1. The case referred to us is concerned with assessment year 1968-69 and accounting period ended on August 31, 1967. The assessed was doing the business of exhibiting cinema pictures two theatres which it had taken on hire in 1959 were the Filmistan and Sudarshan in Lucknow. The rent being paid for these cinemas was RS. 2,674 and Rs. 1,000 respectively. The income from the cinema business was assessed under the heading 'Income from business'.
2. On April 13, 1966, there was an agreement with M/s. Khanna Financiers of Delhi, which allowed that firm to exhibit picture for a period of 104 weeks at the rate of 28 shows per week, the weekly hire charge being Rs. 5,000. This was treated as a 'lease agreement' by the ITO.
3. However, it is not strictly speaking a lease agreement as noticed by the Tribunal, but rather, an agreement to operate the cinema.
4. The agreement provided that the office, management, staff, electricity and other expenses for running the cinemas were to be borne by the assessed, but they would only get a (weekly) hire charges of Rs. 5,000. In return, the 'playing time' was placed at the disposal of M/s. Khanna Financiers. That firm had to make a deposit of Rs. 25,000 with the assessed as security amount. The agreement ran for 41 weeks when it was cancelled by a subsequent agreement. By this agreement, the assessed had to pay sum of Rs. 68,000 as damages for termination of the agreement and also had to pay back the security of M/s Khanna Financiers. The reason for the payment of the amount was explained by the assessed as being in order to take advantage of the 'playing time' by the assessed himself which would lead to better return.
5. The question before ITO was whether the compensation of Rs. 68,000 constituted a revenue expenditure or a capital expenditure. The ITO held that it was a capital expenditure.
6. On appeal to the AAC, that decision was upheld. On further appeal by the assessed to the Tribunal, it was held that all the cases cited by the parties had been decided on facts applicable to those cases and were not of any assistance to the case of the assessed. The case was really one to be decided on facts.
7. According to the Tribunal :
'All that the assessed did was that instead of running the theatres itself it entered in to an agreement with Khanna Financiers by which the latter was permitted to exhibit films of their selection for a period of 104 weeks. By entering in to this agreement the assessed was getting a rental of Rs. 5,000 from which it had to meet all the expenses. The agreement being for a period of two years does not create a capital asset in the sense no asset or advantage of enduring nature has been brought into being.'
8. Later on, the Tribunal observed as follows :
'In these circumstances, the argument of the Department that the cancellation of agreement resulted in the acquisition of a new capital right or the restoration of a capital that was lost, cannot bear scrutiny. Our finding, thereforee, is that the payment of Rs. 68,000 has been made to M/s. Khanna Financiers in the normal course of business and that such payment is incidental to the business. By this payment the assessed was merely altering the mode of use of the profit earning apparatus. It acquired nothing new by way of an enduring nature. After all the period we are concerned with is only 63 weeks. Such a short period can hardly be described as of an enduring nature. In these circumstances, we hold that the revenue authorities erred in treating the above amount as of capital nature.
9. In these circumstances, the Tribunal has referred the following question to this court as a result of an order passed under s. 256(2) of the Income-tax Act, 1961, in I.T.C. No. 37 of 1973, on July 29, 1976 : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 68,000 paid to M/s. Khanna Financiers on cancellation of the agreement is a revenue expenditure ?'
10. We have been referred to a number of cases by learned counsel of both sides regarding the law applicable to determine whether a particular receipt or expenditure is of capital or of revenue nature, as the case may be. We fully agree with the view taken by the Tribunal that the present case has to be decided on its own peculiar facts.
11. The learned counsel for the Revenue urged that the Tribunal was wrong because the assessed had acquired an asset of an enduring nature by paying the sum of Rs. 68,000. The contention is that the assessed was only getting a sum of Rs. 5,000 as hire charges during the first 41 weeks of the agreement and as a result of the payment of Rs. 68,000 and the return of the security deposit, it got back the right to run the cinema itself, and thus an asset was only returned for 63 weeks, because in any case after that it had to be returned to the assessed, but still it is an asset of an enduring nature.
