This is a reference under section 66(1) of the Income-tax Act, the question referred to our decision being 'Whether the sum of Rs. 28,779 representing remuneration for services rendered is a revenue receipt.'
The assessee, T. Sadasivam, is an individual who has succeeded to the business of Chandra Prabha Cinetone, but the entire proceedings have gone on the footing that it was the tax liability of the Chandra Prabha Cinetone that was being adjudicated and in consequence when any reference is made to the assessee, it is the Chandra Prabha Cinetone that is intended.
Sri. T. Sadasivam and his wife Srimathi M. S. Subbulakshmi were partners of a firm called Chandra Prabha Cinetone. The firm was started in or about 1939 for the production of a tamil picture called 'Sakunthala'. After the production had gone on for a while and the partners had spent nearly half a lakh of rupees, they found that they could not find the entire finance necessary for completing the picture. Accordingly they entered into an agreement on 21st July, 1939, with another firm called Messrs. Royal Talkie Distributors, Madurai. The terms of this agreement were reduced to writing and this agreement had been appended as annexure A to the statement of the case by the Appellate Tribunal. This agreement is recited to have been made between Chandra Prabha Cinetone by their partners Mr. T. Sadasivam and Srimathi M. S. Subbulakshmi, both residing at Madras hereinafter called the part of the first part of Messrs. Royal Talkie Distributors hereinafter called the party of the second part. The material terms of this agreement run thus :
Clause 2 : The picture shall be treated as the joint production of both the parties for all purposes. Both the parties shall have equal rights and powers of supervision and management in the matter of the production of the picture.
Clause 3 : The cast of the picture shall be selected by the parties of both parts and shall include Srimathi M. S. Subbulakshmi as Sakunthala and Serukalathur Sama as Kanvar. Srimathi M. S. Subbulakshmi hereby agrees to act in the said picture to the best of her ability and complete the same.
Clause 5 : The party of the second part shall provide finance to the extent of Rs. 60,000 for the production of the said picture.
Clause 6 : Whatever amount the party of the first part might have already spent or might spend in future towards the production of the said picture, it is hereby definitely understood and agreed between the parties that the total cost of the production is to be treated as the sum of Rs. 1,00,000 (Rupees one lakh only) for the purpose of the adjustment mentioned in paragraph 11 infra.
The agreement then proceeds to deal with the commission to which the party of the second part would be entitled and then clause 11 provides :
'So soon as the entire amount due to the party of the second part is repaid, the party of the second part shall thereafter pay the party of the first part of net amount after deducting the commission mentioned in clauses 8 and 13 herein, in repayment of the amount advanced by the party of the first part for the production of the said picture and which amount is hereby fixed by mutual agreement as the difference between the actual advance of the party of the second part and the sum of Rs. 1,00,000 (rupees one lakh only) mutually fixed as the total cost of the production of the said picture.'
Clause 12 : Out of the net collections over and above the sum of Rs. 1,00,000 (rupees one lakh only) mentioned in paragraph 11 supra and after deducting the commissions due to the party of the second part mentioned in paragraphs 8 and 13 and the expenses in connection with the replacement of the films mentioned in paragraph 15 infra fifty per cent. shall be given to the party of the first part towards the remuneration for the services rendered by them in the production of the picture and the party of the second part shall have the balance.
A kind of pre-emption was provided between the two parties by clause 14 which runs thus :
'There shall be no transfer or sale of the rights of the parties except as between the parties inter se as may be mutually agreed upon.'
Clause 17 : The copyrights in the songs and dialogues of the picture shall vest in both the parties and the benefits of any contracts with gramophone companies for the recording of the same shall be equally divided between them. The royalty or remuneration payable to the artistes for the gramophone recording shall be paid to them directly by the gramophone company concerned.
Even the amount which the Royal Talkie Distributors advanced under this agreement namely a sum of Rs. 60,000 was found insufficient for completing the production. There was a further and fresh agreement between the same parties on 24th February, 1940, which is appended as annexure B to the statement of the case. The preamble to the agreement recites after referring to the earlier agreement dated 21st July, 1939 :
'.......Whereas more money is required for the completion of the picture Sakunthala; and whereas at the request of the party of the first part, the party of the second part, have agreed to supply the necessary additional amount of not less than Rs. 40,000 (rupees forty thousand only); and whereas in consequence certain terms and conditions have to be added to or altered or amended in the prior agreement.'
