1. This appeal is directed against the order made under Section 263 of the Income-tax Act, 1961 ('the Act').
2. The assessee is a registered firm. On 5-10-1978, the assessee entered into an agreement with Premalaya by which it acquired the territorial lease rights in a film called 'Andhamaina Anubhavam' for the States of Andhra Pradesh, Orissa and parts of Karnataka for 99 years from the date of the censor of the said picture. The consideration was Rs. 6,60,000 of which Rs. 25,000 was to be paid on the date of agreement and the balance in instalments of Rs. 35,000 on 31st October, Rs. 2 lakhs on 20th November and Rs. 4 lakhs within fifteen days after the date of the censor of the film. On 7-10-1978, the assessee in turn sold the rights in the film to Prema Trust for a sum of Rs. 8,65,000. This amount was payable in instalments of Rs. 10,000 on the date of agreement, Rs. 50,000 on 31-10-1978 and Rs. 2 lakhs on 25-11-1978 and Rs. 6,05,000 within fifteen days of the censor of the film. The accounts of the assessee also showed that the assessee was only passing on the amount received from Prema Trust to Premalaya.
The censorship certificate was given only on 6-4-1979 and the film was released on 14-4-1979. Therefore, according to the assessee, the income from this transaction accrued only in the previous year ended 31-3-1980 and no income accrued in the previous year ended 31-3-1979. Therefore, for the assessment year 1979-80 corresponding to the previous year ended 31-3-1979, the assessee filed a return showing the income to be nil. This was accepted by the ITO by assessment order dated 20-10-1981.
The Commissioner on perusing this assessment order has, after hearing the assessee, reviewed the proceedings and directed the ITO to make a fresh assessment after scrutinising the agreements. He was of the view that the assessment was prejudicial to the revenue, inasmuch as the Prema Trust itself had sold the rights again to an outsider for Rs. 9,50,000 on 25-10-1978 and that indicated that the assessee had transferred the rights within the previous year ended 31-3-1979 and the income accrued in that year. The assessee has appealed against this conclusion of the Commissioner.
3. Before we consider the merits of the appeal, we should record the fact that it is not the case of the revenue that the assessment was made in haste or without proper enquiry by the ITO as it is admitted that the agreements in question were before the ITO and were considered by him before making the assessment. Therefore, the order under Section 263 has been made only because the Commissioner disagreed with the ITO with regard to the acceptance of the claim that these agreements did not give rise to income within the previous year ended 31-3-1979. The Commissioner, however, without giving a categorical decision on this point, restored the matter to the ITO which itself shows that the order is vitiated by lack of clear finding that the assessment was erroneous in law. Be that as it may, we think it proper to go into the merits of the question whether the income could be said to have accrued in the previous year ended 31-3-1979 to decide whether the assessment order was erroneous and thereby conferred jurisdiction to the ITO to revise that assessment.
4. The contention of the assessee on the merits was that the agreements stipulated for the transfer of the property only after the censorship of the picture and, hence, no income could accrue within the previous year ended 31-3-1979. On the other hand, the contention of the revenue was that the agreements themselves having been executed within the previous year ended 31-3-1979 and the amounts also having been required to be paid and taken together with the fact that there have been subsequent transactions transferring the same rights, it should be inferred that the income had accrued in the previous year ended 31-3-1979.
5. On consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed. A perusal of the agreement clearly supports the contention of the assessee. The agreement dated 7-10-1978 states that the assessee granted to the lessee, the lease rights to distribute, exhibit and exploit the film for a period of 99 years from the date of censor of the said picture. This itself shows that the agreement could take effect only from the date of the censor of the picture. Maybe, some amount was payable in advance. But, until the censorship of the picture, the asset, which was the subject-matter of the transfer itself, did not come into existence. In the circumstances, these agreements were only executory agreements relating to an asset which was not in existence on the date of the agreement and which was expected to come into existence only in future. It is settled law that though such agreements are not void, they are effective only from the date when the asset itself comes into existence and not before. If that asset does not come into existence, the agreement will be ineffective and become voidable. Hence, it is not possible for any income to accrue from such an agreement until the asset, which is the subject-matter of the transaction itself, comes into existence. This position has been recognised by the revenue itself since under Rule 9A of the Income-tax Rules, 1962 ('the Rules') relating to the computation of income from feature films, in Sub-rule (10), it is stated that for the purpose of that rule, the rights of exhibition of a feature film shall be deemed to have been sold only on the date when the positive print of the film was delivered to the film distributor, which is possible only when the film is certified for release by the Board of Film Censors. In the present case, the film was certified for release only on 6-4-1979 and it was released on 14-4-1979. Hence, the income from these transactions accrued only in the previous year ended 31-3-1980 and such income could not be assessed in the assessment year relevant to the previous year ended 31-3-1979. The assessment made by the ITO was, therefore, correct in law and was not required to be disturbed by the Commissioner. We must, accordingly, cancel his order made under Section 263. The appeal is allowed.