M/S.pyramid Films International v. The Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED:09.10.2006 CORAM THE HON'BLE MR.JUSTICE R.BALASUBRAMANIAN&THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA TAX CASE (APPEAL) NO.211 OF 2003 M/s.Pyramid Films International7, West Road, West CIT NagarChennai - 600 035..Appellant Vs. The Deputy Commissioner of Income Tax City Circle-VI (Inv), Chennai ..Respondent Prayer: Appeal against the order of the Income Tax AppellateTribunal, "B" Bench dated 24.10.2002 in I.T.A.No.291/2002. for theassessment year 1996-97 against the order of the Commissioner ofIncome Tax (Appeals) VI dated 31.1.2002 and made in ITANo.342/2001-02/VI against the order of the Deputy Commissioner ofIncome Tax City Circle V (Inv.II) II Floor, Kannammai BuildingNo.611, Anna Salai, Chennai- 600 006 dated 24.4.2001 and made inPAN/GIR NO.2304-P. For Appellant : Mr.V.Ramachandran, SC for Mrs.Anitha Sumanth For Respondent : Mrs.Pushya Sitaraman Sr.Standing Counsel for IT JUDGMENT (Judgment of the court was delivered byP.P.S.Janarthana Raja, J.) This appeal, filed under section 260A of the Income Tax Act,is by the assessee. On 01.12.2003, this court admitted the appealand formulated the following substantial questions of law:"1. Whether on the facts and circumstances of thecase, the Income Tax Appellate Tribunal is right inholding that Rs.1.25 crores has accrued to the appellantduring the relevant assessment year? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether on the facts and circumstances of thecase, the Tribunal was correct in law in confirming theaddition of Rs.1.25 crores despite the fact that theappellant having received only Rs.95 lakhs towards thecontract price?" 2. The facts leading to the above questions of law are asunder: The assessee is a partnership firm and it is engaged inproduction of feature films. The relevant assessment year is1996-1997. The assessee filed its return on 25.10.2000 admitting aloss of Rs.27,37,593/-. During the assessment year, the assesseehad produced and released a film called "Love Birds". The assesseeentered into an agreement for the dubbing rights of the saidpicture in Hindi language on 02.02.1995. The agreed considerationwas a consolidated royalty of Rs.75 lakhs. The payment scheduleagreed upon was: Rs.10 lakhs - on signing of the agreement;Rs.20 lakhs - on 05.04.1995;Rs.10 lakhs - on 15.06.1995;Rs.5 lakhs - on 15.07.1995 and Rs.30 lakhs - on or before 90 days from the date of Tamil release or the date of Hindi release, whichever is less. Later on, the assessee entered into a letter of agreement dated01.12.1995 and the consideration was revised upwards toRs.1,25,00,000/-. The letter of arrangement also specified therevised mode of payment as follows:Rs.45 lakhs - already paidRs.25 lakhs - on or before the delivery of the Audio datRs.25 lakhs - on Tamil film releaseRs.30 lakhs - as per the original agreement. 3. The Assessing Officer had added the entire amount ofRs.1.25 crores as income for the assessment year 1996-1997.Aggrieved by that order, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) and the Commissioner of IncomeTax (Appeals), dismissed the appeal and confirmed the order of theAssessing Officer. Aggrieved, the assessee filed an appeal beforethe Income Tax Appellate Tribunal (hereinafter referred to as the"Tribunal), which confirmed the order of the lower authorities anddismissed the assessee's appeal. 4. Mr.V.Ramachandran, learned Senior Counsel appearing for theassessee submitted that as per the agreement dated 02.02.1995, thepayment schedule was fixed by the parties and the final payment wasdue on or after 90 days from the date of release of the Tamil filmor on the day of Hindi or any other language release, whichever isearlier. According to the learned counsel, the Tamil version of https://hcservices.ecourts.gov.in/hcservices/ 4. Mr.V.Ramachandran, learned Senior Counsel appearing for theassessee submitted that as per the agreement dated 02.02.1995, thepayment schedule was fixed by the parties and the final payment wasdue on or after 90 days from the date of release of the Tamil filmor on the day of Hindi or any other language release, whichever isearlier. According to the learned counsel, the Tamil version of https://hcservices.ecourts.gov.in/hcservices/ the film was released on 10.01.1996 and hence the final settlementhas to be made only on or before 10.04.1996, which is beyond theprevious year and hence it is assessable for the subsequentassessment year. It is further submitted that Rs.30,00,000/- wasalso offered for assessment, for the