Income Tax Appellate Tribunal - Madras
Francis Joseph vs Income-Tax Officer on 30 June, 1997
Equivalent citations: [1998]64ITD456(MAD)
ORDER
Kalsian, AM
1. This appeal by the assessee relates to assessment year 1994-95 and arises out of the order of the CIT(Appeals)-IV, Madras dated 12-11-1996. The only ground raised in this appeal by the assessee is that the CIT(Appeals) erred in not appreciating the concept of spread over of royalty on lease of film 'Gentleman' granted to M/s. Rachana Pictures and made and addition of Rs. 60,66,667.
2. The assessee is a film producer and carried on business under the name and style of M/s. A. R. S. Film International. The Assessing Officer observed that during the year ended 31-3-1994, the assessee has produced two films viz. 'Gentleman' and 'Sindunadipoo' and these films were released on 30-7-1993 and 14-1-1994 respectively. Cost of production of the film 'Gentleman' worked out to Rs. 1.29 crores whereas the cost for the other film 'Sindunadipoo' was Rs. 56.36 lakhs. The assessee had leased out the distribution rights of the film 'Gentleman' to Sri K. T. Kunjumon, proprietor of M/s. Rachana Pictures for the areas of Madras city, North Arcot, South Arcot, Chenglepet Districts and Kerala for Rs. 70 lakhs. The assessee declared only a sum of Rs. 9,33,333 as realisation. It was claimed before the Assessing Officer that the assessee has leased out the film 'Gentleman' for a period of five years and the lease consideration of Rs. 70 lakhs was apportioned for a period of five years and the proportionate lease rent of Rs. 9,33,333 was shown in the return of income for the assessment year 1994-95 as lease consideration. The Assessing Officer observed that the assessee had claimed the entire cost of production of the said film as deduction under Rule 9A of the Income-tax Rules and this being so the assessee should have shown the entire amount realised by way of sale rights as his income, for the assessment year under consideration. Therefore, the Assessing Officer treated the entire amount of Rs. 70 lakhs received from M/s. Rachana Pictures as income of the assessee for the assessment year 1994-95 and included the same in the assessee's total income.
3. In first appeal, the CIT(Appeals) confirmed the action of the Assessing Officer, According to the CIT(Appeals) the accrual of income cannot be postponed by some accounting jugglery. The CIT(Appeals) considered that if income could accrue in this year itself in respect of every other territory in identical circumstances, it is difficult to believe that only in respect of this territory it did not accrue just because there was some contrived agreement. Holding that the claim of the assessee is absolutely without merit, the CIT(Appeals) upheld the finding of the Assessing Officer. The assessee is in further appeal before the Tribunal.
4. The ld. counsel for the assessee filed a paper book and argued that the assessee had granted outright lease of exploitation and distribution of the film 'Gentleman' for the entire Tamilnadu, Kerala and Karnataka States on royalty basis to Sri K. T. Kunjumon of M/s. Rachana Pictures for Rs. 14 lakhs on yearly royalty basis, for a period of five years from the date of its first release in such areas. The assessee collected the entire sum of Rs. 70 lakhs as interest-free deposit towards lease consideration for the said period and entered into agreement with the said party stipulating the terms and conditions mentioned in the agreement. Accordingly the assessee admitted Rs. 9,33,333 as proportionate royalty for the period from 30-7-1993 to 31-3-1994 as income of the assessment year under consideration and the balance of Rs. 60,66,667 has been shown as deposit of advance lease from M/s. Rachana Pictures, and shown as a creditor in the liability side of the balance sheet. It is argued by the ld. counsel for the assessee that the nomenclature for the consideration arising out of exploitation and exhibition rights is being termed as royalty and royalty has to be as per the terms of the agreement as in para 8.3 of the accounting standard-9 (AS-9) issued by the Institute of Chartered Accountants of India, on Revenue recognition in para 13. Accordingly, if there is any recital in the agreement that lease rights on royalty basis has to be apportioned on the spread over basis, the same should be adopted for accounting purposes. Otherwise, the entire sum of royalty has to be accounted for as an income of that year. It is contended that in the assessee's case, there is a recital in the agreement between both the parties, that the royalty has to be accounted on the spread over basis. Hence the sum of Rs. 9,33,333 has to be treated as income of that year, arising out of North Arcot, South Arcot, Chinglepet Districts of Tamilnadu and Kerala State received from M/s. Rachana Pictures and the balance amount of Rs. 60,66,667 as an advance from distributors shown in the liability side of the balance sheet, for the year ended 31-3-1994. According to the ld. counsel, the royalty is required to be accounted as per the terms of the agreement with Sri K. T. Kunjumon, proprietor of Rachana Pictures. The assessee admitted the total royalty amount received from others (other than Sri K. T. Kunjumon of Rachana Pictures) its income for the year wherein no such terms and conditions are stipulated. The reason for stipulating the terms and conditions of the spread over basis is that the area conveyed for exploitation on outright basis is wide one. The ld. counsel for the assessee relied on the orders of the Tribunal in the case of G.S.R. Krishanmurthy for the assessment years 1985-86 and 1986-87 in [IT Appeal Nos. 4141, 4043, 3738 and 3195 of (Mad.) 1989, dated 18-2-1994] and IT Appeal No. 1661 (Mad.) of 1989 for the assessment year 1986-87 in the case of Smt. G. Indira Devi (order dated 23-5-1995). The ld. Departmental Representative, on the other hand, supported the orders of the authorities below.