The agreement then proceeds to replace clauses 6, 10, 11, 12 and 17 of the previous agreement and the new clauses 4 to 8 were substituted therefor. Clause 4 is in these terms :
'Irrespective of the amounts, the party of the first part might have already spent, or might spend in future towards or in connection with the production of the said picture, it is hereby definitely understood and agreed between the parties that the total cost of the production of the said picture is to be treated as the sum of Rs. 1,00,000 (rupees one lakh only) or the actual amount advanced by the party of the second part therefor, whichever amount is greater, for the purposes of the adjustment mentioned in clause 6 hereunder.'
Clause 6 which is referred to here runs thus :
'So soon as the entire amount due to the party of the second part is repaid or realised as aforesaid, the party of the first part shall be entitled to get in full discharge of whatever amounts they might have spent for the production of the said picture out of the total collections referred to in sub-claused (a), (b) and (c) of clause 5 above, such amount, if any, as to make up the actual advance by the party of the second part Rs. 1,00,000 (one lakh rupees only) if in case the same has not been advanced by them'.
Clause 7 : Out of the net surplus collections as per sub-clauses (a), (b) and (c) of clause 5 remaining as balance in the hands of the party of the second part, after the appropriations mentioned in clause 5 or 6 above and after defraying the expense in connection with the replacement of the films mentioned in paragraph 15 of the prior agreement 50 per cent, shall be given to the party of the first part towards remuneration for the services rendered by them in the production of the picture and the party of the second party shall have the balance.
Clause 8 deals with copyrights corresponding to clause 17 of the previous agreement and is in these terms :
'The copyrights in the songs and dialogues of the picture shall vest in both the parties and the royalty or the benefits of any contracts with the gramophone companies for the recording of same shall be equally divided between them subject to the provisions of clause 5 herein. The remuneration or royalty payable to the artistes shall be paid to them directly by the gramophone companies concerned.'
With the finances provided by the Royal Talkie Distributors the film 'Sakunthala' was completed and was exhibited. The partners of Chandra Prabha Cinetone were being paid sums from time to time on account by the Royal Talkie Distributors. An account was made up by them upto 12th April, 1942, in respect of the collections from the picture as well as the royalties from gramophone records. These amounts came to Rs. 3,21,241-2-1 and Rs. 9,205-3-9 respectively. The total cost of the picture, making the necessary allowance for expenses incurred by the Chandra Prabha Cinetone was computed at Rs. 2,59,168-14-10 leaving a net profit of Rs. 71,277-7-0. The half share of this profits due to the partners of Chandra Prabha Cinetone was Rs. 35,638-11-6. But these partners had before that date drawn to the extent of Rs. 64,417-14-5 and when the account was struck on that day, the Chandra Prabha Cinetone were in debit to the extent of Rs. 28,779-2-11. On 24th June, 1942, a release deed was executed by the partners of the Chandra Prabha Cinetone to the Royal Talkie Distributors which has been appended as annexure (C) to the statement of the case. Under this document in consideration of the Royal Talkie Distributors remitting the sum of Rs. 28,779-2-11 which the assessee had already overdrawn as per accounts taken on 12th April, 1942, the Chandra Prabha Cinetone relinquished and released all its rights in the said picture to which it was entitled under the previous agreements including the right to receive a share in the future profits so that as and from that date the Royal Talkie Distributors became the sole owners of the picture and became solely entitled to the copyrights, songs, dialogues, etc., to which the assessee was entitled before that date.
