Income Tax Appellate Tribunal - Kolkata
Assistant Commissioner Of Income-Tax vs Chittaranjan Datta on 8 June, 1993
Equivalent citations: [1994]48ITD428(KOL)
ORDER
R.V. Easwar, Judicial Member
1. Mr. C.R. Datta, the assessee herein, is a Barrister of Lincoln's Inn practising in the Calcutta High Court. He wrote a book on Company Law. In the year 1970 he entered into an agreement with M/s. Eastern Law House (ELH), Calcutta by which he granted permission to the publishers (i.e., ELH) to publish the book, subject to payment of royalty. The book itself came to be written later. The first edition was published in 1973 and the second edition in 1976. There was no further edition of the book brought out by ELH and the agreement with ELH was terminated on 21-2-1982 by a written agreement.
2. The assessee thereafter entered into an agreement with M/s. Orient Law House, publishers (OLH, for short). This was on 25-5-1982, By the agreement, the assessee purported to sell the 'copyright' as well as 'the goodwill' in the book for a sum of Rs. 5 lakhs, bifurcated into Rs. 4 lakhs for goodwill and Rs. 1 lakh for the copyright. The amount of Rs. 5 lakhs was received as below:
In the financial Assessment Amount Towards
year ending year Rs.
1981-82 1982-83 1,00,000 Goodwill
1982-83 1983-84 1,50,000 Goodwill
50,000 Copyright
1983-84 1984-85 1,50,000 Goodwill
50,000 Copyright
5,00,000
3. In the returns filed for the assessment years 1983-84 and 1984-85, the assessee claimed that the receipts were not taxable since, according to him, they were capital receipts. The assessee further claimed that the receipts cannot be taxed as capital gains also since both gopdwill and copyright were self-generated assets having no cost of acquisition. It was also contended that the assessee had assigned the copyright and sold the goodwill to OLH under the agreement and it was not a case of mere licence to use these assets.
4. The ITO did not accept the contentions. He took the view that the assessee's brain was his fixed capital and the book, a product of the brain, was floating or circulating capital, or, in other words, the assessee's stock-in-trade and, therefore, the receipts from OLH were taxable as the assessee's income. The receipt of Rs. 2 lakhs in the accounting year relevant to the assessment year 1983-84 was brought to tax under the head "Other sources" and the receipt of an identical sum in the accounting year relevant to the assessment year 1984-85 was brought to tax under the head 'Profession'.
5. On appeal, the CIT (Appeals), in an elaborate and, if we may say so, a lucid order, held that the amounts received were capital receipts not liable to tax even under the head 'Capital gains'.
6. The fate of these appeals must largely depend upon the answers to two main questions: Is the assessee a professional author, so that the receipts in question can be treated as professional income ? Do the amounts received under the agreement represent amounts for the assignment of the copyright and the sale of the goodwill or is it a case of a mere licence to use both ?