5. We have carefully considered the facts of the case, material on record and the arguments of both the parties. As already stated, the assessee produced the film "Gentleman" which was released on 30-7-1993. He leased out the distribution rights of the said film to Sri K. T. Kunjumon, proprietor of M/s. Rachana Pictures for the areas of Madras City, North Arcot, South Arcot, Chenglepet Districts and Kerala for Rs. 70 lakhs. The assessee also granted the outright lease of distribution of the said picture to various distributors. The assessee, proprietor of A.R.S. Film International and the lessee, M/s. A. L. S. Cine Release represented by one K. Alavanthar entered into an agreement dated 27-9-1993 for taking on lease the rights of distributions, exhibition and exploitation of the film "Gentleman" on outright lease basis for the territories of Tiruchirapalli, Thanjavour, Quaid-E-Millath, Nagapattinam, including Karaikkal and Pudukottai, and he received a lease consideration of Rs. 29 lacs. The assessee also entered into agreement with M/s. Sri Surya Movies, represented by its proprietor Mr. A. M. Rathnam for acquiring the rights for dubbing the said picture in Telugu version and received a royalty of Rs. 40,00,000. The assessee also declared in his return the lease consideration of Rs. 29 lakhs and royalty of Rs. 40 lakhs in his return for the assessment year 1994-95. Similarly the assessee also entered agreements with other parties and the consideration received by him from those parties in respect of the film 'Gentleman' were declared by the assessee in the return for the assessment year 1994-95. But in respect of the film "Gentleman" the assessee executed a lease agreement with Sri K. T. Kunjumon Prop. M/s. Rachana Pictures for the areas mentioned hereinabove for a consideration of Rs. 70 lakhs and out of this amount, only a sum of Rs. 9,33,333 was shown as realisation for the assessment year under consideration. The relevant terms of the agreement executed by the assessee with Sri K. T. Kunjumon, Prop. M/s. Rachana Pictures, dated 30-7-1993, are reproduced below :
"1. The lessor hereby grant and assign to the lessee the sole and exclusive rights of distribution, exploitation and exhibition of the Tamil feature film title "Gentleman" in colour and scope starring Arjun, Madhubala, Goundamani and others Music by A. R. Rahman and directed by Shankar by way of yearly lease as provided in cl. 6.
2. The area covered by this agreement, for which the sole and exclusive lease rights have been granted by the lessor shall be the territories of Madras City, North Arcot, South Arcot and Chenglepet districts and Kerala generally known in film trade excluding Chitoor and Tirupathi now in Andhra Pradesh.
3. The lease period shall be 5 years from 3-7-1993 and shall remain valid upto 29-7-1998.
4. In consideration of the lease granted to the Lessee the Lessee agrees to deposit a sum of Rs. 70,00,000 which amount shall not carry any interest and shall be adjusted towards the yearly lease as provided in cl. 6 hereunder.
5. The lessee agreed to pay the interest free deposit of Rs. 70,00,000 which shall be adjusted towards the yearly lease of the said picture.
