1. The assessee-firm carries on the business of production and release of movie films. In Part III of the return of income filed for the year, the assessee claimed as exempt a sum of Rs. 1 lakh being subsidy received from the Government of Kerala in respect of four films released in 1977, 1976, 1975 and 1977, respectively:Name of film Amount Previous year of releaseAcharam Ammini Osharam Ornana 25,000 1977Chhenavala 25,000 1976Dharmakeshstra Kurushetre 25,000 1975Kannappannunni 25,000 1977 In respect of each of these films, the assessee received a sum of Rs. 25,000 as subsidy under a scheme of the Government of Kerala known as the 'scheme for grant of subsidy to full length feature film entirely produced in the State' ('the Scheme'). The ITO rejected the assessee's claim that the sum of Rs. 1 lakh was not a revenue receipt and alternatively, that it was a casual income. He held the amount to be revenue receipt taxable in the hands of the assessee. On appeal, the Commissioner (Appeals) confirmed the order of the ITO. It is, thus, that the matter is in appeal before the Tribunal.
2. The learned Counsel for the assessee has pointed out that these amounts paid as subsidies were merely incentives for production and granted in the nature of awards or gifts. The amount was not taxable at all in t he first place, being not in the nature of income. It is alternatively contended that it is not taxable in the hands of the present assessee. The subsidy was not given on the basis of the cost of the film or on the basis of expenses. It does not depend on the language of the film nor on the facts of the expenditure thereof. The payment was made merely as an incentive to produce films within the State. The letters produced in this connection, according to the learned Counsel, indicate that the subsidy is granted when a picture is produced in the Kerala State. It is not connected with any expenditure incurred by the assessee nor with any depreciable asset. The sole aim was for promotion of film industry in the State. A lump sum was granted without any specific expenses in view. It was not necessary for the assessee to use the subsidy amount for any particular purposes. Insofar as the subsidy was not granted for the reduction of any expenditure, according to the learned Counsel, on this position a liability does not arise at all. Since the Income-tax Act, 1961 ('the Act') and Rule 9A of the Income-tax Rules, 1962 ('the Rules'), gives the assessee a privilege to write off the cost of the film if the film has done 90 days or more, the cost of the film was already written off (sic). There was no question, therefore, of an asset or reducing its cost. The subsidy was also unconnected with the capital structure of the film business or any revenue expenditure incurred. Certainly, according to the learned Counsel, this was not a grant for supplementing the profit earned by the assessee. Reference is made to the Central Subsidy Scheme, whereunder under identical circumstances subsidy is given to small-scale industries. The decision in Pioneer Match Works v. ITO  1 SOT 331 (Mad.) (SB) is referred to in this connection. While the decision in Sahney Steel & Press Works Ltd. v. ITO  4 ITD 6 (Hyd.) (SB) in a sense supports the assessee's case, the facts of First ITO v. Smt. Peethambari Devi  4 ITD 557 decided by the Madras Bench 'B' (Special Bench) of the Tribunal, are clearly distinguishable from the assessee's case.
3. At any rate, it is pointed out that this was not the receipt of the present assessee. The application for the same was filed by an old partnership. The amount received by the present partnership, therefore, would not be assessable even under Section 41(1) of the Act.
4. For the department, stress is laid on the orders of the authorities below. The subsidy amount is received in the accounting year and is a clear receipt arising from the assessee's business of film production.