As it is on the basis of this deed of release that the Chandra Prabha Cinetone gave up its rights to the picture, and got the payment of Rs. 28,779 the subject of the reference it is necessary to set out the relevant clauses of this deed. After reciting the earlier agreements the preamble to the deed proceeds to state : 'Whereas under the terms of the said two agreements, Messrs. Royal Talkie Distributors are entitled to appropriate towards the discharge of the amounts actually advanced by them for the production of the picture, the net amounts realised by the sale or lease of the said talkie picture Sakunthala ....... and after such appropriation and full realisations of all the amounts actually advanced by them, out of the surplus collections fifty per cent. shall be given to us (Chandra Prabha Cinetone) as remuneration for the services rendered in the production of the said picture and the other half of fifty per cent. shall be appropriated by the Royal Talkie Distributors.....'. It further recites that 'whereas the parties have gone into the accounts and found that a sum of Rs. 28,779-2-11 had been overdrawn by the releasors in excess of their remuneration on the proceeds of the picture hitherto realised and they are now desirous of relinquishing and releasing all their rights in the said picture including the right to receive a share in the future proceeds and the Royal Talkie Distributors have now agreed to take over the said rights.' The operative part of the deed provided that Sri T. Sadasivam and Srimathi M. S. Subbulakshmi as partners of Chandra Prabha Cinetone and in their individual capacity release and relinquish in favour of the Royal Talkie Distributors all and every of their rights in the said talkie picture 'Sakunthala' including the rights to share in the future proceeds of the picture by sale or lease or exhibition in any part of the world and all their rights in the songs, scenario, dialogues, etc., and in the negatives, copies, etc., of the said picture and in the royalty to be received by the Royal Talkie Distributors from time to time from the gramophone company. This was followed by a declaration by the releasors whereby they agreed that the Royal Talkie Distributors were the sole proprietors of the talkie picture 'Sakunthala' without any claim or right subsisting or in future on the part of the releasors as and from 13th April, 1942.
It would thus be seen that the assessee had received in respect of this picture a sum of Rs. 64,417-14-5 made up of 50 per cent. of the profits which had accrued due to the partners under clause 7 of annexure B and Rs. 28,779-2-11 for which they relinquished all their future rights in the picture.
In respect of the assessment for 1943-44 and in the case of the assessee the accounting period being the 12 months ended 30th June, 1942, the assessee contended before the Income-tax Officer that out of Rs. 64,417 which had been received from the Royal Talkie Distributors no doubt a sum of Rs. 35,638 was a revenue receipt but the balance of Rs. 28,779 reresented merely compensation for giving up their (partners) rights in the picture and for future remuneration and possibly future profits and that it was therefore a capital receipt not liable to tax. The Income-tax Officer however overruled this contention and after referring to the terms of the release deed which recited that 50 per cent. of profits allowed to the partners of the Chandra Prabha Cinetone was in consideration of their share of remuneration for services rendered, held that the sum received by the assessee for the release deed was in the nature of a revenue receipt and so liable to be assessed, and on this basis treated the entire amount of Rs. 64,417 which had been received by the assessee from the Royal Talkie Distributors as assessable income. From this receipt he deducted a sum of Rs. 50,182 which was the expenses which had been incurred by the assessee in the production of the picture. The balance of Rs. 14,235 was treated as the net share of income received by the assessee in the joint production of the picture 'Sakunthala' and making some allowances for some small items, the rest was treated as assessable income under this head and tax was demanded on this basis. The assessee appealed to the Appellate Assistant Commissioner raising the same question but with the same result. Before the Appellate Tribunal also a contention that this sum of Rs. 28,779 represented the capitalised value of the estimated future profits was not accepted and the appeal was dismissed. It is in these circumstances that the following question has been referred to this Court for its decision, namely :
'Whether the sum of Rs. 28,779 represents remuneration for services rendered and is a revenue receipt ?'
The first contention raised by the learned counsel for the assessee is that though under this document it is recited that the consideration therefor is giving up of the right to remuneration, still, if the documents were viewed as a whole, in the background for the agreements which preceded the release, there is no question of Rs. 28,779 having been paid to the assessee as and on account of remuneration due. In this connection reliance is placed on a passage in the judgment of Viscount Simon in Inland Revenue Commissioners v. Wesleyan General Assurance Society which runs thus :
'First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.'
We do not however see how this passage assists the assessee. It is not denied that the documents appended as annexure (C) is a deed of release. Its true nature as a release is not now in dispute. That recites the earlier transactions under which the releasors obtained rights which they ultimately relinquished. In doing so it refers to their right to 50 per cent. of the net profits as attributable to that consideration. In this respect it really repeats the words and the terms contained in the earlier agreements while setting them out in the preamble. If at the time when the agreements were concluded the parties expressly stipulated for moneys being paid to them as and for remuneration for services rendered we are unable to see how the legal effect of such a contract could be obliterated by now starting a theory that they had not rendered any service or it could not be deemed to be remuneration for those services or that it was payable to them in some other character than for remuneration. We are not aware of any rule of interpretation by which when parties to a contract stipulate that any benefit flowing to one of them stems from some consideration furnished by the other a court of construction could say that it was not so. (Vide, Simon, Income Tax, Vol. 1, p. 52, citing Inland Revenue Commissioners v. Fleming).