7. The first question must, in our opinion, be answered in the negative. It is not disputed that the assessee is a Barrister practising in the Calcutta High Court. It is no part of a Barrister's profession to write books. His profession is to appear before the Courts on being instructed by Solicitors. In his life so far the assessee has written only one book. The fact that the assessee was able to utilise the knowledge and expertise gained in practising law in writing the book on Company Law cannot automatically lead to the conclusion that writing of the book was part of the assessee's profession. On behalf of the Department, reliance was placed on the decision of the Allahabad High Court in Addl. CIT v. Ram Kripal Tripathi [1980] 125 ITR 4081. But that was a case of a teacher of "Vedanta" being given a car by his disciples. The High Court applied P. Krishnd Menon v. CIT [1959] 35 ITR 48 (SC) and held that the receipt arose in the course of the exercise of the vocation of teaching and was taxable under Section 28(iv). As stated by us earlier, the receipts in the assessee's case did not arise in the course of the exercise of the profession of law. Pleading in the Courts of law and authoring a book on Company Law are two unconnected things. It was then pointed out on behalf of the Department that the assessee has devoted much of his time, which he would have otherwise devoted to his profession, to the writing of the book as can be seen from the substantial earnings by way of royalty from the first edition of the book. This fact was also relied upon to suggest a conscious decision on the part of the assessee to "branch out" from practising law to authoring of books. But we fail to see any such branching out. It must be remembered that the book was written in 1970 and published first in 1973. If at all, only during this period of about three years it could be said that the assessee had devoted time to write the book. But then, we have little evidence to show that during that period his professional earnings had dwindled because of that. After the publication of the first edition, all that the assessee had to do was to receive the royalty. It is also not disputed that the assessee did not write any other book in his career. It is, therefore, not possible to spell out any intention on the part of the assessee to 'branch out' from practising law to the profession of being an author. There is also no merit in the argument of the revenue that the assessee must be taken to have switched over to authoring of books as a profession merely because he had approached ELH first and not vice versa and because the assessee was free, under the agreement, to write books on subjects other than Company Law and to enter into arrangements for publishing them. Though theoreti-cally the assessee was free to write books on subjects other than Company Law, it is an admitted fact that he did not do so. The existence of such a clause in the agreement is by way of a safeguard both to the publisher as well as the assessee and beyond that is of no significance. The reliance on the decision of the Allahabad High Court in CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 7472 is not apposite. That was a case of receipt of subsidy which was held to have arisen in the course of the business and assessable under Section 28(iv). We also find that the stand of the Department that the receipt should be assessed as income under the head 'Profession' is inconsistent with the past assessments. In the assessment years 1976-77 to 1979-80, the royalty from ELH was assessed under the head 'Other sources'. Even during the assessment proceedings for the assessment year 1983-84 which is in appeal, the ITO had proposed to assess the receipts under the agreement only under the head "Other sources", as is evident from the letter of the ITO dated 3-2-1986. The assessments for the assessment years 1976-77 to 1979-80 would show that the revenue itself has recognised that royalty receipts are not part of the assessee's income from profession. The settled position, that the assessee is not an author by profession, cannot now be allowed to be upset or unsettled by the parties, as held by the Supreme Court in Radhasoami Satsang v. CTT [1992] 193 ITR 321.
8. We are, therefore, of the view that the assessee was not an author by profession and the assessment of the receipts under the agreement with OLH cannot be made on that basis.
9. We now turn to the second question. In order to appreciate the nature of the receipts, it is necessary to set forth the material parts of the memorandum of agreement between the assessee and OLH:
MEMORANDUM OF AGREEMENT made this twenty fifth day of May 1982 between Chittaranjan Datta, Barrister-at-Law, of P-9, Lake Road, Calcutta 700 029 (hereinafter referred to as the 'author' which term will include unless the context otherwise requires his heirs and legal representatives) of the ONE PART and ORIENT LAW HOUSE, a partnership firm carrying on business as publisher and bookseller, opposite Allahabad High Court, Allahabad, its partners GELA RAM KATARIA, GANESH RAM KATARIA, RAM CHAND KATARIA AND RAJ PAL KATARIA all of Allahabad (hereinafter referred to as the 'Publishers' which term will include their successors, heirs, legal representatives and assigns) of the other part.
The author has written, inter alia, a book captioned 'Company Law' which was being published by the Eastern Law House Private Limited, Calcutta, and henceforward will be published by the said publishers, the Eastern Law House Private Limited having given its 'No objection' certificate for such publication.
AND WHEREAS the said book has acquired a goodwill because of its special features and the standing of the author.
AND WHEREAS the publishers are desirous to establish themselves in the publishing business by publishing quality books of reputed authors and they consider the 'Company Law' a quality book and the author as a reputed author.
AND WHEREAS the publishers are agreeable to purchase the goodwill as well as the copyright of the said book and publish the book maintaining its standard which is necessary in the interest of both the publishers and the author.
Now therefore it is hereby agreed by and between the parties as follows:
1. The publishers will pay to the author a sum of Rs. 4,00,000 (Rupees four lakhs) as the purchase price of the goodwill.
