1. The Income-tax Appellate Tribunal, Madras Bench ' A ', has stated a case to this court and referred the following questions of law under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :
' (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of Section 147(a) of the Income-tax Act were not applicable for the reassessments for, 1957-58 and 1958-59?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that under the terms of the agreement Between the applicant and Messrs. Gemini Pictures Circuit Private ' Ltd., the commission provided for had become diverted by an overriding title in favour of the distributors ?
(3) Whether, on the facts and in the circumstances of the case, therewas any payment of commission by the producers to the distributors towarrant the application of Section 10(4)(b) of the Indian Income-tax Act,1922? '
2. The assessee is a registered firm. The firm was reconstituted under adeed dated December 20, 1955. In the reconstituted firm, the partnerswere T. S. Srinivasa Iyer, C. S. Mani and S. Balasubramanian, each having2/15ths share and Messrs. Gemini Pictures Circuit Private Ltd., having9/15ths share. The assessee-firm was constituted for the business of production and distribution of cinema films. However, it carried on the businessof only production of pictures. The distribution part was passed on andentrusted to Messrs. Gemini Pictures Circuit Private Ltd., one of thepartners. That limited company was mainly engaged in the distributionof cinema films, not only the films produced by the assessee-firm but alsothe films produced by several other producers. As far as the assessee wasconcerned, it entered into agreements with Messrs. Gemini Pictures CircuitPrivate Ltd. in connection with the distribution of the pictures producedby it. The first of the agreements is dated 13th May, 1955, which isannexure ' A ' to the statement of the case. This agreement was modifiedby a letter dated 16th May, 1955, and that is annexure ' B ' to the statement of the case. The agreement was further modified on 18th May, 1955,by another letter, which is annexure ' C ' to the statement of the case. Alater agreement was entered into between the parties on 1st September,1956, which is annexure ' D ' to the statement of the case, and it is enoughif we refer to the terms of that agreement. Under the terms of that agreement, the company which was called as distributors had to advance to theproducers, namely, the assessee-firm, a sum of Rs. 20,00,000 withoutinterest and the manner of payment of that amount was also prescribed inthat agreement. Under Clause (2) of the agreement, the distributors shallbe entitled to the sole and permanent distribution and exploitation rightsof the pictures involved in the agreement throughout the world and thedistributors shall be entitled at their sole discretion to exploit and distribute the said pictures at such rates and at such times and on such termsand conditions and in such manner as the distributors may deem fit. Under Clause (4), the distributors were authorised, from the realisations of theexhibition and distribution of the said pictures, to pay themselves theirdistribution commission in respect of the said pictures, as provided in theagreement, and next to pay themselves the available balance until the entireadvance of Rs. 20,00,000 was completely discharged and satisfied. Clause (5)of the agreement provided that after the advance was discharged, thedistributors shall pay to the producers the balance out of the net realisationsafter taking their commission. Clause (7) referred to the percentage of thecommission on the realisations to which the distributors were entitled. Theagreement also provided for the distributors submitting monthly statementof accounts to the producers.
3. For the assessment years 1957-58 to 1962-63, the assessee returned the income which was received by way of net realisations as provided for in the agreement and it also made it clear that the said amounts were received after the adjustment of the commission payable to the distributors. The Income-tax Officer, at the first instance, accepted the return as made by the assessee and assessed the income accordingly. However, at the time of the assessment for the year 1963-64, the Income-tax Officer realised that the distributors were only a partner of the assessee-firm, that, therefore, the commission taken by the distributors would come within the scope of Section 10(4)(b) of the Indian Income-tax Act, 1922, and that consequently that amount should not have been deducted in computing the income of the assessee-firm. On this basis, the assessments for the earlier years, namely, 1957-58 to 1962-63 were reopened. The assessee objected to the reopening of the assessments both on the ground of limitation and on the merits. The assessee contended that all that it received was only the net amount to which it was entitled under the agreement entered into between it and the distributors and that the commission taken by the distributors cannot be said to be payment made by the assessee to one of. its partners so as to attract the provisions of Section 10(4)(b) of the Indian Income-tax Act, 1922. The Income-tax Officer rejected the case of the assessee and reassessed the income of the assessee for the years 1957-58 to 1962-63, by applying Section 10(4)(b) of the Indian Income-tax Act, 1922, with regard to the commission taken by the distributors in respect of the pictures produced by the assessee.
4. The assessee preferred appeals to the Appellate Assistant Commissioner of Income-tax, who allowed the appeals. With regard to the first two years, namely, assessment years 1957-58 and 1958-59, he held that the proceedings initiated by the Income-tax Officer under Section 147 of the Act were barred by limitation and with regard to all the years he also held that Section 10(4)(b) of the Act could not be invoked and that, therefore, the income of the assessee as originally computed was correct. The department preferred appeals to the Income-tax Appellate Tribunal and the Tribunal agreeing with the Appellate Assistant Commissioner dismissed the appeals. It is, thereafter, at the instance of the Commissioner of Income-tax, Madras-I, Madras the above questions have been referred to this court for its opinion.
