1999 (11) TMI 32 - HC - Income Tax

Court Upholds Tax Assessment on Dubbing Income: Contract Binding Upon Promise Exchange

Lakshminarayana Films Versus Commissioner Of Income-Tax

Lakshminarayana Films Versus Commissioner Of Income-Tax - [2000] 244 ITR 344, 129 TAXMANN 955 Issues Involved:1. Accrual of income from the agreement dated May 25, 1974, and August 27, 1974, for the assessment year 1975-76.2. Method of accounting adopted by the assessee.3. Validity of the Commissioner's order u/s 263 of the Income-tax Act, 1961.4. Interpretation of contract terms and their impact on income accrual.Summary:1. Accrual of Income:The primary issue was whether the income of Rs. 1,05,000 accrued to the assessee during the previous year ended on March 31, 1975. The assessee had leased dubbing rights of its picture 'Sri Rama Anjeneyayudham' for Tamil and Malayalam to Jay Films and Cine Link Service by agreements dated May 25, 1974, and August 27, 1974, for Rs. 60,000 and Rs. 45,000, respectively. The assessee did not disclose this income for the assessment year 1975-76, arguing that the income became due only upon delivery of certain materials to the lessees.2. Method of Accounting:The Commissioner of Income-tax found that the assessee, who had followed the mercantile system in previous years, had switched to the cash system for these transactions, which was not permissible. Consequently, the Commissioner included the income from these agreements in the assessment year 1975-76 and set aside the original assessment order u/s 263 of the Act.3. Validity of Commissioner's Order:The Income-tax Appellate Tribunal upheld the Commissioner's order, stating that the contract became binding upon the exchange of valid promises, and the income accrued as per the terms of the agreements during the previous year. The Tribunal referenced the case of Union of India v. Chaman Lal Loona and Co., AIR 1957 SC 652, to support its conclusion that the contract was concluded when the promises were exchanged, making the income assessable in the relevant year.4. Interpretation of Contract Terms:The court examined the agreements and found that for the Malayalam dubbing rights, the contract was concluded on August 27, 1974, with most of the consideration paid before the end of the previous year. Therefore, the income of Rs. 45,000 accrued during the previous year ended March 31, 1975. However, for the Tamil dubbing rights, the payment of Rs. 50,000 was postponed to later dates, and the right to receive the amount depended on future performance. Thus, the income did not accrue during the previous year ended March 31, 1975, except for an advance of Rs. 10,000 received on June 21, 1974.Conclusion:The court concluded that the royalty of Rs. 45,000 for the Malayalam dubbing rights accrued as income during the previous year ended March 31, 1975, while the royalty of Rs. 50,000 for the Tamil dubbing rights did not accrue during the same period. The question of law was answered accordingly, with no order as to costs.