12. The question for consideration is that the facts show that the assessed had taken these two cinemas in Lucknow at a monthly rent of Rs. 2,674 and Rs. 1,000 respectively making a total of Rs. 3,674 monthly. Assuming that there are four weeks in a month, the assessed was getting a sum of Rs. 20,000 under the agreement, but paying for the expenses of running the cinemas. This arrangement with M/s. Khanna Financiers was a business arrangement, assuring the return of Rs. 5,000 for the use of 'playing time'. This type of an arrangement is not uncommon in the business of running cinemas. Normally the 'playing time' is hired out at varying rates dependent on the nature of the theatre. The effect of such an arrangement is that the box-office receipts are collected by the person who runs the cinema and from the same a sum of Rs. 5,000 is paid to the person hiring out the 'playing time'. It may happen that the box-office receipts are less than Rs. 5,000 or are much more than Rs. 5,000. This depends on the nature of the picture run, the reaction of the public and other circumstances which fluctuate from time to time. It may be that the assessed preferred to get a fixed yield from the business rather than be at the mercy of the reaction to the film actually being screened at the cinema. It often happens that a particular picture flops and there are hardly any receipt from the box-office, or it may be that a picture is a great success and a heavy return is available from the public. In this sense, the cinema business is a chancy affair. Sometimes, the return can be very heavy and sometimes it may be very merge. In any case, the assessed preferred to get a fixed return and, may be, due to changes in circumstances decided that they would prefer to run the cinema themselves with a view to getting that benefit, they paid Rs. 68,000 as compensation to M/s. Khanna Financiers for their loss of profits for the remaining 63 weeks. This is the way we understand this agreement. There is no asset of an enduring nature involved, but only an alteration in the mode of earning money from the cinemas. It may be that the assessed might have lost in this process because in the next 63 weeks it may not have been able to recoup the expenditure of Rs. 68,000 or it may have recovered the same. If the sum of Rs. 68,000 is treated as a capital expenditure, true picture of the income of the assessed cannot be obtained. If the parties had continued with the the agreement, the assessed would have got Rs. 5,000 per week for the remaining 63 weeks which is Rs. 3,05,000. By running the cinemas itself, the assessed had to spend Rs. 68,000 extra which it would only get if the box-office realisations were at least Rs. 3,73,000 for the remaining 63 weeks. One cannot say what the result would be, but it is apparent that if the realisations were less than Rs. 3,73,000, the transaction would have resulted in a reduction in the income of the assessed had bit a increase. It is, thereforee, claimed that the sum of Rs. 68,000 has to be taken into account for determining the true profit of the assessed-company during the remaining 63 weeks and, thereforee is an expenditure of revenue nature.
13. It may be useful now to refer to the cases.
14. Mr. Wazir Singh referred to Empire Jute Co. Ltd. v. CIT : 124ITR1(SC) , on the submission that was a parallel clause. That was a case in which loom hours of members of the Indian Jute Mills Association were restricted. The agreement also provided for the transfer of loom hours to others. A sum of Rs. 2,03,255 was claimed as revenue expenditure by the assessed for purchasing loom hours from for other mills. The High Court had held that this was an expenditure of an enduring nature, but the Supreme Court held it was a revenue expenditure.
15. The argument of the Revenue in the case was that by purchasing loom hours the assessed had acquired a right to produce more, but the Supreme Court rejected this contention by holding as follows (p. 12) :
'But we fail to see how it can at all be did in the present case that the assessed acquired a source of profit or income when it purchased loom hours. The source of profit income was the profit-making apparatus and this remained untouched and unaltered. There was no enlargement of permanent structure of which the income would be the produce or fruit. What the assessed acquired was merely an advantage in the nature of relaxation if restriction on working imposed by the working time agreement, so that the assessed could operate its profit earning structure for a longer number of hours.'
16. The test as indicated by the Supreme Court on an analysis of several cases was whether the expenditure was in the capital filed or in the revenue field. Following is view, we are also of the view that in the present case, the cinemas remained the same but the same but the manner of realisation of profits from the same was changed by the assessed. Instead of getting Rs. 5,000 as a fixed yield weekly from the financiers who were running the cinemas, the assessed preferred to run the cinemas itself and took the chance of either making more or less from the box-office. The expenditure of Rs. 68,000 was, thereforee, properly in the revenue field and not in the capital field. In order to get back the benefit of running the cinemas itself (which might turn out to be benefit or a disadvantage dependent on future circumstances) the assessed had to pay to M/S. Khanna Financiers for the loss of their profits for the remaining 63 weeks which was calculated to be Rs. 68,000, which works out at a little more than Rs. 1,000 per week.
