1997 (8) TMI 122 - AT - Income Tax

Tribunal rules film lease sale should be taxed upon receipt & confirms tax avoidance scheme

The Tribunal upheld the Assessing Officer's decision that the entire lease consideration from the sale of lease rights of films should be taxed in the ... Accrual Of Income, Lease Agreement, Spreading Of Income Issues Involved:1. Taxability of royalty income from the sale of lease rights of films.2. Sale of lease rights to related concerns and the addition made in this connection.Summary:1. Taxability of Royalty Income from Sale of Lease Rights of Films:The assessee, deriving income from film distribution and theatre operations, sold lease rights of 16 films and declared income proportionately over the lease period. The Assessing Officer (AO) observed that the entire lease consideration was received upfront, and since the assessee lost control over the film rights upon signing the agreements, the entire amount should be taxed in the year of receipt. The CIT(Appeals) upheld the AO's decision, stating that the entire sale consideration accrued and was realized at the time of agreement execution, making it assessable in the year of receipt. The Tribunal confirmed this view, citing sections 4 and 5 of the Income-tax Act, 1961, and relevant case law, emphasizing that the entire amount received constituted trading receipts and was taxable in the year of receipt.2. Sale of Lease Rights to Related Concerns:The assessee sold lease rights of the film 'Chinna Thambi Periyathambi' to a related concern, M/s. Sri Devi Films, owned by her minor granddaughter, at a significantly low price. The AO found that the minor had no expertise in film distribution, and the film rights were effectively retained by the assessee. The AO concluded that the transaction was a device to reduce tax liability, adding the actual collections from the film to the assessee's income. The CIT(Appeals) upheld this addition. The Tribunal, referencing the Supreme Court's decision in Workmen of Associated Rubber Industry Ltd., confirmed that the transaction was a tax avoidance device, and the actual collections realized were rightly included in the assessee's income.Conclusion:The Tribunal dismissed the assessee's appeals for all the assessment years, confirming the additions made by the AO and CIT(Appeals) on both issues. The entire lease consideration was held taxable in the year of receipt, and the income from the related concern transaction was rightly added to the assessee's income.