5. Before proceeding further, we shall extract the provision contained in Section 10(4)(b) of the Indian Income-tax Act, 1922, so far as is necessary for the purpose of this case :
' Nothing in Clause (ix) or Clause (xv) of Sub-section (2) shall be deemedto authorise.........
(b) any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm. '
6. On the language of the said provision, it is clear that there must be income of the firm and that out of the said income, the firm should have paid by way of interest, salary, commission or remuneration to a partner of the firm. It has been settled by a decision of this court that once a payment has been made to a partner of the firm, it is totally irrelevant for the purpose of Section 10(4)(b) of the Act, as to in what capacity the said payment was made--whether it was made in his capacity as a partner or otherwise. In view of this, the sole question for consideration in the present reference is, whether the commission which the distributors paid themselves out of the realisation they have made by way of exploiting and exhibiting the pictures produced by the assessee can be said to be payment made by the assessee-firm to one of its partners, namely, Messrs, Gemini Pictures Circuit Private Ltd., by way of commission. We are clearly of the opinion that the said amount cannot be said to fall within the scope of Section 10(4)(b) of the Act. Before the application of Section 10(4)(b), two requirements must be satisfied. One is, the income must be the income of the firm. The second is, out of the said income the payment must be made to a partner. The very object of the total bar of payment of interest of salary or commission or remuneration to a partner under Section 10(4)(b) of the Act with reference to the computation of the income of the firm is to prevent diversion of the profits of the firm to the hands of its partners. Therefore, it must first be established that the payment was made by the firm to its partner out of the income of the firm. Hence, we shall first consider the question whether there was any income of the assessee-firm out of which commission was paid to Messrs. Gemini Pictures Circuit Private Ltd., Madras.
7. As we have pointed out already, Messrs. Gemini Pictures Circuit Private Ltd. were carrying on business as film distributors in their own right. They were not distributing the films produced by the assessee-firm only and they were distributing the films produced by several other producers also. This fact was not in controversy. As a matter of fact, the Tribunal itself has annexed an agreement entered into by Messrs. Gemini Pictures Circuit Private Ltd. with the Modern Theatres, Salem, as annexure 'E' to the statement of the case. In paragraph 7 of its order, the Tribunal pointed out that the agreements which Messrs. Gemini Pictures Circuit Private Ltd. entered into with other producers like the Modern Theatres, Salem, were more or less similar to the one entered into between them and the assessee herein. As a matter of fact, except for the fact that under the agreement entered into between Messrs. Gemini Pictures Circuit Private Ltd. and the assessee, the distribution right was granted on a permanent basis, while in the case of the agreement entered into between Messrs. Gemini Pictures Circuit Private Ltd. and the Modern Theatres, Salem, the distribution right was granted for a prescribed period, there was not any significant difference in the other terms and stipulations contained in the two agreements and even that was not disputed before us. Under these circumstances, what we have to consider is, as to whether the amount realised by Messrs. Gemini Pictures Circuit Private Ltd. by way of exhibiting and exploiting the pictures produced by the assessee-firm can be said to be income of the assessee-firm.
8. It is pertinent to point out that Messrs. Gemini Pictures Circuit Private Ltd. have absolute discretion under the terms of the agreement to exhibit and exploit the pictures in any manner they like and equally it was open to them to appoint sub-distributors and sub-agents for the purpose of exhibiting the pictures without any reference whatever to the assessee in the present case. Under such circumstances, it is indisputably clear that Messrs. Gemini Pictures Circuit Private Ltd. were carrying on independent business of distribution of films produced by others also. If so, the income which Messrs. Gemini Pictures Circuit Private Ltd. receive in the course of the carrying on of their business will be their income and it will not be the income of the producers whose picture they are exhibiting, exploiting and distributing. We have already referred to the agreement entered into between the Modern Theatres, Salem, and Messrs. Gemini Pictures Circuit Private Ltd., Madras, and to the fact that Messrs. Gemini Pictures Circuit Private Ltd. have entered into similar agreements with other producers also. Therefore, it is impossible to contend and it was not contended before us that the monies realised by Messrs. Gemini Pictures Circuit Private Ltd. by way of distributing the pictures of the various producers were so realised on behalf of the various producers and that it is the moneys of those producers which came into their hands. If so, the position cannot be different with regard to the assessee and the character of the receipt of the money by the company will not change simply because the distributor happened to be a partner of the assessee. It may be that having regard to the obligation undertaken by Messrs. Gemini Pictures Circuit Private Ltd. under the distribution agreements entered into between them and the various producers, they may have to render accounts of the collections, so that they may pay the net realisations to the producers concerned as stipulated in the agreements. That is far different from saying that when Messrs. Gemini Pictures Circuit Private Ltd. realised moneys by way of exhibition, exploiting and distributing the pictures, they realised the moneys of the producers with reference to whose pictures the amounts had been realised. Consequently, the very first requirement, namely, that the amount out of which the commission is paid must be the income of the firm of which the recipient is a partner is absent in the present case. If so, there is no scope for applying Section 10(4)(b) of the Indian Income-tax Act, 1922.