The subsidy is paid for production of films. The assessee is in the line of film production. Only a person who produces a film satisfying the requisite conditions can get the subsidy. The assessee's status is that of a producer of films. The receipt is in that capacity only. A receipt in the course of business can be exempted from tax only if it is a capital receipt or a casual receipt. In the assessee's case, neither of these claims can be made. To support the case that any receipt in the course of business is revenue receipt and income, the learned counsel has relied on the decisions in Dhrangadhra Chemical Works Ltd. v. CIT  106 ITR 473 (Bom.), CIT v. Wheel & Rim Co. of India Ltd.  107 ITR 168 (Mad.), Kesoram Industries & Cotton Mills Ltd. v. CIT  115 ITR 143 (Cal.) and CIT v. Swadeshi Cotton Mills Co. Ltd.  121 ITR 747 (All.). Since the subsidy is received in the assessee's capacity as a film producer and it has necessarily worked for the same, it cannot be said to be a casual receipt. It is also not a capital receipt. The Central Government subsidy scheme referred to by the assessee, according to the learned Counsel, has nothing to do with the present subsidy. The letter is not related to a capital expenditure or a capital outlay. Films are clearly the stock-in-trade of the assessee and a trading asset. Any receipt in connection with the films should, therefore, be only on revenue account. The decision in Smt. Peethambari Devi's case (supra) clearly supports the department's case. Referring to Rule 4 of the Scheme, it is pointed out that the award of the subsidy clearly depends on the quality of the film. In this respect, it cannot even be said to be similar to the Central Government subsidy scheme for small-scale industries. Reference is made to  96 ITR (St.) 151 where a circular on the subject is referred to--Circular No. 142 [F. No.204/25/74 IT(A-II)], dated 1-8-1974. The decision in Smt. Peethambari Devi's case (supra) and Pioneer Match Works' case (supra) drew strength from the circular. The subsidy there was particularly intended to be towards capital outlay.
5. On the question of the assessability of the amount in the hands of the assessee, the learned Counsel for the department has pointed out that there was only one firm all through. Changes in the constitution of the firm did not give rise to another entity with every change of the constitution. There was also a specific provision in the partnership deed that the retirement of a partner did not dissolve the firm. On the question of a single firm, reference is made to the decisions in CIT v. A.W. Figgies & Co.  24 ITR 405 (SC), Shivram Poddar v. ITO  51 ITR 823 (SC), CIT v. Kirkend Coal Co.  74 ITR 67 (SC) and CIT v. Sant Lal Arvind Kumar  136 ITR 379 (Delhi). The decision of the Andhra Pradesh High Court in the case of CIT v. Chandajee Khubajee & Co.  143 ITR 365 broadly supports the department's stand. The question to be asked, according to the learned Counsel, was, who became entitled to the subsidy, who applied for the subsidy and who received it. The answer to these questions is 'Excel Productions'. The producer is all along the same assessee--Excel Productions. The question of allocation of shares of partners comes only after the income is earned. With reference to the dissolution of the partnership on the strength of which the assessee claimed that it was not the recipient of the subsidy, it is pointed out that after the dissolution of the firm the assets and liabilities were divided. In this there was no provision dealing with what would go to the erstwhile partners. Referring to Clause 3 of the partnership deed, it is pointed out that these can have relevance only to partners, inter se, and not the firm. It is only an overriding title against the continuing partners and not the firm.
6. We have considered the matter. There was a firm of eight partners constituted under a deed dated 4-8-1965. On 1-10-1977, this partnership was dissolved. A new deed drawn up on 1-10-1977 created a partnership of five partners. During the previous year relevant to the assessment year under appeal, the firm was constituted of five partners. The subsidy amount, the subject-matter of the present appeal, was received on 25-3-1978 during the previous year by the firm constituted of five partners. The assessee's claim is that the amount received is a capital receipt and is not taxable. It is also claimed that at any rate, the present firm only received the amount but it accrued under the rules to the earlier firm.
7. The relevant portions of the rules for the grant of subsidy to full length feature film produced in Kerala State are as under: (iii) Subject to such relaxations that may be considered by Government, they shall apply to all full length feature films entirely produced, processed, recorded and re-recorded in the State of Kerala and duly certified for public exhibition by the Central Board of Film Censors (Government of India).
2. (ii) 'Producer', means any individual, body of individual association or company, corporate or otherwise, as the case may be, whose name is mentioned as producer in the credit titles of the film duly certified by the Central Board of Film Censors.
(iii) The registered office of the Producer should be within the Kerala State.
3. (i) The producer of a feature film requesting for the grant of subsidy should furnish (d) details of indoor and outdoor shooting schedules of the film to the Director of Public Relations, Kerala. These details should be furnished within ten days before the commencement of the shooting except in the case of films which are already completed, or, are in various stages of making when these rules are published.
