Sabyasachi Mukharji, J. - (1.) We are concerned in this reference with the assessment for the assessment year 1960-61. The relevant previous year ended on 30th September, 1959. The assessee is a company. The assessee carries on business of production and distribution of cinematograph films. During the year, the assessee produced and released for exhibition a film called "Sagar Sangame". In respect of this film, the assessee had entered into an agreement with one Amar Das Mallick, a film producer, on 20th June, 1957. Under the agreement the assessee was to finance the production and to be the distributor of the film. The assessee had to finance a sum not exceeding Rs. 1,12,500 including Rs. 10,000 for acquiring the story rights, Rs. 25,000 for the director, Debaki Kumar Bose, and Rs. 5,000 to the music director, Sri Rai Chand Boral. The film was to be completed in six months and the assessee was to be the absolute owner thereof. The film was produced. It secured the President's award. The assessee had financed the production. Disputes arose between the said Amar Das Mallick and the assessee as to who was the producer of the film. The matter was referred to the arbitration of the Bengal Motion Pictures Association. By an award dated 18th April, 1959, the arbitrator decided that Sri Amar Das Mallick and the assessee were the joint producers of the said film. There were certain other disputes between the parties, viz., the assessee and the said Sri Amar Das Mallick, regarding the agreement dated 20th June, 1957. Those disputes were settled by the terms of a settlement dated 22nd April, 1959. This settlement was filed in this court in Matter No. 35 of 1959. Under the settlement the assessee had to pay Rs. 20,101 to Sri Amar Das Mallick so as to enable him to give up all his claims as producer of the film "Sagar Sangame" including his 40% share of profits and other benefits reserved to him by the agreement dated 20th June, 1957. Another document dated 17th May, 1,960, was executed between the said Sri Amar Das Mallick and the assessee under which it was declared that the assessee would be the sole producer and the owner of the film and would be entitled to the President's award and medals declared by the Government of India. The document is called a "release" and recites the payment of Rs. 20,101 as the consideration thereof. Clauses 1 and 2 of the said document were as follows : "1. In consideration of a sum of Rs. 20,101 to be paid by Messrs. De Luxe Film Distributors Ltd. to Sri Amar Das Mallick, the said Sri Amar Das Mallick gives up all his claims as producer of the film 'Sagar Sangame' including 40% shares of profits and all other benefits reserved to him by the agreement dated the 20th June, 1957, and/or under the award of the Bengal Motion Pictures Association dated the 19th of April, 1969.
(2.) It is declared that M/s. De Luxe Film Distributors Ltd. alone are the sole producers and owners of the said film and are entitled to the President's award and the medals declared by the Government of India in respect of the film "Sagar Sangame" and the said Messrs. De Luxe Film Distributors Ltd. or their authorised representatives shall receive the cash award of Rs. 20,000 as also the medals that may be awarded by the Ministry of Information and Broadcasting, Government of India, New Delhi, in respect of the said film. The said Sri Amar Das Mallick will have no interest in the said film or any claim with regard thereto." This sum of Rs. 20,101 was claimed as forming part of the cost of the picture, "Sagar Sangame", so as to be considered in giving amortisation allowance. The Income-tax Officer disallowed the claim on the ground that this payment was made to secure the right of absolute ownership of the film and to remove a contestant in the field in order to have unrestricted enjoyment of the ownership of the film. According to the Income-tax Officer, although it was a capital payment, it had nothing to do with the cost of production of the film in question and could not be allowed either as revenue expenditure or for amortisation. 2. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The assessee thereafter went up in appeal before the Tribunal. The Tribunal did not accept the assessee's contention that the sum of Rs. 20,101 was forming a part of the cost of the production of the film. The Tribunal, however, held as follows : "In the case of a financier like the assessee, generally part of the net receipts go as consideration for certain services in connection with the picture. In the present case, the assessee had to pay 40% of the net receipts to Amar Das Mallick and 10% to Sri Debaki Kumar Bose. It is the right of Amar Das Mallick that has been acquired by the assessee by payment of the sum of Rs. 20,101. From Clause 1 of the agreement dated 17th May, 1960, it is found that the sum has been paid to Sri Amar Das Mallick. so that he gives up all his rights as producer of the film, including 40% of the share of profits and all other benefits reserved to him under the agreement dated 20th August, 1957. Even the rights arising under the award of the Bengal Motion Pictures Association dated 18th April, 1959, has also been given up. The payment of Rs. 20,101 is thus to enable the assessee to net all the receipts of profits except to those which are liable to go in favour of Debaki Kumar Bose. In the hands of a financier like the assessee, acquisition of such rights in motion picture has a revenue character. In the circumstances, we consider that the sum of Rs. 20,101 will have to be taken into account in the hands of the assessee in arriving at profit or loss from the picture. We do not think it necessary to send the matter back to the income-tax authorities for any factual investigation as the relevant materials on the basis of which this contention was advanced are all before us. We direct accordingly."
(3.) Upon this, under Section 66(1) of the Indian Income-tax Act, 1922 the following question has been referred to this court: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 20,101 paid to Sri Amar Das Mallick was properly allowed by the Appellate Tribunal as a revenue deduction ?" On behalf of the revenue, it was contended that the sum was expended to perfect the title to the film. It was the sum spent to acquire the film properly or in other words to get the acquisition of the film for profit making purpose and the title was made perfect by spending this amount on the film in question. It was, further, contended that alternatively it could be considered to be an expenditure incurred for obtaining a right to conduct the business, not to earn the profit. It was, further, urged that the expenditure in question was incurred for acquisition of the title to the film which was in the nature of capital asset. On behalf of the revenue, reliance was placed on the observations in the case of Dalmia Jain and Co. Ltd. v. Commissioner of Income-tax [1971] 81 ITR 754, where the Supreme Court held that the assessee had resisted the suit in order to protect its business and not to safeguard its prospects to get a new lease and it did not initiate the proceeding ; it merely defended the claim made against it. The suit was launched against it because of one of its business activities and, therefore, the litigation expenses were revenue expenditure laid out wholly and exclusively for the purpose of the business. Where the litigation expenses were incurred by the assessee for the purpose of creating, curing or completing the assessee's title to any particular thing then the expenses incurred must be considered as capital expenditure. But if the litigation expenses were incurred to protect the business of the assessee then this must be considered as revenue expenditure.;