COMMISSIONER OF INCOME TAX Vs. DEVI FILMS P LIMITED

JUDGEMENT

(1.) AT this instance of the Commissioner of Income-tax and in pursuance of the directions of this court, two questions have been referred under s. 256(1) of the I.T. Act, 1961. The first of them is :

(2.) THE assessee is a private limited company. It derives income, inter, alia, from film distribution and financing. We are concerned with the assessment years 1964-65, 1965-66 and 1966-67. THE relevant accounting years are the Tamil Years. THE assessee had entered into an agreement with the Matha Pictures on September 31, 1962. Matha Pictures was producing a Kannada film called "Sakthi Sakthi". While the film was in the process of production, the producer, who wanted finances for completing the picture, approached the assessee and offered to entrust it with the exclusive rights of distribution in certain areas in Karnataka State. THE assessee agreed to advance a sum of Rs. 2,80,000 to spent only towards the production of the said picture. A sum of Rs. 85,000 was to paid in full statement of the amounts due to another distributor. THE balance was to be paid on different occasions. For instance, a sum of Rs. 40,000 was to paid on signing the agreement, another sum of Rs. 25,000 after fifteen call sheets were shot, another sum of Rs. 25,000 after completing thirty call sheets, which would completed the picture, and the balance of Rs. 80,000 was to be retained towards the cost of prints and publicities. THEre were certain other provision which are usually to be found in such agreement and which are not of any significance to us. it is enough for our purpose to refer to those clauses which are material. Clause 5 provided for a distribution commission calculated at 35 per cent. on the net realisation of the picture. Under clause 6, the expression "net realisation" was defined as meaning the distributor's share, after deducting the taxes, derived from the screening of the picture. Clause 7 authorised the distributor to deduct the distribution commission as mentioned in clause 5 and appropriate the balance towards the discharge of the amounts advanced to the producer. After the advance was completely adjusted, the distributor had to remit to the producer the realisation after deducting the distribution commission. Clause 14 provided that in the event of the advance not being fully adjusted and wiped off during the period of twelve months from the date of realise of the picture, the producer was to refund to the distributor immediately such unrecouped portion of the amount stipulated. THE distributor was also entitled under clause 15 to demand and receive the overflow collections from certain other distributors. THE producer undertook to complete and deliver the prints for the realise of the picture on November 27,1962, that is, the Deepavali day in that year, failing which the producer undertook to pay damages together with interest for amount received at the 12 per cent. per annum from the date of default up to the date of delivery of the prints. If the producer was unable to complete the picture and deliver the prints by the Deepavali of the negatives of the picture so far produced and to proceed with the completion of the render all assistance to the assessee for the production and completion of the picture. THE expenditure incurred by the distribution was to be entirely borne by the producer which had to be treated as further distribution advances under the contract.

(3.) WE have already summarised the agreement and referred to the relevant clauses which are material here. The agreement contemplated release of the picture on November 27,1962. It is not in dispute that the picture could not be complete and that the assessee had to take over the production from the original producer. The production was completed only by September, 1963, when the picture was released. Thus, there was a breach of the agreement by the producer as he did not complete the picture within the stipulated period. The further fact that emerges from the accounts as shown in the annexures is that the assessee had actually advanced a sum of Rs. 4,37,828.43. He had also to incur further expenditure by way of additional prints, excise duty, advertisement charges, etc. The total amount incurred by the assessee before distribution of the picture came to Rs. 4,63,574.11. The realisation up to April 12, 1964, was only Rs. 2,62,536.68. The further realisation up to April 12, 1965, and April 13, 1966, came to Rs. 66,298.48 and Rs. 22,187.48. From these figures it would be clear that the picture had no successful run. Apparently, because of the difficulties, the producer is stated to have become a sanyasi. But the assessee had to take over the production of the picture only because he had substantial advances and had to look to the realisation for the purpose of recovering the amounts so advanced. The way in which the picture was receiving by the public could, in the circumstances, have shown to the assessee that even the amounts advanced could not have been realised. The question of realisation of the commission or the interest that is contemplated by the agreement would thus be a very doubtful one. It is in the background of these facts that we have to examine the relevant authorities.