subsequent assessment year.It was pointed out by the learned counsel that eventhough thewording in the schedule of payment states "on or before 90 daysfrom the date of Tamil release or on the day of Hindi or any otherlanguages release, whichever is earlier", it should be actuallyread as "on or after 90 days from the date of Tamil release or onthe day of Hindi or any other languages release, whichever isearlier", in the context of the agreement and circumstances of thecase and also the intention of both the parties. Moreover, eventhough the original agreement was executed for a totalconsideration of Rs.75 lakhs, the parties have agreed to increasethe amount to Rs.1.25 crores by a subsequent agreement dated01.12.1995. However, the payment schedule has been maintained asper the original agreement. Further it is submitted by the learnedsenior counsel that, whatever amount received before the release ofthe Tamil version of the film, has to be treated as advance andhence, no income accrued to the assessee during the relevantassessment year under consideration. He further submitted thatthe right to receive money would depend upon the performance of anobligation as per the agreement and hence, the royalty or any othersum received as advance has not accrued to the assessee as incomeduring the relevant period. Hence, the additions made by theAssessing Officer is illegal and without any basis. 5. Learned Senior Standing Counsel appearing for the Revenuesubmitted that admittedly, the film certification for the Tamilversion was issued on 10.01.1996 and the film was released on thesame day. Therefore, as per the agreement, the final payment hasto be made on the date of release of the film i.e., on 10.01.1996or before 90 days. In other words, the payment has to be made on10.01.1996 or 90 days before 10.01.1996. Since the Tamil versionof the film was released on 10.01.1996, the assessee has a right toreceive the balance consideration as per the agreement. Hence, themere non-payment or non-receipt of money within the financial yearcannot be a ground to delete the abovesaid amount from the totalincome of the assessee. Learned counsel for the Revenue furthersubmitted that, as per the agreement, the assessee had performedhis part of the obligation and hence the income had accrued at thehands of the assessee. It is further submitted that the assesseeis following mercantile system of accounting and hence,irrespective of the actual receipt of money, the same has to beincluded in his total income and also relied on the judgmentreported in 285 ITR 501 in the case of P.L.Ganapathi Rao andAnother Vs. Commissioner of Income-tax. 6. Heard the counsel and perused the materials available onrecord very carefully. Admittedly, the assessee had entered intoan agreement on 02.02.1995 with M/s.Shradha Entertainers PrivateLtd. The learned Senior Counsel appearing for the assessee fairlystated that the amount of Rs.95 lakhs is alone assessable for therelevant assessment year. Hence the dispute in the present case isnow only for the assessment of the balance amount of Rs.30 lakhs.It was stated that the said balance amount of Rs.30 lakhs has noteven been received by the assessee, till now. Further the due datefor receiving the same falls outside the accounting year. As perthe said agreement, the final settlement of Rs.30 lakhs was to bemade on or after 90 days from the date of Tamil release or the dateof Hindi release, whichever is earlier. The relevant clause in theagreement dated 02.02.1995 reads as follows: "NOW THIS AGREEMENT WITNESSETH AS FOLLOWS: The payment schedule of the aforesaid is the essenceof this agreement." M/s.Shradha Entertainers Pvt. Ltd.385-387 Shah & Nahar Industrial EstateA-2 Building, 3[rd] FloorDhanraj Mills CompoundBombay - 400 013 "December 1, 1995 Fax No.022 495 2166 Dear Sir, Ref: "LOVE BIRDS" for Hindi Dubbing/Remake. With reference to our agreement dated 02.02.1995 and thesubsequent discussions we had on the above subject, we confirm thatwe have revised the contract amount from Rs.75,00,000/- (RupeesSeventy Five Lakhs Only) to Rs.1,25,00,000/- (Rupees One CroreTwenty Five Lakhs Only) as there are some additions in the filmlike inclusion of Appachi Indian and additional shooting days. The revised mode of payment will be as follows: Rs.45,00,000/- - Already paid.Rs.25,00,000/- - On or before delivery of audio dat.Rs.25,00,000/- - On Tamil film release.Rs.30,00,000/- - As per the original agreement. Please sign the copy of this letter of arrangement as yourconfirmation. Thanking You.Yours faithfully,PYRAMID FILMS INTERNATIONALAGREED AND