Before leaving this part of the case an argument put for forward by learned counsel for the assessee may be noticed. It is said that when Srimathi M. S. Subbulakshmi by her labour produced a capital asset, namely, the film which became the joint property of the Chandra Prabha Cinetone as well as the Royal Talkie Distributors, there was no element of contract of service which might lead to the consideration paid to her being regarded as remuneration. In other words the argument was that it could in no sense be said that under the agreement of 1939 or 1940 the Royal Talkie Distributors employed Srimathi M. S. Subbulakshmi but that the true view was that both the parties to the agreement, one contributing labour and the other capital, produced a capital asset in the shape of a film. It is therefore urged that the 50 per cent. of the profits even if they were for services rendered were not in the nature of remuneration and therefore not of a revenue nature. We are unable to appreciate this contention. Neither the agreement of 1939 nor that of 1940 created any partnership between Chandra Prabha Cinetone and the Royal Talkie Distributors. In pursuance of the obligation undertaken by the Chandra Prabha Cinetone under these agreements, Srimathi Subbulakshmi acted in the picture and the consideration payable to the out of the net collections was fixed at 50 per cent. of the net profits. The consideration paid to her is in essence only remuneration for services rendered and cannot be viewed in any other light. The fact that the services rendered resulted in the creation of an asset in the nature of a film is wholly irrelevant for considering the nature of the payment made to her for her services.
The next head of learned counsels argument was that the Rs. 28,779 received by the assessee as consideration for the release was merely a surrender of a right to future payments, and was therefore a stabilisation of a capitalised asset and so a capital receipt. Reliance was particularly placed on the judgment of Finlay, J., and the House of Lords affirming him in Van Den Berghs Ltd. v. Clark, and the several cases in which the principle laid down in that case has been followed. What the Court had to consider in Van Den Berghs case, was the nature of a sum of Pound 450,000 received by the assessee in full settlement of all claims and counter claims which existed between the assessee and a Dutch company. Both the companies had been engaged in the business of manufacturing and dealing in margarine and similar products. They had entered into pooling arrangements at as early a date as in 1908 under which they bound themselves to work in friendly alliance and to share their profits of their respective business in margarine in specified proportions. This basic agreement of 1908 was being added to and varied from time to time particularly in 1913 and 1920 and, under this, the agreement was to subsist until 1940. In 1922 the assessee made a claim against the Dutch company for about Pound 450,000 as the amount due to it by the Dutch company under the agreements recited just previously. This was however repudiated and the Dutch company claimed that far from owing any moneys to the assessee, moneys were owing to them. One of the methods suggested for putting an end to the dispute was by a termination of the agreement between the two companies but this was resisted by the assessee company. A settlement was however reached in 1927 whereby in consideration of the payment by the Dutch company of Pound 450,000 to the assessee as damages, the agreements were determined as at 31st December, 1927, and each party released the other from all claims thereunder. The question was whether this sum of Pound 450,000 was a revenue receipt on which the income-tax could be levied against the assessee. Finlay, J., held against the Crown that the sum received was not a revenue receipt, a view which was confirmed by the House of Lords. He formulated the question to be considered by him in these terms at page 410 :
'I agree with Mr. Latter that there are three questions here. The first is : What was this payment for The second is : If a payment for future rights, is it assessable The third question is 'Ought it to go into the year 1927.'
The answer by the learned Judge to the first question was that it was a payment for future rights. That is, it was really a payment for cancelling such rights as subsisted in the assessee between 1928 and 1940. Having answered the first question in this manner the learned Judge held on the second that it was not assessable. His reasoning is to be found in the passage at page 413 :
'Not without hesitation, I have come to the conclusion that it is not liable to assessment. I think that the agreement being an agreement whereby this company had a share in the profits of another company, was a capital asset. I think that the case is to be distinguished from the case where there is a cancellation of a contract made in the ordinary course of the companys business. But it seems to me that where one gets, as one does here, not a contract made in the course of the companys business -for it is not the business of this company to make pooling agreements or to make agreements whereby they acquired shares in the business of another company - it seems to me that where one gets a payment made in respect of the cancellation of that agreement, that, truly, is a sum received by way of capital and not an income receipt at all.'
