Law:

Section:

Section 5 of the Income-tax Act, 1961 - Income - Concept of real income - Assessment years 1964-65 to 1966-67 - Under agreement, assessee agreed to finance with exclusive distribution rights of picture in certain areas - Distribution commission was fixed at certain percentage of net realisation on picture and it was to be adjusted towards discharge of amount advanced to producer - Picture was not successful and assessee could not even realise amount advanced - However, out of amount realised, assessee debited certain percentage as distribution commission to producer's account - Whether since assessee even failed to recover amount advanced, distribution commission debited to producer's account could not be treated as assessee's income merely because it was following mercantile system of accounting - Held, yes FACTS The assessee entered into an agreement with the producer of Kananda film. The assessee agreed to advance certain amount for production of the picture and the producer entrusted the assessee with the exclusive rights of distribution in certain areas. The distribution commission was to be calculated at certain per cent on the net realisation of the picture. The assessee was authorised to deduct the distribution commission, and appropriate the balance towards the discharge of the amounts advanced to the producers. After the advance was completely adjusted, the assessee had to remit to the producer the realisations after deducting the distribution commission. The picture could not be completed in time and the assessee had to take over the production from the original producer. The production was completed only by September 1963, when the picture was released. The picture had no successful run and even the amounts advanced could not be realised. However, on realisation the assessee debited the distribution commission to the producer's account. The ITO brought to tax the said amount. In making these assessments the ITO rejected the assessee's claim that it could expect to earn the commission only after the capital was realised and that so long as the amount of realisation fell short of the said capital, it could not be taxed on the commission. The AAC…

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