2. The publishers will pay to the author a sum of Rs. 1,00,000 (Rupees one lakh) as the purchase price of the copyright of the said book "Company Law.
3. It is recorded that the publishers have paid by two several drafts of different dates on different dates Rs. 1,00,000 and Rs. 1,50,000 (subject to encashment) and a cheque for Rs. 50,000 dated 24-6-1982 (subject to encashment) by way of earnest moneys towards the purchase of goodwill and intend to furnish a bank guarantee for Rs. 2,00,000 (Rupees two lakhs) within a month from date. The entire purchase moneys will however be paid within 25th June, 1983. On such payment of the entire purchase moneys the goodwill and copyright shall stand transferred to and vested in the publishers. In the meantime, the publishers will have the right to publish the third edition of the book.
4. In default of payment of the entire consideration moneys on 26th June, 1983 the moneys already paid shall stand forfeited for the sole benefit of the author and the publishers will have no right to the same.
5. Subject to the aforesaid the publishers will be the owners of the copyright, will have all rights of translation, will be entitled to publish the, editions of the book at their own costs, risks and responsibilities.
6. ... consolidates the law on the subject and repeals the present Companies Acter, 1956 the publishers will be entitled to use all materials of the. book as revised in future by virtue of the copyright as and when vested in the publishers and they will be free to use the name of the author as the Author of such amended book or re-enacted under the same title or some other title subject to the terms of these presents.
7. The publishers will be entitled to publish any number of editions and any number of volumes as may be thought fit and proper by them. The publishers will have the right, after the copyright has vested in them, to transfer the aforesaid right purchased or acquired by them from the author unless the parties hereto otherwise agree.
8. The author will not lend his name or write any book similar to and competitive with the said book "Company Law". This is however without prejudice to the rights of the author in other books on the subject already in the market or books on other subjects written or that might be written.
The first three clauses and Clause (5) make it clear that the assessee has assigned the copyright in the book to OLH, the publishers, and also sold to them the goodwill for a price. This is further clarified by Clause (7) whichstates that the publishers can in turn sell the copyright to others. In the case of a person who is not a professional author, the assignment of the copyright amounts to a sale of a capital asset and the payment therefor would be capital. There is ample authority for this proposition - See Withers (Inspector of Taxes) v. Nethersole [1948] 16 ITR (Suppl.) 92 (HL) and Shiner v. Lindblom 39 TC 367, two English decisions. The same proposition was laid down in Beare (Inspector of Taxes) v. Carter23 TC 353. In Nethersole's case (supra), the following paragraph brings out the position in law:
Rule 19(2), however, deals only with patents. In this case we are not concerned with patents but with copyright. Copyright is a species of incorporeal property. The Copyright Acter, 1911, which is a consolidating Act repealing earlier Acts, makes it perfectly clear that the ownership of copyright can be transferred by assignment either wholly or partially and either for the whole term of the copyright or for any part thereof. So far as the property is assigned, the assignee becomes the owner instead of the assignor. The Act also provides that, in contrast with an assignment of copyright, the owner may grant a licence which, though it permits the licensee to use the copyrighted matter within the limits of the licence without breach of copyright, does not involve any change of ownership in the copyright at all. It appears to me that the argument for the Crown does not sufficiently allow for this distinction. It is not disputed that the present case is a case of assignment; the respondent, under the relevant agreement, made a partial assignment of her copyright and ceased to be the owner of the portion assigned, receiving a sum of money in exchange. This amounts to a sale of property by a person who is not engaged in the trade or profession of dealing in such property, and the proceeds of such a sale is, for income-tax purposes, a sum in the nature of untaxable capital and not in the nature of taxable revenue.
In that case, the finding of the Commissioner was that Miss Nethersole was not engaged in any trade or business. The case of the assessee before us would be 'a fortiori', since the assessee is neither engaged in the business of dealing in such property nor is he an author by profession. The basis of the judgment in Howson (Inspector of Taxes) v. Monsell 31 TC 529, where such sums received in respect of sale of the copyright in the books written by the authoress were held rightly included in her professional earnings, is contained in the following extract:
... it is plain that Mrs. Monsell received these sums by reason of the fact that she was carrying on the vocation of writer or authoress of historical books, and that the receipt by her was plainly in the course of carrying on that vocation.
