'royalty' is normally used for payment for copyright, patents or licence or technical information, etc., whereas the assessee in the present case, received Rs. 2.10 lakhs for lease of the film 'Thiruvilayadal' for commercial exploitation. It may be emphasised that no accounting standard could override the provisions of law and the amount of Rs. 2.10 lakhs had accrued to the assessee and has also been received by her in the previous year relevant to the assessment year 1988-89, which is correctly includible in the total income of the assessee for the assessment year under consideration.
14. It may be mentioned that the law changes due to amendment of law by Legislature or evolution of law by judicial precedents and pronouncements. Due to judicial decisions a particular provision of law may be construed in a different manner than the manner in which it was construed earlier. Therefore, the Tribunal need not follow the ratio laid down in its earlier orders if certain judicial precedents which were not brought to its notice earlier or provisions of law came to its knowledge subsequently. It may happen that all the aspects of the case might not have been brought to the notice of the Tribunal earlier when the same issue was decided. A Tribunal may reach a different conclusion in a particular case if after considering all the aspects of the case and other material on record which were not considered earlier, it feels that its earlier decision does not lay down good law. It would rather be incongruous to follow an earlier decision on the same issue if after considering all the aspects of the case and other material on record which came to the notice of the Tribunal subsequently, the Tribunal considered that a different decision would be correct than the earlier one. In the name of judicial uniformity the error should not be perpetuated when different conclusion seems to be correct on the basis of judicial precedents and other material available on record.
"To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience" - Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 (SC).
14.1 In the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC), the facts of the case were that, the assessee, a company engaged in the manufacture and sale of paints, had, as a consistent practice, valued its goods-in-process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. For the assessment years 1963-64 and 1964-65, the ITO held that there was no justification to recognise the practice of valuing stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be valued at cost (viz., raw material plus expenditure) or market price, whichever was lower. The ITO therefore, calculated the value of the opening and closing stocks by adding the overhead expenditure. The issue travelled up to the Hon'ble Supreme Court. The Apex Court held that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained, and if he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Act. In that case it was found that the profits of one year was likely to be shifted to another year which would be an incorrect method of computing profits.
Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee-company was found to be such that income could not properly be deduced therefrom. The Apex Court therefore, held that it was not only the right but the duty of the ITO to act in exercise of his statutory power for determining what, in his opinion, would be the correct income. It was further held that it is incorrect to say that the ITO is bound to accept the system of accounting regularly followed by the assessee the correctness of which had not been questioned in the past.
There is no estoppel in these matters and the ITO is not bound by the method followed in the earlier years.
15. The ratio laid down in the aforesaid case is clearly applicable to the present assessee's case. The assessee is bifurcating the trading receipts of one year into five years, thereby shifting the profits of one year into five years which is not a correct method of computing the profits and gains of business. When the assessee has debited the entire cost of acquisition of rights of distribution, exploitation and exhibition of the films to the profit and loss account, there is no reason why the entire amount received by her from the lessees on account of sale of lease rights of the films should not be credited to the profit and loss account in one year. There is no estoppel in these matters and the Assessing Officer is not bound by the incorrect method of accounting followed by the assessee, or even accepted by the Department in earlier years. The Assessing Officer, therefore, correctly made addition of Rs. 6,51,402 to the total income of the assessee for the assessment year 1988-89 because the whole amount has accrued to the assessee and received by her in the accounting year relevant to the assessment year 1988-89.
15.1 We have looked at the case of the assessee from a different angle also. The assessee has debited the cost of entire cost of acquisition of the rights of exploitation, exhibition and exploitation of the films to the profit and loss account whereas only 1/5th of the amount has been taken into consideration for the purpose of computing the income for assessment year 1988-89. When the entire cost of acquisition of the films is debited to the profit and loss account, there is no justification for not showing the value of closing stock of the films in the P&L account. It cannot be said that the value of closing stock of the films leased out by the assessee to various lessees was nil as on 31-3-1988 because she has received the amount of Rs. 8,25,002 from various lessees, whereas the assessee has shown only an income of Rs. 1,73,600 from the total receipts of Rs. 8,25,002. Even if it is presumed, without admitting, that the assessee has received Rs. 8,25,002 as advance from various lessees for exploitation of the films for five years and the amount of Rs. 1,73,600 pertain to assessment year 1988-89, then the balance amount of Rs. 6,51,402 would be the value of the closing stock of the rights for exploitation of the films possessed by the assessee and the value of such rights should be credited to the profit and loss account. If the sum of Rs. 6,51,402 is treated as value of closing stock of the lease rights possessed by the assessee for various films, then the result would be the same and the assessee's income would be enhanced by the said amount of Rs. 6,51,402, even if the receipt is considered as per terms of the agreement, which is however, only a wishful thinking. When the assessee has received total amount of Rs. 8,25,002 which is not refundable then there is no other conclusion possible except that the amount of Rs. 6,51,402 constitute the value of the closing stock of the lease rights possessed by the assessee in respect of various films which have been further leased out by the assessee to various lessees. It may, however, be mentioned that by her private arrangement and agreements, the assessee cannot override the provisions of law and change the legal character of the receipt.