(ii) When the film is completed, the producer may apply for the grant of subsidy to the Director of Public Relations in the prescribed form bearing Court fee stamp of the value of Rs. 2 and accompanies by the following documents: (b) Certificate by the Producer to the effect that the film has been produced in its entirety within the State of Kerala [subject to modifications as referred to in Rule 1(iv) and (v)].
(c) Certificate from a regular film studio(s), unit(s), situated and functioning within the State of Kerala to the effect that the film has been shot therein or with their unit in locations inside Kerala accompanied by the copies of the daily shooting reports from the cameraman and sound recordist indicating the name of the production, title of the film, nature of shooting work, location, time and date and total footage shot; etc.
4. There shall be a Committee with the Minister-in-charge of Information and Publicity as the Chairman, two eminent individuals of known aesthetic and cinematic scholarship and the Director of Public Relations and Cultural Development Officer as official members to preview each film and recommend to Government regarding the grant of subsidy. The Cultural Development Officer will be the Convenor of this Advisory Committee.
6. On the basis of the recommendations of the Committee, the Government of Kerala may grant subsidy of Rs. 25,000 to the producer in respect of full length feature film duly produced, processed, recorded and re-recorded in its entirety in the State of Kerala [subject to such relaxations that may be considered by Government and the modifications referred to in Rule 1(iv) and (v)].
7. The subsidy amount sanctioned by Government shall not be mortgaged or authorised to be paid to any other persons. It shall be paid only to the producer of the film soon after the release of the film.
(i) No film produced and certified prior to 1st April 1975, shall be eligible for subsidy.
(iv) If a full length feature film is made in more than one language version simultaneously, only one version of the film shall be eligible for consideration of the subsidy.
An order of the State Government dated 25-7-1976 specifies the purpose of the subsidy as under: Even though quite a large number of feature films are produced every year, majority of them including films in Malayalam are produced in places outside the State. Government have been considering the question of adopting measures for encouraging the production of feature films in the State. As the first step in this direction, Government has formulated a scheme under which subsidy amounting to Rs. 25,000 will be granted to full length feature films entirely produced in the State and duly certified for public exhibition by the Central Board of Film Censors (Government of India).
Under its G.O. dated 25-2-1976, our orders were passed on 25-3-1978 sanctioning the subsidy of Rs. 25,000, three of them to the managing partner, Excel Productions, P.B. No. 181, Alleppey, and the fourth one to Smt. Annamma Kunchacko, partner Excel Productions, P.B. No. 181, Alleppey. These sanctions refer to applications received from the managing partner in respect of the first three sanctions and Smt.
Annamma Kunchacko for the fourth sanction. Apparently, the four abovementioned films were produced earlier to the above date and as clarified in the assessment order in the years between 1975 and 1977 and none of them were produced during the previous year relevant to the assessment year under appeal. The constitution of the firm at the time of the production was the one under the partnership deed of 4-8-1965 with eight partners and not the one under the new deed of 1-10-1977.
8. The conditions laid down in the rules for the grant of the subsidy along with the order of the Government dated 25-7-1976 clearly indicate that the purpose of the subsidy is to give an incentive for production of full length feature films within the State. This scheme aimed at promotion of film industry within the State does not, however, specify anything about the particular technological qualities or merits of the feature films to be produced. Thus, the subsidy would be available to a film produced in any language. There is no limit or restraint on the expenditure to be incurred in the film either within the State or outside the State, other than the length of the film fifed at 3000 mts.
in 35 mm. The subsidy is not based on the expenditure incurred by the producer. It is a lump sum amount payable for all films coming within the specified class. No condition relating to the expenses incurred for producing the film either on capital or on revenue account obtains. The subsidy received can be utilised for any purpose the recipient likes.
He may use it for working capital or for fixed capital in the business.
There is not even any requisite that he should use it in the business.
It can be taken away for personal purposes.