This decision was reversed by the Court of Appeal but was restored on further appeal by the House of Lords. Lord Macmillan who delivered the leading judgment in the case said at page 431 :
'Not what were the appellants giving up They gave up their whole rights under the agreements for thirteen years ahead. These agreements are called in the stated cases pooling agreements but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if payment is measured by annual receipts, it is not necessarily in itself an item of income.... The three agreements which the appellants consented to cancel were not ordinary commercial contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants profit making apparatus. They regulated the appellants activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a traders activities can be regarded as an income disbursement or an income receipt... In my opinion that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered was a capital asset.'
The argument advanced before us on behalf of the assessee based upon this and other decisions following this case to which we shall presently refer was that the assessee in the present case surrendered its half proprietory interest in the film which was a capital asset. It had a number of rights under the agreements which might be compendiously described as a half share in an asset. For instance this included the right to a share in the royalty. There was also a right in the nature of pre-emption conferred on both the parties by paragraph 14 of the first agreement which was continued without alteration by the second. It was for giving up the assessees interest in the 'congeries of rights' that the payment of Rs. 28,779 was made. It was therefore urged that it was not open to the Income-tax authorities to separate the component elements of this single payment and relate any particular portion to any specific item of right was released. This argument however we are unable to accept. In the first place, a distinction should be drawn between payments made for past services or in discharge of past liabilities. Such payments do not lose their revenue nature merely because they also form part of a transaction by which future rights are released and a single consideration is recited for the two sets of items. This distinction is made clear both by Finlay, J., and Lord Macmillan in Van Den Berghs case. Finlay, J., posed the question whether the finding of the Commissioners was that the payment of Pound 450,000 was one in respect of sums due in the past to the assessee and regard being had to the ambiguity of the language used, he took it that it was a payment in the respect of future rights so as to be consistent with the inference which he was inclined to draw. Dealing with the alternative contention he said at page 413 :-
'But the case is one of undoubted difficulty and it is, I think, proper that I should say something, though quite shortly, upon the other view, which is that this was a sum paid in respect of the past, that is to say, that it was a sum paid in order to make an end of, by way of payment, the claim which the appellant company said they had in respect of the past. If it was that, it was clearly a revenue receipt in some way or other and at some time liable to pay tax.'
Lord Macmillan dealing with this point at page 431 said :
'If the payment had been in respect of a balance of profits due to the Appellants by the Dutch company for the years 1914 to 1927, different considerations might have applied, but it is agreed that it is not to be so regarded.'
We have, therefore, to examine whether Rs. 28,779 or any portion of it was received for a consideration, which, so far as the assessee was concerned, had been fully executed but in respect of which it had stipulated for remuneration payable in future.
This distinction between a payment for a past consideration and that for services to be rendered in the future has been explained in the later decision also. Van Den Berghs Ltd. v. Clark was applied in Barr, Crombie, and Company Ltd. v. Commissioners of Inland Revenue where a sum received as damages or compensation for the termination of an agreement was held to be a capital asset. A shipping company appointed the assessee to act as its manager by an agreement dated 25th May, 1937, on terms of receiving a management fee of Pound 500, a commission fee of one per cent. on the price of any vessel built purchased or sold and a commission of 5 per cent. on the profits with a further stipulation that the remuneration to be paid should not be less than Pound 2000 per annum. The shipping company went into liquidation on 5th November, 1942, and as this contract was prematurely terminated it paid to the assessee a sum of Pound 16,306 as compensation. The Court of Session held that this sum was a capital receipt and not a trading receipt on revenue account. Lord President Normand analysed the facts and said at page 60.
'It has been truly said that every case must be considered on its own facts, and that no legal criterion for distinguishing between capital payments and income payments is readily applicable.
Referring to the facts of that case the learned Lord said :
'In the present case, virtually the whole assets of the appellant company consisted in this agreement. When the agreement was surrendered or abandoned practically nothing remained of the companys business.'
