Film distribution cancellation payments treated as revenue receipts where compensation replaced lost commission, not capital asset surrender.

Cancellation of film distribution agreements was analysed as a question whether the payment received was capital or revenue in nature. The majority view was that the agreements were made in the ordinary course of the assessee's distribution business, and their cancellation only adjusted the business relationship without sale, surrender, or sterilisation of a capital asset; the receipt therefore represented compensation for lost commission and was treated as revenue income assessable to tax. A dissenting opinion viewed the arrangements as composite financing and distribution rights involving capital assets, so cancellation for consideration would have produced a capital receipt.

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Issues: (i) Whether the sum received on cancellation of the film distribution agreements was a capital receipt or a revenue receipt.

Analysis: The majority held that the agreements were entered into in the ordinary course of the assessee's film distribution business and that their cancellation merely adjusted the business relationship between the parties. The payment represented compensation for the loss of commission and did not amount to consideration for the sale, surrender, or sterilization of a capital asset. The agreements had a fixed term, the business of distribution continued, and the receipt was treated as arising from a going business rather than from the destruction of any fundamental profit-making apparatus.

Conclusion: The receipt was a revenue receipt and was assessable to tax, in favour of Revenue.

Dissenting Opinion: Bhagwati, J. held that the agreements were composite arrangements involving financing and distribution rights, that the assessee had acquired capital assets under them, and that cancellation of those rights for consideration resulted in a capital receipt not liable to tax.

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