10. In Shiner's case (supra) the sums received by the taxpayer, an actor by profession, on the sale of the copyright in a film the rights in which were purchased by him as investment, were held not liable for income-tax on the grounds that (i) it was not part of the taxpayer's profession (as actor) to dispose of copyright, (ii) the amounts received were distinct from his professional earnings, and (iii) the taxpayer was realising his investment.
11. These authorities show that the receipts of the assessee before us under the agreement with OLH cannot be treated as his income from profession.
12. It was contended on behalf of the revenue that the agreement has to be "pierced" in order to find out the true nature of the receipts and it was suggested that the receipts were in truth and reality "royalty" receipts chargeable as income. In this connection, it was submitted that there was only a change in the mode of payment from royalty linked to a sale of the book under the agreement with ELH to a lump sum payment or a payment once for all under the agreement with OLH and that the character of the payment remained the same. But we cannot give effect to this submission. In CIT v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692 it was held by the Supreme Court that when a transaction is embodied in a document the liability to tax depends upon the meaning and context of the language used in accordance with the ordinary rules of construction. It was not suggested that there was bad faith or fraud vitiating the agreement. In the absence of bad faith or fraud and where unambiguous and unequivocal language is used in the agreement, full effect has to be given to the intention of the parties. In CIT v. B.M. Kharwar [1969] 72 ITR 603 the Supreme Court held that the legal effect of the transaction embodied in a document cannot be displaced by probing into the "substance of the matter" and that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the "substance of the matter". This principle was held applicable both to cases where the legal relation is recorded in a formal document and to cases where it has to be gathered from evidence or conduct of the parties. If these principles are borne in mind, as indeed they ought to be, we find that the various clauses in the agreement with OLH are very clear and convey unambiguously what the parties had in mind. The parties had intended that there should be a sale, outright, of both the copyright in the book and its goodwill. The price, which was in lump sum, was to be a onetime payment for the assignment of the copyright and the sale of goodwill. It was not in any way linked to the sale of the book, as in the case of the agreement with ELH; nor was the price paid merely for the licence to make use of the copyright or goodwill. It is therefore not possible for us to accept the contention that the receipts under the agreement with OLH were, in fact, and truth royalties assessable as income.
13. It was, thereafter, argued on behalf of the revenue that all assignments of copyright need not necessarily bring in capital receipts and that sometimes they may bring in revenue receipts also. The only way this argument can be appreciated is to take it as meaning that in the case of an author by profession even the assignment of copyright may give rise to taxable revenue receipts. Put that way, the proposition is unexceptionable. But we are not to decide any such hypothetical issue, for, we have before us a clear case where there is no evidence upon which we can conclude that the assessee was an author by profession. On the facts of the case, there is great difficulty in treating the receipts under the agreement as income. The assessee has realised his capital assets for a price and the price represents capital receipt in his hands.
14. We may briefly notice two more decisions cited on behalf of the assessee. In Murray (Inspector of Taxes) v. Imperial Chemical Industries Ltd. [1969] 71 ITR 661, a decision of the Court of Appeal, it was held that lump sum receipts under an exclusive licence and for covenanting not to compete were capital in nature. In IRC v. Sangster 12 TC 208 it was held that even in the case of a non-exclusive licence (as against an outright assignment) granted by Mr. Sangster; who has been an inventor of patents and held about 400 such patents, the royalties were not assessable as his business income. This case is undoubtedly an extreme case but that does not detract from its authority. The point to be noticed is that the Rowlatt, J. took the view that in all cases of this type it is necessary to enquire whether the taxpayer sells the patents "habitually" so "as to bring him within the category of people who carry on a business" (page 217 of the Report). Such enquiry in the present case shows that there is no such habit; the assessee has written just one book in his life so far. The decisions cited on behalf of the assessee are thus in support of his case.