6. The lessee hereby agreed to pay the lessor the yearly lease as detailed hereunder :-
Year For the year Amount
First 30-7-93 to 31-3-94 Rs. 9,33,333
Second 1-4-94 to 31-3-95 Rs. 14,00,000
Third 1-4-95 to 31-3-96 Rs. 14,00,000
Fourth 1-4-96 to 31-3-97 Rs. 14,00,000
Fifth 1-4-97 to 31-3-98 Rs. 14,00,000
Sixth 1-4-98 to 29-7-98 Rs. 4,66,667
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Rs. 70,00,000
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7. The lessor shall supply to the lessee two brand new prints with two runnable prints for Madras City and fourteen brand new prints for the rest of the territory at his cost.
8. The Lessor hereby agree to provide facilities to the Lessee by authorising the concerned laboratory to print the required number of additional prints for exploitation of the Lessee in the territory leased out the them during the lease period, provided that the Lessee pays the cost of positive prints required, in addition to printing and processing charges and other incidental costs.
9. The Lessee shall not release or cause to release the said picture in any territory other than the territory granted to him by this agreement. In case of default the Lessor shall be entitled to claim damages from the lessee.
10. The Lessor hereby agrees that the Lessee is entitled to exploit the said pictures by himself or grant exploitation rights in turn at his discretion without referring to the Lessor, for any territory within the time limit and territory granted to the Lessee under this agreement, subject to the terms and conditions of this agreement ...."
Thus the assessee has shown a sum of Rs. 9,33,333 as realisation on the basis of the aforesaid terms of the agreement and declared this amount as his income for the assessment year 1994-95. The only issue to be considered is whether the claim of the assessee is correct in declaring income of Rs. 9,33,333 as income for the assessment year under consideration in respect of the film 'Gentlemen' leased out to Sri K. T. Kunjumon, proprietor Rachana Pictures, or whether the entire amount of Rs. 70 lakhs is includible in his total income for the assessment year under consideration.
6. 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, 1961 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 duty year; or
(c) accrues or arises to him outside India during such year :
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.
7. 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 Co. 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-cls. (ii), (iii) and (iv) of cl. 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 end.) whether the term has been explained as a payment to a 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 Mozley & Whiteley'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 otherwise 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 CIT v. Stanton & Stavely (Overseas) Ltd. [1984] 146 ITR 405/[1983] 13 Taxman 162 (Cal.) 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 come 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 been conclusive while interpreting the document. Therefore, in the aforesaid case, the Hon'ble Calcutta High Court confirmed the finding of the Tribunal that 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.
8. 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.
9. Therefore, keeping in view the ratio laid down in the aforementioned decision and the provisions of sections 4 and 5 of the Act, it has to be examined whether the amount of Rs. 70 lakhs received by the assessee was deposit or advance against the exploitation of the film 'Gentleman' for five years in the allotted territories. The assessee has received Rs. 70 lakhs for commercial exploitation of the said film Sri K. T. Kunjumon, proprietor of M/s. Rachana Pictures. In the agreement the receipt has been shown for six years as per cl. 6 of the agreement reproduced earlier. In the agreement the amount of Rs. 70 lakhs was shown as interest-free deposit from the lessee, which is adjustable towards yearly lease of the said picture. The amount of Rs. 70 lakhs was shown as royalty. As held by the Courts in the aforementioned two decisions the nomenclature given to the transaction by the parties does not necessarily decide the nature of the transaction, and the question to be considered always is the real character of the receipt and not what the parties call it. In this connection we are reminded of the observations of the Hon'ble Supreme Court in the cases of Wormen 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 :