9. Before proceeding further, we may point out that the Appellate Assistant Commissioner of Income-tax who disposed of the appeals preferred by the assessee did realise this position and pointed out that the amounts realised by Messrs. Gemini Pictures Circuit Private Ltd. were not the income of the assessee-firm. However, on further appeal, the Income-tax Appellate Tribunal appears to have gone on an entirely wrong track. In one place, the Tribunal stated in its order that the various clauses contained in the agreement entered into between Messrs. Gemini Pictures Circuit, Private Ltd. and the assessee would indicate that the parties contemplated and intended practical assignment more or less in the nature of a sale of the pictures produced by the assessee to the distributors. Having regard to the terms of the agreement it is clear that such an inference is utterly unsustainable. In yet another place, the Tribunal had gone to the extent of stating that the commission earned by the distributors by entering into a separate agreement with the assessee-firm constituted a diversion of the income of the assessee-firm by overriding title. Once we come to the conclusion that the amounts received by the distributors, namely, Messrs. Gemini Pictures Circuit Private Ltd., were not moneys of the firm nor were they received on behalf of the firm, the question of diverting the same by overriding title does not arise. Even though considerable amount of arguments advanced before us and the authorities cited before us were concerned with these two aspects of the matter, once it was realised that the amounts realised by Messrs. Gemini Pictures Circuit Private Ltd. were not the moneys of the assessee-firm and that Messrs, Gemini Pictures Circuit Private Ltd. did not receive those amounts on behalf of or as agent of the assessee-firm, but received them only in their own right in the course of carrying on of their independent business, both sides realised the futility of the above two positions taken by the Tribunal and the arguments advanced with reference thereto. Consequently, with reference to the third question which we have mentioned already, our answer is that the appropriation of the commission which Messrs. Gemini Pictures Circuit Private Ltd. made cannot be said to constitute ' payment of commission ' attracting Section 10(4)(b) of the Indian Income-tax Act, 1922, and, therefore, our answer is in the negative and against the department.
10. We may also point out that with regard to the assessment year 1963-64,it was not even Section 10(4)(b) of the Indian Income-tax Act, 1922,that applied and it is Section 40(b) of the Income-tax Act, 1961, thatapplied and probably by oversight no reference was made to that section inthe third question.
11. As far as the first question is concerned, both the 'Appellate Assistant Commissioner and the Income-tax Appellate Tribunal have taken the view that the assessments in respect of 1957-58 and 1958-59 could not be reopened and that they were time-barred. In this connection it is relevant to refer to the date of the notice under Section 148 of the Act. For both the assessments 1957-58 and 1958-59, notice was issued on November 11, 1963, and reassessments were completed on December 31, 1963, It is not in dispute that the notices were issued beyond the period of four years prescribed under Section 147(b). If only action was taken under Section 147(a), the notice issued on November 11, 1963, could be said to be in time. Both the Appellate Assistant Commissioner and the Tribunal took the view that in the assessment proceedings themselves originally the assessee had disclosed all the relevant and necessary particulars. The Appellate Assistant Commissioner pointed out that the constitution of the firm was clearly beyond doubt; secondly, in the first year's return, namely, for the year 1957-58, which happened to be the very first year of the firm, the auditor, after referring to the constitution of the firm, also reiterated that the picture Insaniyat was released on September 30, 1955, and that the same was distributed through Messrs. Gemini Pictures Circuit Private Ltd., Madras ; thirdly, in accounting for the assessee's portion of the commission, the profit and loss statement clearly mentioned that the collection amount shown was less than the distribution commission; fourthly, the distribution agreement itself was placed before the Income-tax Officer; lastly, the Income-tax Officer himself had noted in his file, in relation to the assessment for the year 1957-58, as follows :
' The picture was completed by the assessee and given to Gemini Pictures Circuit Private Ltd. for distribution. Gross collections of the picture amounted to Rs. 42.02 lakhs out of which Rs. 8'28 lakhs had been paid as commission to M/s. Gemini Pictures Circuit Private Ltd.'
12. For the succeeding year, namely, for 1958-59, also the position was the same. Under those circumstances, the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal came to the conclusion that there was no failure on the part of the assessee to disclose primary facts relating to the commission payment and once there was no such failure on the parkof the assessee to disclose the necessary and relevant facts, the eight-year period of limitation could not be invoked and the assessment proceedings could not be reopened under Section 147(a) of the Income-tax Act, 1961. Having regard to these facts and the findings thereon by the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal, even the learned counsel for the department was not able to advance any worthwhile argument in support of the department, as far as the first question is concerned. Consequently, our answer to the first question is in the affirmative and in favour of the assessee.
13. Since, in view of our answer to the third question, the assessee completely succeeds and there is nothing more to be looked into or enquired into with regard to the liability of the assessee, we do not consider that any answer is necessary to the second question.
14. Since the assessee has completely succeeded, the assessee will be entitled to the costs of this reference. Counsel's fee is fixed at Rs. 250.