16. The assessee has executed similar agreements with various lessees for the other films as mentioned by the Assessing Officer in para 16.1 of his assessment order for 1988-89. The position in respect of those films remains the same as in respect of 'Thiruvilayadal'. The total amount received by the assessee in the accounting year relevant to the assessment year 1988-89 for commercial exploitation of the films from the lessees in respect of 13 pictures was Rs. 8,25,002, whereas the assessee has shown only a part of lease income at Rs. 1,73,600 as her income. We, therefore, confirm the entire addition of Rs. 6,51,400 made to the total income of the assessee for the assessment year 1988-89 and dismiss the grounds raised by the assessee.
17. The learned counsel for the assessee stated that in the balance sheets of the respective years the remaining portion of the lease rental which was not offered for taxation, was shown in the liabilities side under the head 'Current liabilities'. In this connection we may state that the entries in the books of account or in the balance sheets of the assessee are not reliable for determining the legal nature of the rights and obligation of the parties to the transaction. When, as already stated, there was no liability of the assessee to refund any amount to the lessees in respect of grant of lease for exploitation of the rights of exhibiting the pictures by the assessee to the lessees, then the showing of the amount as 'current liabilities' in the balance sheet has no relevance or meaning because there is no liability to any one in respect of the amounts shown under the head 'Current liabilities'.
18. The next ground is with regard to sale of lease rights to related concerns. The grounds raised by the assessee for the assessment year 1988-89 (ground Nos. 9 to 17) is that the CIT(Appeals) should have deleted the addition made by the Assessing Officer adding the minor grand daughter's income in the hands of the assessee. The Assessing Officer found that the assessee claimed to have sold the lease rights of distribution, exhibition and exploitation of Tamil film 'Chinna Thambi Periyathambi' to M/s. Sri Devi Films, a proprietary concern of minor B. Sridevi represented by mother and guardian Smt. Vijaya. The assessee has claimed to have sold the lease rights by an agreement dated 1-6-1987 to for a period of five years (1-6-1987 to 26-2-1992) for a sum of Rs. 1,50,000 and the lease rights cover the areas, Tiruchy, Thanjavur, Pudukottai Districts including Karaikal. The assessee had originally purchased the lease rights of distribution, exploitation and exhibition of the film 'Chinna Thambi Perim Thambi' in the revenue districts of Tiruchy, Thanjavur and Pudukottai from its producers M/s. Chemba Creations, Mylapore, Madras by an agreement dated 13-10-1986 for a period of five years from the date of release of the picture at a cost of Rs. 5.75 lakhs. The cost including print came to Rs. 5.90 lakhs. The Assessing Officer further found that the said picture was released on 27-12-1987 and was exhibited and exploited by the assessee up to 31-5-1987 and the collection made by the assessee during this period was under : The Assessing Officer observed that taking into account the collections of the preceding months, the sale of lease rights of the above film at Rs. 1.50 lakhs is very low. Even going by the collections for the later period, i.e., from 1-6-1987 to 31-3-1988 at Rs. 2,78,943 after the sale the Assessing Officer came to the conclusion that the sale price is unreasonably low, especially when compared to the original cost at which it was purchased by the assessee only four months earlier. The Assessing Officer noticed that the prints of this picture were not handed over to the lessee M/s. Sri Devi Films. He also noticed that M/s. Sri Devi Films acquired the lease rights and again leased out the picture to the assessee on commission basis at 5 per cent of the realisation. Thus the Assessing Officer came to the conclusion that by one common agreement the assessee has sold the lease rights of the film to M/s. Sri Devi Films and received the lease rights of distributions, exhibition and exploitation from her. The Assessing Officer found that M/s. Sri Devi Films is a related concern, i.e., minor Sri Devi is the grand daughter of the assessee, and by creating the situation of a notional sale the assessee has tried to reduce the tax burden by offering less income as sale consideration in place of actual collections realised from exhibition of the film. The Assessing Officer stated that the assessee had admitted income by way of royalty a sum of