Referring to the words of Lord Macmillan in the case of Van Den Berghs Ltd. v. Clark the learned Lord said that 'after the liquidation of the shipping company and the payment to the appellant company of this sum of money, the structure of the company was radically affected and its whole character as a business was decisively altered.' Lord Moncrieff drew a distinction between payments in liquidation of past obligations and those for the termination of rights in future and said at page 62.
'If that fourth article had provided, as the Commissioners had evidently thought, that there should be on liquidation an immediate pre-payment of all the remuneration for services which would eventually have fallen due under the agreement had liquidation not taken place, then the fact that the remuneration for services was prepaid in a lump sum might not have protected it from income-tax.'
The conclusion reached by the learned Judges was that the sum paid was in respect of remuneration for future services which were dispensed with and not remuneration for past services though payable in the future.
The decision in Commissioner of Income-tax v. South Indian Pictures Ltd. referred to by learned counsel for the assessee does not really assist him. The point decided was that the money received as compensation for the termination of the three contracts under which assessee was to render service was not a receipt of a revenue nature. The decision of the Bombay High Court in Commissioner of Income-tax v. Asiatic Textile Company Limited holding that the sum received by the assessee as damages, compensation or solatium for premature termination of a managing agency was a capital receipt, does not lay down any different principle.
We have therefore to examine the several items of rights which the assessee possessed under the agreements of 1939 and 1940 which were surrendered in consideration of the payment received in 1942 and on account of which the release was executed and see how far any of them satisfies the tests which we have formulated above. The first item to be considered is that contained in clause 3 of the first agreement namely the promise by Srimathi M. S. Subbulakshmi to act in the picture to the best of her ability and complete the same. The picture was completed long before 1942 and had been released and exploited so that the assessee firm had completely performed its part of the bargain under this clause and in so far as any share or portion of the 50 per cent. of the profits was payable to the assessee after 1942, it was certainly remuneration for past services. The second item which was pressed upon us was the expenses incurred by the assessee in the production of the film up to the stage of the first agreement. Up to that stage the assessee firm had spent about Rs. 50,000 and the terms of the first agreement provided that the financier was to advance not more than Rs, 60,000 and that the total cost of production should artificially be deemed to be Rs. 1,00,000 and that the assessee was to be repaid the amount expended by him in the production after the financier was paid off what he had advanced. In other words, prvoision was made for the refund of Rs. 40,000 out of Rs. 50,000 and odd which they had expended on the picture. This was to be in addition to the 50 per cent. of the profits which the assessee was to obtain, the primary consideration being of course the assessee was to obtain, the primary consideration being of course the acting of Srimathi M. S. Subbulakshmi provided by clause 3. When however we come to the second agreement, which superseded the first in tis regard, the financier undertook to advance at least another Rs. 40,000 and the notional cost of the production of the picture being kept at the same figure of one lakh. The result was that as the parties contemplated the financier advancing the entire one lakh of rupees, which was treated as the notional cost of the picture so far as the assessee was concerned, he could not have any refund of his initial expenses. Of course there was a provision that if the financier had expended more than Rs. 1,00,000 he could appropriate such sum as he had actually advanced without reference to this notional figure. The position after the second agreement was that the assessee was not entitled to a refund of any portion of the moneys originally advanced by him and yet the share of profits payable to the assessee was not altered so that the 50 per cent. of the profits stipulated as in consideration of the services rendered by the Chandra Prabha Cinetone towards the production of the picture could relate only to items of service other than its original expenditure.
The next item to be considered is that contained in clause 17 of the original agreement reproduced in clause 8 of the second. Under this clause copyright in the songs and dialogues of the picture was to vest in both the parties and the royalty and the benefits of any contracts with gramophone companies were to be equally divided between the assessee and the financier. This was of course in addition to the 50 per cent. of the profits referred to earlier. This is one of the items in respect of which the assessee firm released its rights. In regard to this, there is no question of any remuneration being payable in future in respect of services rendered in the past. Mr. Rama Rao Sahib, learned counsel for the Commissioner, does not contest that, so far as the assessee gave up his rights to this item of asset, the sum received is a capital receipt.