9. Other interesting sidelights, the rules of the Scheme reveal are that there is no condition as to the exhibition of the film or the period of exhibition of the film. Rule 2(ii) of the Scheme defines 'producer' as the person "whose name is mentioned as producer in the credit titles of the film duly certified by the Central Board of Film Censors". It is, therefore, not a requisite for the grant of subsidy that the alleged producer should be even a highly technically qualified man. Normally, the producer is a person who produces a thing. It would perhaps include a person who gets together the necessary finance, organisation, etc., and produces the article in this case, a film. He can also, if he has got the necessary finance, hand it over to someone who carries out the production. This point is stressed because we find that the rules do not expect any technical or other expertise from the part of the person who produces the feature film in the State and who is eligible for the grant of the subsidy. In other words, vide as the qualifications of the recipient of the subsidy are, except in the broad sense of producing films within the State, no qualifications are expected. Apart from the criteria the committee of the judges, granting the subsidy, would perhaps decide from time to time, no explicit criteria for the awarding of the subsidy exists. Apart from production of the film itself, neither the exhibition nor box office or other success is also provided for. All these indicate that the Government in awarding the subsidy has fixed its eye mainly on the production of film within the State but not on any other criteria. As it is in the film world, we find one person advances the finance, perhaps another gets together the organisation, a third one directs the film, others do various other activities, all of which together go to make up the final film. From this division of work and introduction of resources, it is not possible to say who is the producer in the case of any particular film. It is in this context, it would appear that the award is stated to be given to the person who is shown as the producer in the title of the film itself as recognised by the Censor authorities. If, therefore, someone advanced the money, someone else brought technical excellence and ability to bear on the project, but the picture is treated as produced by someone, that person gets the subsidy. The property in the film may belong to anyone. The film may be exhibited or given up for exhibition by one to anyone else. The grant of the subsidy is not concerned with this either. We are stressing these facts to highlight the issue that the State in granting the subsidy has not taken into account any other fact than the production of a feature film within the State. The question is, against such a grant will the fact of carrying on business by one or other entity be relevant Could the carrying on of the business be regarded as a sine qua non of the grant of the subsidy The natural corollary is, could the subsidy be then regarded as an inevitable addition to the receipts of a business carried on The main reason for bringing to tax the subsidy amount is that it arises out of the business of the assessee. If the subsidy goes only to a producer listed in the title of the film and the advance of money, expenditure of money, collection on exhibition, etc.,--in fact, the entire operation of the business--belong to someone else, would it be correct as a matter of fact or law to say that the person who receives the subsidy is the person carrying on the business 10. In our opinion, the clear answer to the above questions is that the award has nothing to do with the carrying on of the business. If that were so, the rules regarding the subsidy could have laid down that the person who receives the subsidy should carry on the business of producing, distributing or in any other way carrying on a business within the State. Without such a specific requirement specified in the rules, in our view, it would not be proper to connect the receipt of the subsidy with the carrying on of the business. If, for instance, while the assessee may carry on a business, but the films which receive the awards are produced by someone else, could it be said that the assessee would be entitled to receive the awards merely because the award producing films were traded on by the assessee? In our opinion, the answer is certainly 'no'. In the case of certain awards of grants as incentives, there might be the requirement of carrying on a business. In other cases, the awards or incentives could be given only to persons carrying on a business. In such cases, it is the inevitable circumstance of conducting a business which leads to the acquisition of the award or grant. In our opinion, the same cannot be said of the awards in the present case. It is more so because for the reasons detailed in the earlier paragraphs, the rules have not taken note of any business aspect in production or release of movie films at all. In fact, the second aspect of the question raised by the learned Counsel for the assessee lends an answer to this problem. It may be that one person produces a movie and gets the award, but the business of dealing in the film, exhibiting it, getting a profit, etc., pertains to another person.
11. In the present case, the producer of the subsidy winning films submitted applications for the subsidy based on the movies produced in the previous years 1975 to 1977. If either that producer was non-existent during the previous year when the award was given or he was not in business at that time, certainly it cannot be stated that these awards were received by a person satisfying these conditions in the later year. Even though the rules do not mention the time for the grant of the subsidy, apparently, the conditions specified therein would relate to the time when the film was produced. As a natural corollary, the award must go to the person who produced the film. In this light, the subsidy is clearly referable to the person who produced the film and at the time when it was produced. There would certainly not be any grant of subsidy to a person at a later time or to any other person for a matter of that. In the light of the rules, therefore, and on a proper interpretation of them, the grant of the subsidy should clearly relate to the completion of the act of producing the film in the first instance, and to the producer, as defined at that time, in the second. The fact, therefore, that the assessee carries on a business during the previous year under appeal would not, in our view, be relevant to the question of receipt of the subsidy which relates to a film produced very much earlier than in the previous year.