15. One other contention raised on behalf of the revenue was that the bifurcation of the receipt into two parts, one for the assignment of the copyright and the other for goodwill is not justified. But we have earlier held that the terms of the agreement with OLH have to be given full effect. The transaction is at arm's length. No mala fide or motive to avoid tax frowned upon by McDowell & Co. Lid. v. CTO [1988] 154 ITR 1481 (SC) is shown to exist. The assignment of the copyright is in writing, as required by Section 17 of the Copyright Act. The book, which is one of the two or three standard works on the subject, cannot be stated to have no goodwill. It has been put through two editions by ELH. Further, there is nothing on record to suggest that the terms embodied in the agreement are not the result of a hard bargain between the assessee and OLH. We hold that the CIT (Appeals) has rightly upheld the assessee's contention that the receipt referable to goodwill is exempt even as capital gains, since there is no cost in respect of the same [please see CIT v. B.C. Srinivasa Setty [1981] 128 ITR 2942 (SC)]. We also uphold his decision that the receipt in respect of the assignment of the copyright is a realisation of a capital asset, a capital receipt and hence exempt.
16. The Department has raised an additional ground as follows:
That without prejudice to the grounds already taken, the ld. CIT(A) erred in not holding that the receipt arising out of copyright and goodwill was assessable under Section 10(3) of the Income-tax Act, 1961.
The additional ground is misconceived. Section 10 is not a section that brings to tax any income. It contains a list, by no means an exhaustive list, of items of income that do not form part of the total income at all. It is not the case of the assessee that the receipts under the agreement are casual and non-recurring. In fact, it cannot be, since receipts based on an agreement cannot be termed "casual and non-recurring" [please see Cossimbazar Raj Wards Estate v. CIT [1946] 14 ITR 377 (Cal.) at page 395 and CIT v. Indian Textile Engineers (P.) Ltd. [1983] 141 ITR 693 (Bom.) at page 78]. In Dr. K. George Thomas v. CIT [1985] 156 ITR 412 at page 418, the Supreme Court has held, on the interpretation of Section 4(3)(vii) of the 1922 Act which is the forerunner of Section 10(3) of the 1961 Act, as under:
As the section made it clear, in order to be entitled to exemption, the receipts must be of income character first. In the instant case, there is no doubt that if a sum of money is received for the purpose in pursuance of an avocation or vocation, it arose out of this vocation or profession. If that is so, then this was income under the Act. Such income could only be excluded if it was specifically excluded by any provision of the Act. The High Court held, in and in our opinion rightly, that in view of the facts and circumstances of this case as found by the Tribunal, these amounts were not excluded under Section 4(3}(vii) of the Act. The posit ion was thus, these amounts were received by the assessee in the course of his avocation or vocation and were given to him for the purpose of the same. These were, therefore, incomes which were not also of a casual and non-recurring nature nor were these capital gains under Section 12B of the Act. If that was the position, then, in our opinion, the amounts were clearly taxable as held by the Income-tax Officer and by the High Court.
The purpose of specifically excluding capital gains chargeable to tax under Section 45 from the purview of Section 10(3) is to prevent an assessee from claiming exemption on the ground that receipts arising from the sale of capital assets are casual and non-recurring. Separate provision has been made in Section 45 for the charging of capital gains. From this, it cannot be inferred, as the revenue wants us to, that capital gains should be brought to tax under Section 10(3). In B.C. Sriniuasa Setty's case (supra), the Supreme Court has held that Section 45 is the charging section for capital gains. Therefore, we cannot accept the contention raised in the additional ground. The decision of the Allahabad High Court in CIT v. Gulab Chand [1991] 192 ITR 495 relied on by the Department has not referred to the decision of the Supreme Court in Dr. K. George Thomas's case (supra) (cited above) on the interpretation of the provisions of Section 10(3).
17. We, therefore, dismiss the additional ground.
18. The order of the CIT (Appeals) is confirmed and the appeals are dismissed.