Lastly, under clause 14 of the first agreement which is left untouched by the second, each of the two contracting parties was given a right of pre-emption. Any sum received in consideration of the surrender or release of this item cannot by any means be a trading or a revenue receipt. The position as it emerges from the above analysis is that the consideration for the receipt of Rs. 28,779 was made up of three components, (1) the surrender or release of the 50 per cent. of the future profits attributable to past services rendered by the assessee which is a revenue receipt; and a release of (a) the right to royalties; and (b) the right of pre-emption, both of which are capital receipts. The sum attributable to all these three items, viz., Rs. 28,779, is however treated by the Revenue authorities as wholly due to the surrender of the 50 per cent. of the profits in future. This was not justified.
When during the course of the arguments the position was analysed as above, learned counsel for the assessee put forward two contentions. The first was that if a consolidated payment was received for a mixed consideration compounded of elements some of a trading or revenue nature and others being the realisation of a capital asset, the tax authorities could not and ought not to split up the components, but, as there was at least some item of a capital nature included in the receipt, the whole of it should be treated as other than revenue. We are unable to accept this argument which is not supported by any authority and appears to us to rest on no principle. When Lord Macmillan spoke of a congeries of rights which were given up by the assessee in Van Den Berghs case, the learned Lord could not be deemed to have intended that if the consideration received for giving up one of these rights was in the nature of a trading profit or a revenue receipt, the same should be ignored because it was mixed up with other items which undoubtedly were of a capital nature. The opposite was exactly the decision which was rendered in Carter v. Wadman. The assessee was a resident manager of certain licensed premises on a salary of Pound 10 a week and one-fourth share of the net profits. His employment was for a term which was to continue in force until June, 1949, but was terminated on 2nd December, 1942, when the employer assigned the lease of the licensed premises, and transferred his licence. In consideration of the assessees consent to his termination of the employment he was paid Pound 2,000 in full settlement of all past, present and future claims.' The question raised in the case was whether this sum of Pound 2,000 was paid as compensation for loss of management and was therefore not assessable. It was found that during the period of his service, though the assessee had received his salary he had not received anything in respect of his share of the profits. This was ascertained at Pound 1,090. The Crown contended that out of Pound 2,00 paid to the assessee Pound 1,090 was assessable since it represented payments for service rendered. Atkinson, J., and Lord Greene, M. R., on appeal held that there should be an apportionment between the sum attributable to remuneration due on the date of the termination and that which could be attributed to damages for termination of the employment which would be in the nature of a capital receipt. Atkinson, J., said at page 48 :
'It is clear from the case of Wales v. Tilley, that where a lump sum payment is made in respect of two different matters, one of which would lead to an assessment for tax and the other would not, the Commissioners have to apportion the sum. I do not think I need refer in detail to Wales v. Tilley. There, a big sum was paid in respect of surrendering the rights of future salary and also for giving up pension rights. In so far as it was attributable to the giving up of the pension rights, it was not assessable and it was sent back to the Commissioners to apportion.'
In affirming this decision Lord Greene, Master of the Rolls, said at page 52 :
'Mr. Mustoe sought to argue that, as the consideration was one lump sum of Pound 2,000, it was impossible to point to any portion of the Pound 2,000 and say that it was a profit arising from his employment; but the Crown might equally well have argued that, as it was impossible to fix any sum which represented a capital payment, the whole must be income. Indeed, that was in effect the argument which prevailed in the Court of Appeal in the case of Wales v. Talley. The House of Lords took a different view. It is true that before the House of Lords the Attorney-General either conceded that the sum in question was apportionable.....or only faintly argued that a division was not practicable........But we respectfully agree with their Lordships that in principle there must be apportionment, and we think that on the facts of the present case, though the calculation of the value of the appellant of the unexpired portion of the agreement must be a matter of estimate, there is no insuperable difficulty in estimating its value.'
We consider that the present case falls within this principle and that there should be an apportionment on the basis that three rights were surrendered and released in consideration of the payment of Rs. 28,799, namely, (1) giving up the right to 50 per cent. of the profits. The amount apportionable to this item would be a revenue receipt. (2) The surrender of the right to royalty and (3) the surrender of pre-emption right. The consideration received for the surrender of these latter two items of rights would be a capital receipt not assessable to tax. The Appellate Tribunal should apportion the sum received to these three items and on that basis determine the assessable portion of the same.
Our answer to the question referred is that the sum of Rs. 28,779 represents not merely remuneration for services rendered but also other items of a capital nature and cannot therefore be wholly treated as a revenue receipt....As neither side wholly succeeded in this reference, there will be no order as to costs.
Reference answered accordingly.