17. In Godrej & Co. v. CIT : 37ITR381(SC) , the managing gents were entitled to a remuneration of 20% of net profits, but they reduced the remuneration to 10% and received a lump-sum in lieu of reduction. It was held by the court that the expenditure was a capital expenditure because it reduced the liability to pay 20% and as far as the receipt was concerned, it was a capital receipt, i.e., compensatory. This case is distinguishable on the simple ground that it was a case of reducing a liability on the company and at the same time it has reduced the future income of the managing agents which was of a capital nature is their hands. There is no parallel with the present case.
18. In J. K. Cotton . V. CIT : 101ITR221(SC) , a managing agency was voluntarily terminated, but it was held that the compensation paid was not dictated by commercial expendiency and the appellant really wanted to benefit both the firms in which the Singhania family had major interest. The compensation was held not to be of a revenue nature but a capital expenditure. It is again a case of compensation which is treated as of capital nature being compensation for termination of the managing agency. It is difficult to treat the present case on par because of the special facts involved.
19. In CIT v. Ashok Leyland Ltd. : 86ITR549(SC) , the question of compensation paid for termination of the managing agency was treated as being of a revenue nature. It thus would appear that this type of judgment of the Supreme Court turns on the special facts of each.
20. In Kettlewell Bullen and Co. Ltd. v. CIT : 53ITR261(SC) , there was a voluntary relinquishment of a managing agency and a sum was paid for the same and the question arose whether the arrangement was a trading transaction or whether the appellants had parted with an asset of an enduring value. It was held that the assessed had received compensation for the loss of a capital asset, and it was, thereforee, not a revenue receipt.
21. It is not useful to refer to more cases as the question in each case had necessarily to turn on the nature of the transaction. As analysed above, we are of the view that no asset of an enduring nature was acquired by the assessed. In fact, it had always had the asset of an enduring nature, namely the two cinema houses, but the assessed decided that it should run these cinemas through M/S. Khanna Financiers for 104 weeks and, thereforee had entered into a transaction resulting in a weekly hire being paid for 'playing time' amounting to Rs. 5,000. This was an arrangement to run the cinemas. The assessed then brought about a cancellation of this arrangement to run the cinema in a different way. For this, the assessed had to pay a sum of Rs. 68,000 in order to take a change of earning much more. It is thus a change in the method of earning profits from the cinemas and not a transfer of any asset. The Tribunal was right in holding that it was an expenditure of revenue nature. Assuming that the arrangement had continued, M/S. Khanna Financiers would have got something over and above the sum of Rs. 5,000 from running the cinema. After paying Rs. 5,000, the balance would be kept by M/S. Khanna Financiers lost the chance of getting this extra sum and, thereforee, had to be paid compensation which would be a kind of compensation for the loss of those profits. At the same time, the assessed would get the profit of more than Rs. 5,000 (if possible). It was, thereforee a mere change in the nature of the arrangement for running the cinemas. It was an expenditure of revenue nature and did not bring into being any capital asset of an enduring nature.
22. We agree with the conclusion of the Tribunal that the expenditure was of revenue nature.
23. It now remain to examine why the ITO held that the amount was of a capital nature. The case of Godrej & Co. : 37ITR381(SC) , was followed. It was observed that the release from paying higher remuneration was an advantage of an enduring nature when the managing agency was reduced. The benefit to the business and the reduction in expenditure was regarded as the acquisition of an enduring value and, thereforee, a capital asset. The ITO was of the view that this was a similar case. It may be observed that the managing agency agreement enabling the managing agents to take 20% profits for a number of years is in no sense similar to the present case. The assessed was not paying anything to M/s. Khanna Financiers. In fact, M/s. Khanna Financiers were paying Rs. 5,000 per week. The assessed preferred to loss at chance to get Rs. 5,000 weekly instead to take the chance of earning more or less by running the cinemas itself. Thus we are of the view that the ITO applied that case in the wrong context. If we view the matter from the angle of M/s. Khanna Financiers, the receipt may be capital in nature, but the expenditure qua the present assessed was a loss in income and not a gain, though the eventual result might be a gain.
24. In the circumstances, the question referred to us has to be answered in the affirmative, in favor of the assessed and against the Department. We have to hold that the amount of Rs. 68,000 was a revenue expenditure but we leave the parties to bear their own costs.