Sethuraman, J. - (1.)IN this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no part of the amounts received by the assessee amounting in the aggregate to Rs. 1,50,000 from Blaze in terms of the agreement of April 1, 1966, was liable to be assessed in any of the assessment years 1968-69, 1969-70 and 1970-71 ?"

(2.)THE assessee is a registered firm of five partners. THE previous years are the calendar years preceding the relevant assessment years. THE firm came into existence in January, 1960, and started carrying on the business of arranging exhibition of advertisement films of M/s. Lintas Ltd., originally done under a letter dated 15th January, 1960. By this letter, the rights for distribution and exhibition of films had been secured for the calendar years 1960 to 1962 for the areas, Madras and Rajasthan. Subsequently, there was a formal contract on 22nd April, 1961, which reduced the terms of the informal arrangement obtaining previously into a formal character. THE agreement was as between principal and principal and the rates at which the assessee was to be paid were stipulated in the agreement. Lintas was to provide the assessee with the necessary prints, etc. THE prints were to be of films in the Indian languages.
The terms of the contract, as reduced to writing on 22nd April, 1961, were continued for the calendar year 1962 and also for 1963. On 26th June, 1963, the arrangement was again reduced to writing, but it was to be enforced up to 31st December, 1963. In the last mentioned agreement, there was a new clause that Lintas, during the period of the agreement, had the right to enter into agreement with other persons for distribution and exhibition of their films even in the towns covered by the agreement with the assessee.

The agreement continued for the calendar year 1964, also under a contract dated 9th April, 1964. On 25th June, 1965, Lintas wrote to the assessee that they would continue to handle the distribution and screening of advertisement films during the calendar year 1965, on the same terms and conditions as contained in the contract dated 9th April, 1964. The period could further be extended up to not more than twelve months at a time by exchange of letters. No letters were produced to show that there was any further extension under the terms of the agreement dated 9th April, 1964. However, it is common ground that the contract continued on the same terms for the calendar year 1965. The terms were reduced to writing on 25th June, 1965.

During the subsistence of the agreement with Lintas in the manner mentioned above, the assessee entered into an agreement on 16th May, 1965, with Miss Freni Variava and Mr. M. J. Bijlani, collectively known as "Blaze". The agreement was to have effect for a period of nearly ten years up to 31st March, 1975. This agreement was for the distribution and exhibition of advertisement shorts. In the agreement, the assessee is referred to as "Saraswathi", and Blaze as "Blaze". Blaze as well as Saraswathi had earlier entered into independent arrangements with various parties for the distribution as well as exhibition of the films. The agreement dated 16th May, 1965, was for the purpose of seeing that the business of each other did not suffer by competitions in the territories of the whole of the States of Madras, Andhra, Kerala and Mysore. But, as far as the State of Mysore was concerned, it excluded the districts of Belgaum, Dharwar and Bijapur, There were certain mutual obligations, and the Schedule to the agreement set out the list of businesses handled by Blaze as well as Saraswathi. The Schedule contained 118 items, but as far as the assessee was concerned, its main agreement was with Lintas Ltd. and the advertisements were for various products of Hindustan Lever, such as, soaps, tooth pastes, etc. The other clients of the assessee were Colgate-Palmolive, the Orwo Films and Estrella Batteries.

From 1960 up to the end of the calendar year 1964, the assessee had contract or arrangement for exhibition of films only with Lintas, with an arrangement of only a minor magnitude with another entity, and that too only in the year 1964. Only in the year 1965, it secured similar contracts from Colgate-Palmolive, Orwo Films and Estrella Batteries. In the year 1965, the total receipts from Lintas came to Rs. 2,55,047.41, from Colgate Rs. 1,22,299.71 and from others Rs. 22,068.55.

(3.)THE agreement with Lintas came to an end on 31st December, 1965. On 1st April, 1966, the assessee entered into a further agreement with Blaze modifying the terms of the agreement of 16th May, 1965, to some extent. In this agreement of 1st April, 1966, it was mentioned that by the earlier agreement of 1965, it had been agreed that neither party should interfere with the business of the other during the life of the agreement, i.e., till 31st March, 1975, and that the main business of the assessee was the business of exhibition of film shorts of Lintas in the agreed areas. It was also stated that Blaze was exhibiting film shorts of Lintas Ltd. in areas other than the agreed areas and was desirous of having the business of M/s. Hindustan Lever Ltd. and/or Lintas Ltd. in the agreed area also. Under the agreement of 16th May, 1965, the assessee had agreed not to represent or otherwise do business in film shorts and any sort of advertisement on the cinema screens for Hindustan Lever Ltd. or Lintas Ltd. in the agreed area. THE assessee had agreed also to Blaze "taking over and handling" the said business from April 1, 1966, and further agreed to refrain from carrying on the business with Hindustan Lever Ltd. or handle any film advertising business till the end of 1975. In consideration of these terms, Blaze agreed to pay the assessee (Saraswathi) a sum of Rs. 1,50,000. THE amount was payable by Blaze to Saraswathi irrespective of whether Blaze secured the said business from Hindustan Lever Ltd. or Lintas Ltd, or not. This amount of Rs. 1,50,000 was payable in instalments, three instalments of Rs. 25,000 each in 1968, and three instalments of Rs. 25,000 each in 1969. If there was a default in paying any one instalment the entire amount that remained due as on that date would become payable immediately to the assessee. In the event of Blaze failing to pay such amount, Saraswathi was entitled to claim from Blaze such amount jointly and severally from the parties constituting Blaze. THEre were other clauses in the agreement that in the event of Saraswathi or its allied concerns, approaching Hindustan Lever or Lintas for business, then an amount of Rs. 3,00,000 would have to be paid as liquidated damages by Saraswathi to Blaze.
The ITO brought to tax a sum of Rs. 25,000 for the assessment year 1968-69, as according to the assessee only that amount had been received in that year. For the assessment year 1969-70, similarly he brought to tax another sum of Rs. 25,000 which alone had been received from Blaze. However, for the assessment year 1970-71, the ITO considered that the whole of the balance of the amount would have to be assessed and he brought to tax the sum of Rs. 1,00,000.

The assessee appealed to the AAC. While the AAC was of the prima facie view that the assessments for 1968-69 and 1969-70 should be enhanced by bringing to tax the entire sum of Rs. 1,50,000 at the rate of Rs. 75,000 in each of those two years, ultimately on the representation of the assessee, he did not disturb the assessments of Rs. 25,000 each made for those two years. However, he held that the entire amount of Rs. 1,50,000 was not assessable in any of the three years, as, in his view, the covenant, concluded on 1st April, 1966, was very specific about the assessee imposing on itself certain restrictions on its activities in the designated areas for a specified period of ten years. Following the decisions of the Supreme Court, he considered that the amount was not liable to be taxed. In effect, his view was that the amount represented capital receipt.