Trading receipts from termination of film-financing contracts were taxable because the business structure was not sterilised.

Sums received on termination of film-financing and sub-distribution contracts were treated as trading receipts because the assessees were carrying on financing and allied film-distribution business under ordinary commercial arrangements. The cancellation of the contracts did not destroy the profit-making apparatus or impair the trading structure; it only adjusted business relations in the course of trade. Applying the fixed capital and circulating capital test, the receipts were connected with circulating capital and arose from ordinary business contracts, not from sterilisation of a capital asset or loss of an income-producing source. They were therefore taxable as trading receipts.

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Issues: Whether the sums received on termination of the film-financing and sub-distribution arrangements were capital receipts or trading receipts.

Analysis: The assessees were engaged in financing and allied film-distribution activities under contracts made in the ordinary course of business. The arrangements with the producer provided for financial advances, recovery out of realisations, commissions, and adjustments of rights upon termination. The cancellation of those contracts did not destroy the profit-making apparatus or impair the trading structure; it merely adjusted commercial relations in the course of the business. Applying the test of fixed capital and circulating capital, the receipts were connected with circulating capital and arose from ordinary commercial contracts, not from sterilisation of a capital asset or loss of an income-producing source.

Conclusion: The receipts of Rs. 2,75,000 and Rs. 75,000 were trading receipts and were taxable.

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