Rs. 30,000 from this picture and that in the absence of the alleged sale agreement, she would have accounted for Rs. 2,78,943 as collections from the picture for the period 1-6-1987 to 31-3-1988. The Assessing Officer then stated that minor Sri Devi who is the proprietress of lessee concern has no experience or expertise for exhibition or exploitation of the films and that she did not carry out any part of the actual distribution work as the same distribution rights were retained by the assessee. The assessee has realised collections from the exhibition of the picture from various theatres in the areas of Tiruchy, Tanjore, Pudukottai till 31-3-1988 and has entered the full collections in her ledger, and on 31-3-1988 the assessee has transferred an amount of Rs. 1,14,995 towards share of M/s. Sri Devi Films. There was no actual transfer of share of collections from the picture to the lessee and it was only book entry made at the year end by way of book adjustment. The Assessing Officer also found that the amount of Rs. 1,14,995 has been arrived at after deducting the sale consideration of Rs. 1.50 lakhs from the total share of monthly collections of Rs. 2,64,995 from the picture 'Chinna Thambi Periya Thambi'. It was then found that on the alleged sale of lease rights on 1-6-1987 the assessee did not receive the consideration of Rs. 1.50 lakhs on 1-6-1987, there was no actual money transfer by lessee and the account of Sri Devi Film was then credited with monthly share of collection for about 10 months, i.e., Rs. 2,64,995 and the net balance of Rs. 1,14,995 (Rs. 2,64,995 - Rs. 1,50,000) was shown as outstanding on 31-3-1988. Since the amount has not been paid by the assessee to Sri Devi Films, there was no actual transfer of money and the entries are made by book adjustments. The Assessing Officer accordingly concluded that the actual collections realised during the period 1-6-1987 to 31-3-1988 from this picture of Rs. 2,78,943 is the assessee's income and since she has admitted Rs. 30,000 as realisation from the film, the balance amount of Rs. 2,48,943 was considered as income of the assessee and added to her total income. In appeal the CIT(Appeals) upheld the action of the Assessing Officer. The assessee felt aggrieved and has preferred the present appeal before the Tribunal.
19. It is argued by the learned counsel for the assessee that there is no legal bar for a grandmother to have transaction with her grand daughter, either in general law or under the provisions of Income-tax Act including section 64 of the Income-tax Act, 1961, especially when the grand daughter happens to be the daughter of the daughter. It is further argued that the CIT(Appeals) should have followed the Supreme Court's dictum, that what is apparent is 'real', especially in the admitted absence of any evidence to show that the assessee's transaction with her grand daughter was sham and was not intended to be acted upon. The profits that accrued to the minor grand daughter both in law and on facts belonged to the minor and have been enjoyed by the minor as such and assessed as such by the Department in the assessments under section 143(3). It is contended that the CIT(Appeals) should have deleted the additions especially in the admitted absence of any evidence to show that the profits that have accrued to the minor have reached back the coffers of the assessee either directly or indirectly in any manner or to any extent and the addition in the hands of the assessee per se is double taxation. It is therefore, pleaded that the assessee's claim for deleting the additions made and sustained by the CIT(Appeals) be accepted.
20. The learned Departmental Representative, on the other hand, supported the orders of the authorities below on this issue, and argued that the name of the minor grand daughter has been used to reduce the burden of taxation by, the assessee and in the circumstances the transaction was not a genuine one and the inclusion of the collection realised of Rs. 2,48,943 as the assessee's income for the assessment year 1988-89 should be confirmed.
21. We have carefully considered the rival submissions, facts of the case and material on record. The facts mentioned by the Assessing Officer in paras 17 and 18 of the assessment order have not been disputed. The fact remains that the assessee has purchased the lease right of distribution, exhibition and exploitation of the film 'Chinna Thambi Peria Thambi' from the producers, M/s. Chemba Creations, Madras by an agreement dated 13-10-1986 for a period of five years at the cost of Rs. 5.75 lakhs. The cost including the print cost was Rs. 5,90,000.