CONFIRMEDV.NATARAJAN SHRADHA ENTERTAINERS PVT. LTD." As per the above payment schedule, the first three instalmentsamounting to Rs.95 lakhs had accrued to the assessee and alsoreceived the same. Learned counsel appearing for the assessee alsofairly stated that it is assessable during the accounting year.With regard to the balance amount of Rs.30 lakhs, the said amountis payable on or after 90 days from the date of Tamil release or onthe day of Hindi or any other languages release, whichever isearlier. In this case, the Tamil version of the film was releasedon 10.01.1996. So, the period of 90 days ends on 10.04.1996. Theassessee is entitled to receive the money only on or before10.04.1996. The said due date falls outside the accounting year.Hence the same is assessable only for the subsequent assessmentyear. We also agree with the Learned Counsel that the wording "onor before" should be read as "on or after", in the context of theagreement and circumstances of the case and also the intention ofboth the parties. Learned Standing Counsel appearing for theRevenue relied on the Andhra Pradesh High Court judgment reportedin 285 ITR 501 in the case of P.L.Ganapathi Rao and Another Vs.Commissioner of Income-tax. In that case, the assessee firmcarried on business in distribution of feature films, acquired https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ rights over a film during the year 1974 from its producers, andduring the assessment year 1986-87, the assessee transferred theleasehold rights in respect of the film by an agreement datedDecember 1, 1984 for a consideration of Rs.4,00,000/- which has tobe paid immediately on execution of the agreement. The saidagreement states that the amount of Rs.4,00,000/- shall be adjustedin five years, Rs.1,00,000/- in the first year, Rs.90,000/- in thesecond year, Rs.80,000/- in the third year, Rs.70,000/- in thefourth year and Rs.60,000/- in the fifth year. The entire amountof Rs.4,00,000/- was paid to the assessee in the year in questionbut the assessee showed only Rs.1,00,000/- as income for theassessment year 1986-87 and showed the balance amount as a deposit.The Court also held that the assessee received Rs.4,00,000/- on theexecution of the agreement. Once the amount is received in a year,the same cannot be spread over for five years and the same can betaken as income only for the year in which amount is received.Hence, the Court came to the conclusion that the amount received,could not be spread over for five years. The facts in the abovecase, is entirely different from the facts in the present case. Inthe present case, the actual amount received was Rs.95 lakhs duringthe accounting year and the same was assessable and the right toreceive the balance amount of Rs.30 lakhs falls outside theaccounting year. So, we find that the Andhra Pradesh High CourtJudgment cited supra is, in no way helps the Revenue. 7.It is seen from the facts that before the due date theassessee has no right to claim from the other party. If the otherparty refuses to pay before the due date, the assessee cannotenforce the same. The due date is very relevant which gives rightto the assessee to receive the amount. 8.Taking into consideration all the facts, we are of theview that only Rs.95 lakhs alone is assessable for the assessmentyear 1996-97 and hence the Tribunal is right in taxing the sameduring the relevant assessment year. In respect of the balanceamount of Rs.30 lakhs, it is not taxable during the assessment yearas it accrues only for the subsequent assessment year and also itis seen from the records that the said amount of Rs.30 lakhs wasnot at all received till now. Under these circumstances, we are ofthe view that only Rs.95 lakhs alone has been accrued to theassessee during the accounting year and hence the same is taxablefor the assessment year 1996-97 and to that extent the order of theTribunal is confirmed. With regard to the balance Rs.30 lakhs, itis not taxable for the assessment year 1996-97 and to that extentthe order of the Tribunal is set aside. 9. With the above observation, we answer the question partlyin favour of the assessee and partly in favour of the Revenue. Thetax case is disposed of accordingly. No costs. Sd/-Asst. Registrar. /true copy/Sub Asst. Registrar.Vsl/kmTo1.The Deputy Commissioner of Income Tax, City Circle-V (Inv), Chennai 2.The Commissioner of Income Tax (Appeals), VI Chennai 3. The Assistant Registrar, Income Tax Appellate Tribunal,III Floor, Rajaji Bhavan, Besant Nagar, Chennai.1 cc to M/s. Anitha Sumanth, Advocate, Sr. 47279T.C. (A) No.211 of 2003 KM (CO)kk 2/11