Decided on August 07,1962

Habib Hussein Appellant


TAMBE J. - (1.)THIS is a consolidated reference under sub -section (1) of section 66 of the Indian Income -tax Act (hereinafter referred to as the Act) for the three assessment years 1950 -51, 1951 -52 and 1952 -53, corresponding accounting years being financial years ending with 3Ist March, 1950, 31st March, 1951, and 31st March, 1952. During these assessment years, the assessee derived income from various sources including his business of exhibiting pictures in a theatre known as 'Liberty Cinema.'
(2.)SOME time in the year 1947 the assessee thought of opening a cinema theatre in the City of Bombay. It appears that one Manu Subedar had entered into an agreement with the Government of India to take on lease certain lands at Marine Lines, Bombay, including composite plot No. 41/42 on Queen's Road Estate. On January 6, 1947, the assessee obtained a licence from Manu Subedar in respect of this plot to enter upon this land and erect thereon buildings, cinema theatre, show rooms, shops, business premises and residential quarters. The rental agreed to be paid was Rs. 4,200 per month. Manu Subedar had further agreed that he would give a sub -lease to the assessee for the term of 999 years as and when he would get a regular lease from the Government, and it appears that on 4th October, 1949, Manu Subedar gave a sub -lease to the assessee of the said plot at a rental of Rs 4,200 per month. The building programme, however, was carried on after the licence to enter on the land had been obtained by the assessee from Manu Subedar. It appears that for the purpose of erection of the theatre and starting the cinema business, the assessee had requested Manu Subedar to help and assist him in getting prepared suitable plans and designs for the cinema theatre and other buildings, in obtaining permission from the Bombay Municipality for constructing an addition sixth floor, in procuring the required finance to enable the assessee to complete the construction of a modern theatre and other buildings, in procuring various priorities and permits for scarce materials including cement, steel and petrol for transport, in securing import licences for various goods for the purpose of the cinema theatre, in securing foreign exchange facilities to enable the assessee to import from abroad the various goods required for the purpose of the theatre and other buildings. The assessee had also requested Manu Subedar to advise him from time to time during the course of construction of the Cinema theatre and buildings, and also enter into negotiations with the Bombay Municipal Corporation to get the adjoining roads widened. Manu Subedar responded to these requests made by the assessee and had rendered him assistance in the aforesaid matters. On 4th of June, 1948, an agreement was arrived at between Manu Subedar and the assessee under which in consideration of the aforesaid services and assistance rendered by Manu Subedar, the assessee agreed to give to Manu Subedar for a period of 20 years 2% of the gross annual income earned by him in his cinema business. The other terms agreed to between the parties are as mentioned in annexure 'A' to the statement of case. It is not necessary to refer to all of them but it may be mentioned that it was agreed that the payment of 2% of the gross annual income would only be made in the years profits are made. In the year when there was no profit, that year would not be counted towards the 20 years period mentioned in the agreement. Further it was agreed that as security for the due performance and observance of the terms of the agreement, the assessee should within six months of the date of the agreement deposit with Manu Subedar a sum of Rs. 50,000 and it was further agreed that the burden of the aforesaid payment on the assessee was to attach and run with the said cinema theatre known as the 'Liberty Cinema' in whosoever hands the said cinema theatre shall be for running cinema shows. Paragraph 3 of the agreement deals with certain financial arrangements between the said Manu Subedar and the assessee in the event the assessee makes an arrangements with any purchaser or distributor of cinema films, the assessee reserving to himself certain guaranteed minimum income. Paragraph 4 provides that if the assessee was to let out the said cinema theatre to any other party or person or sell the said cinema theatre to any other person, the assessee shall makes it a condition with the lessee or the purchaser of the said cinema theatre that the said lessee or the purchaser shall pay to the said Manu Subedar every year up to the said period of 20 years the payments specified in the agreement. Paragraph 5 provides :
'Subject to what is stated in clause (4) above the party of the first part (assessee) shall not assign, transfer, sell or let out the said cinema theatre during the currency of the contract provided however that if the party of the first part shall pay to the second part (Manu Subedar) a lump sum computed at the rate of Rs. 1,250 per month for the then unexpired period of the said period of twenty years plus ten per cent. on such aggregate lump sum then only the party of the first part shall be at liberty to assign, transfer, sell or let out the said cinema theatre free from all claims of the party of the second part under this Agreement and the same shall stand terminated on such payment as aforesaid.'

The theatre and the building were completed before 1st April, 1949, and the assessee started his business on 1st April, 1949. The assessee desired certain variations in the matter of exercising the option given to him by the aforesaid clause (5) of the agreement made on June 4, 1948, and, therefore, on 15th March, 1950, he addressed a letter to Manu Subedar, the material part of which is in the following terms :

'As I desire to leave my affairs as clear as possible for my son, may I request you to consider whether you would not allow the operation of this clause of capital payment exactly as it is stated to be, to take place not merely in the event of sale of the Liberty Cinema, but also otherwise at may option any time within the next twelve months.'

(3.)BY his letter dated 17th March, 1950, Manu Subedar informed the assessee as follows :
'I am agreeable if you wish to buy out for a capital sum the annual payment involved in the agreement under the circumstances other than the sale of the Liberty Cinema.'

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