The assessee has realised an amount of Rs. 3,83,817 up to March 1987, Rs. 1,42,863 up to April 1987 and Rs. 1,60,253 up to May 1987 on account of exhibition of the said film. On 1-6-1987 the assessee has claimed to have sold the lease rights of distribution, exhibition and exploitation of the film to M/s. Sri Devi Films, a proprietary concern of minor B. Sri Devi, represented by mother and guardian Smt. B.Vijaya. At the same time the assessee acquired the lease rights of the said film from the said M/s. Sri Devi Films on commission basis @ 5 per cent of the collections. It is the assessee who has done all work relating to exhibition, exploitation and distribution of the film 'Chinna Thambi Peria Thambi' M/s. Sri Devi Films played no role either in the exhibition or distribution of the said film. The film in fact remained with the assessee. Except book entries no financial transaction had taken place between the assessee and M/s. Sri Devi Films. There is no evidence on record to show as to why the agreement dated 1-6-1987 was executed by the assessee with the said concern, which is proprietary concern of assessee's minor grand daughter B. Sri Devi, who has no experience or expertise for exhibition or exploitation of the films. Thus, M/s. Sri Devi Films, the lessee, did not carry out any part of the actual distribution work of the film as the distribution rights were retained by the assessee. These facts this speak themselves that the assessee by creating the situation of a notional sale, had tried to reduce her tax burden by offering loss income as sale consideration in place of actual collections realised from exhibition of the film. Therefore, the actual collections realised during the period 1-6-1987 to 31-3-1988 from this picture of Rs. 2,78,943 is in fact the income of the assessee and after considering the sum of Rs. 30,000 already admitted by her as realisation of the film, the balance amount of Rs. 2,48,943 has rightly been considered as income of the assessee.
22. In this connection we may refer to the decision of the Hon'ble Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. (supra). In this case the assessee-company purchased shares worth Rs. 4.5 lakhs of Inarco and the dividends received in respect of those shares were taken into account for the purpose of calculating the bonus payable to its workmen. In 1968, the assessee-company transferred all those shares to Aril, a wholly-owned subsidiary company. Aril had no other business or source of income whatever except receiving the dividends on those Inarco shares. The dividend income was not transferred to the assessee-company and it did not find a place in its profit and loss account with the result that the available surplus for payment of bonus to workmen got reduced, and bonus was paid at the rate of 4 per cent only for 1969 instead of at 16 per cent, to which the workmen would otherwise have been entitled. Subsequently in 1971, Aril was wound up and amalgamated with the assessee-company. The workmen raised an industrial dispute claiming bonus at 16 per cent for 1969.
The Industrial Tribunal, and the High Court on a writ petition rejected the claim on the ground that the assessee-company and Aril were two independent companies with separate legal existence and the profit made by Aril could not be treated as the profit of the assessee-company. On an appeal to the Hon'ble Supreme Court, the decision of the High Court was reversed and it was held that a new company was created wholly-owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving no purpose whatsoever except to reduce the gross profits of the principal company. These facts spoke for themselves. Their Lordships of the Supreme Court further held that there could not be direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose that was served and which stared one in the fact was to reduce the amount to be paid by way of bonus to workmen. It was such an obvious device that no further evidence, direct or circumstantial, was necessary. In this case the Apex Court held that the Court is not to be satisfied with form and leave well alone the substance of a transaction .... Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering the problems arising out of such avoidance has necessarily to be the same.
Keeping in view the facts of the assessee's case before us, the agreement dated 1-6-1987 with M/s. Sri Devi Films for transferring the lease rights of the film 'Chinna Thambi Peria Thambi' and again leasing out the picture to the assessee on commission basis @ 5 per cent of the realisation, could only be considered as a device to reduce the assessee's tax burden offering less income as sale consideration. In fact, M/s. Sri Devi Films had played no role and did no work in connection with exhibition and distribution of the film as the same distribution rights were retained by the assessee. Therefore, the facts in the assessee's case speak for themselves that the agreement dated 1-6-1987 was only a device to reduce the income of the assessee for whatever purposes. An obvious purpose that was served and which stared one in the face was to reduce the assessee's income and it was such an obvious device that no further evidence, direct or circumstantial, is necessary. For these reasons, we confirm the orders of the authorities below and dismiss the assessee's appeal for the assessment year 1988-89.
23. For the assessment year 1989-90 also the assessee raised similar grounds, viz., action of the authorities below in treating the entire amount of lease consideration of the films as income of the assessee and adding as income from the film sold to sister concern to the income returned by the assessee. For the assessment years 1986-87 and 1987-88 only the ground relating to inclusion of income from royalty for the purpose of assessment, is raised. For the reasons narrated elaborately while disposing of the assessee's appeal for the assessment year 1988-89 in earlier paragraphs of this order, we uphold the orders of the authorities below for the assessment years 1986-87, 1987-88 and 1989-90 as well, since the facts relating to these assessment years admittedly continued to be the same.
24. The assessee's appeals for the assessment years 1988-89 and 1989-90 are belated by 13 days. Having regard to the contentions urged before us, we condoned the delay and admitted the appeals.