157 ITR 77 : "... It is the duty of the Court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction."
154 ITR 148 : "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."
The parties to the agreement may frame the terms of the agreements in such a manner as to override the provisions of law and in such a case the issue cannot be decided merely on the basis of the terms of the agreement, if such terms override the provisions of the law. Under the Income-tax Act, as already stated, in view of section 4 of the Act the total income is chargeable to tax in accordance with the provisions of the Act. The assessee has shown total receipt from all the other lessees, to whom the film 'Gentleman' has been leased out for commercial exploitation, in different areas in the assessment year 1994-95. But in case of Sri K. T. Kunjumon, proprietor Rachana Pictures, only a sum of Rs. 9,33,333 was shown as income on the basis of the agreement. After perusing that terms and conditions of the agreement between the parties, we are of the considered opinion that the total income of Rs. 70 lakhs has accrued as well as has been received by the assessee in the previous year relevant to the assessment year 1994-95. Therefore, there is no question of not including the entire sum of Rs. 70 lakhs in the assessee's total income. Though the amount of Rs. 70 lakhs was mentioned as deposit by the parties to the agreement, but the said amount is not a deposit but it is towards cost of lease of film, "Gentleman", because the deposit is always refundable after a fixed period specified by the parties to the agreement and in this case, it remains a fact that no fixed period is specified and it is also not shown in the agreement that after certain period the amount of 70 lakhs would be refundable to M/s. Rachana Pictures. Since the amount of Rs. 70 lakhs is neither refundable nor the assessee is bound to pay any interest on that amount and the amount has only been received on account of commercial exploitation of the film 'Gentleman', we hold that the said sum is income of the assessee which has accrued to him and which has also been received by the assessee in the previous year relevant to the assessment year 1994-95 and is rightly includible in his total income, in view of the provisions of section 5(1) of the Income-tax Act, 1961 and chargeable to tax under section 4. Bifurcation of this amount of Rs. 70 lakhs for six years as per cl. 6 of the agreement has no meaning because the terms of the agreement cannot override the provisions of the Act. The learned counsel for the assessee relied on the earlier orders of the Tribunal in the cases of Sri G. S. R. Krishnamurthy and Smt. G. Indira Devi, referred in para 4 of this order. But we found that the above-mentioned legal position was not brought to the notice of the Tribunal in those cases and therefore, the true legal nature of the receipts could not be considered by the Tribunal in those cases. Therefore, those decisions are clearly distinguishable from the facts of the present assessee's case. The assessee has not pointed out any valid reason why in respect of lease amounts received from other lessees whole lease consideration was shown as his income for the assessment year under consideration, and why only in respect of the lease amount of Rs. 70 lakhs received from M/s. Rachana Pictures different treatment was given. It may be mentioned that the amount of Rs. 70 lakhs received from M/s. Rachana Pictures is 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. 70 lakhs for lease of the film 'Gentleman' for commercial exploitation by Rachana Pictures, which is not in the nature of royalty, but is in the nature of lease or sale consideration for the commercial exploitation of the said film. Therefore, even the Accounting Standard issues by the Institute of Chartered Accounts of India, relied on by the assessee's counsel, is not applicable. It may also be clarified that no accounting standard could override the provisions of law and the amount of Rs. 70 lakhs has accrued to the assessee and has also been received by the assessee in the previous year relevant to the assessment year 1994-95, which is correctly includible in his total income for the assessment year under consideration.
10. We have looked at the case of the assessee from another angle also. The assessee has debited the entire cost of production of the film 'Gentleman' to the profit and loss account but only a sum of Rs. 9,33,333, has been credited to the profit and loss account. When the assessee is carrying on business of film production and entire cost of production of the film 'Gentleman' is debited to his profit and loss account, then there is no justification for not showing the value of closing stock of the said film in the profit and loss account. It cannot be said that the value of closing stock of the film 'Gentleman' was nil as on 31-3-1994, because the assessee has received Rs. 70 lakhs from the lessees for commercial exploitation of the said film. Even if it is assumed, without admitting, that the assessee has received the sum of Rs. 70 lakhs as deposit from Sri K. T. Kunjumon, proprietor of M/s. Rachana Pictures, Madras against commercial exploitation of the film for five years and the amount of Rs. 9,33,333 pertains to the assessment year 1994-95, then the balance amount of Rs. 60,66,667 would be the value of the closing stock of the film and should be credited to the profit and loss account. If the amount of Rs. 60,66,667 is treated as value of the closing stock of the film, then the result would be the same and the assessee's income would be enhanced by the said amount of Rs. 60,66,667 even if the receipt is considered as per terms of the agreement. When the terms of the agreement provide for payment to the assessee (Lessor) by M/s. Rachana Pictures (Lessee) for lease of Rs. 70 lakh and the assessee has already received the said sum of Rs. 70 lakhs (considered as deposit by the assessee) which is not refundable, then there is no other conclusion possible except that the amount of Rs. 60,66,667 constitutes the value of closing stock of the film 'Gentleman' because, the whole cost of production of the film has been debited to the profit and loss account. Therefore, even if we look at the case of the assessee from this angle, then also the income would be enhanced by the amount of Rs. 60,66,667 and there would be no relief to the assessee.
11. The grounds raised by the assessee are rejected and the appeal is dismissed.