12. The assessee's second point is also, therefore, in our opinion, closely connected with the above discussion. What is pointed out is that the person who should have received the subsidy, is a firm constituted in the particular accounting years 1975 to 1977. It was only that firm which was entitled to the receipt of the subsidy. Merely because it was as a matter of fact, received in the year 1978, it cannot be treated as the income of the assessee--a firm in existence in this last mentioned year. It is not necessary, in our view, to go into the question of the continuity of the firm from 1975 to 1978 at all for resolving this dispute. Even granting for argument's sake that the assessee in 1975 is the same as in 1978, the grant of the subsidy relates only to what the assessee has done in the years 1975 to 1977.
It has nothing to do with whatever business he may do in 1978. In other words, even if the assessee has closed its business in 1977, the subsidy relating to the years 1975 to 1977 could have been received by it if granted late on account of the procedure involved in the grant only in a subsequent year. If he has closed the business in 1977, he would be receiving the subsidy after the business is closed. Since the subsidy is granted to each film separately on its own merits and satisfying certain conditions, it could certainly not be regarded as the product of the business in existence in 1978, since it was clearly referable to certain activities performed in 1975 to 1977. Even if, therefore, the same assessee continues the business for all these years and in 1978, the award whenever received would be traceable and relevant to the business conducted by the assessee in the earlier year.
If treated as an income, it cannot be regarded as relevant to the year under appeal at all.
13. Apart from the above, we are not sure that the mere fact of treating the assessee as the same for these years would be sufficient to regard the subsidy as a receipt of the same assessee in the current year. There was a change in the constitution of the firm even according to the department. On the date when these films were produced, the assessee was a firm of eight partners. The business leading to the grant of this award (assuming that it is the product of the business) was done by an assessee in the years 1975 to 1977. Any income arising from that business would accrue to that assessee during the year when the business was done. Even if, therefore, the same firm were regarded as continuing in the year 1978, the subsidy regarded as an income would accrue to the old partners who were partners in the years 1975 to 1977.
The subsidy cannot constitute the income of the firm constituted in 1978. Section 186 of the Act, while holding that the income would be assessable in the hands of a subsequent firm, does not say that the charge of tax on a business conducted in an earlier year would actually be on the firm continuing on a later date. The income has to be apportioned among the partners who were partners at the time when the income was earned. All controversy about the apportionment of income or assessment of income between an earlier and later period decided by the Courts and reported in the law reports refers only to cases where there was a change in the constitution of the firm during the previous year and the income was earned in the earlier part of the year rather than in the later part of the year. No notice is taken in the decided cases or no decision given regarding the income earned by the firm in a period prior to the previous year relevant to the assessment year. For this reason also, the subsidy relating to a production during an earlier year cannot be treated as the income of a later previous year or assessment year.
14. It was pointed out that the producer was all along 'Excel Productions' and so the person who applied for the subsidy, became entitled to it and who received it was the same. There is a fallacy in this argument. The name 'Excel Productions', by itself, does not indicate the real chargeable entity or the real person who received the alleged income. This name could be adopted by different entities--an individual, a firm with one or other constitution, even a company or any other legal entity. The name, by itself, therefore, does not fix the personality of the assessee or the entity to be assessed. One has to see who carries on the business under that name. In the present case, one has to see who produced the film even though under that name.
Obviously, the persons who produced the film using the name 'Excel Productions' in 1975 to 1977 apparently were not the same persons who did the business in 1978 and who received the subsidy. In fact, the group of people who were known as Excel Productions in the title of the feature films, as recognised by the Central Board of Film Censors, cannot be said to be the same group of people who received the award in 1978. In law the former group could certainly lay a claim to the award and even demand it, if received by another set of people. The assessee's claim, therefore, that the partnership as constituted during the previous year relevant to the year under appeal, has not received the subsidy, at any rate exclusively or beneficially as its income has also to be accepted. In our view, it is not necessary, therefore, to go into the question whether the same firm continues or not for this purpose.
15. It is necessary to look into the decisions cited on behalf of the parties. In Smt. Peethambari Devi's case (supra), it was claimed by the assessee that the subsidy was a capital receipt and the Special Bench applied a test as to whether the assessee was able to show that the subsidy was designed to meet the cost of any capital asset. It is on this basis and asking the question whether it was designed to meet the cost of any capital asset, that the subsidy was held assessable as part of the income of the assessee. This is not exactly the point before us.
The assessee has not laid a claim that the subsidy was given for the purpose of meeting the cost of any capital asset. The assessee's claim is that it has nothing to do with any capital expenditure or revenue expenditure incurred in connection with the film production. It was given as a prize or award for a person who fulfilled certain conditions. As we have dealt with, at length, on the above point and indicated that even carrying on a business in films is not a sine qua non of getting the award, the question considered by the Madras Bench, in our opinion, is not relevant to the issue on hand. This decision does not help the revenue.
16. In Sahney Steel & Press Works Ltd.'s case (supra), the Special Bench was dealing with certain incentives granted by the Government for encouraging the setting up of industries in the State of Andhra Pradesh. The incentives included, inter alia, refund of sales tax on raw materials, machineries, etc. The refund was subject to a maximum of 10 per cent of the equity capital in the case of public limited companies and the actual capital outlay (excluding work capital) in the case of other companies. The Bench held that the amounts refunded were not really a refund of sales tax nor did they represent any profits or gains of a business carried on by the assessee. Broadly, this decision supports the assessee's case. The Bench considered extensively the other decisions cited before us on behalf of the revenue. In Circular No. 142 [F. No. 204/25/74 IT (A-II)] dated 1-8-1974, the Board had clarified the position regarding the taxability of the '10 per cent Central outright grant of subsidy scheme, 1971' for industrial units to be set up in selected backward areas, etc. The payment of subsidy under the scheme was considered primarily as given for helping the growth of industries and not for supplementing their profits. Since there was a provision to determine the quantum of subsidy with reference to the fixed capital and not the profits, the subsidy, it was advised, could be regarded as being in the nature of capital receipt. In the present case, there is no relation between the subsidy and the fixed capital of any business. That the subsidy would, therefore, go to strengthen the fixed capital base of the business also cannot be urged.
17. Much stress has been laid by the learned Counsel for the department on the decision of the Andhra Pradesh High Court in the case of Chandajee Khubajee & Co. (supra). This was a case where a firm was in existence since the year 1924-1925 with changes in composition from time to time continued up to the assessment year 1971-72. The firm was assessed to sales tax, which was allowed as a trading liability in the earlier years 1962-63 to 1965-66. It obtained a refund during the accounting year relevant to the assessment year 1971-72. The High Court upheld the assessment of the amount refunded under Section 41(1). In this case the fact that there were changes in the constitution of the firm did not make any difference to the applicability of Section 41(1), was stressed. Their Lordships, however, relied on an important fact, viz., that there was no material on record to show that the partnership deeds executed from time to time reserved a right in favour of the retiring partners to share the amount of refund of sales tax as and when received. This was actually a case of the application of Section 41(1). The decision was based on the fact that this was a case of reconstitution of the firm on the one hand and the absence of provisions in favour of the retiring partners for sharing the amount of refund of sales tax on the other. The firm was actually contesting in a litigation, the liability to sales tax and the anticipation of a refund was clearly there. Even then, no provision was made for securing the rights of the retiring partners as regards the sales tax if ever refunded. This decision does not help the revenue in the present case.
Section 41(1) refers to the assessment to tax following certain allowances previously made and where there is a clear charge on the receipts. In the present case, the receipts, if at all, belonged to an earlier year when the conditions necessary for getting the subsidy were satisfied. Even for that year it cannot be held that there was a clear charge. For the year under appeal, therefore, this cannot be held taxable on the analogy of the Andhra Pradesh High Court case.
18. In the result, we hold that the subsidy received is not taxable in the hands of the assessee.