PETITIONER:
PERFORMING RIGHT SOCIETY LTD. & ANR.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX & OTHERS
DATE OF JUDGMENT10/08/1976
BENCH:
GUPTA, A.C.
SINGH, JASWANT
CITATION:
1976 AIR 1973 1977 SCR (1) 171
1976 SCC (4) 37
ACT
Income Tax Act, 1961--S. 5(2)--Non-resident campany receiv-
ing income outside India--income if accrued in India.
HEADNOTE
The appellant Society which is an association of compos-
ers, authors and publishers of copyright musical works was
incorporated under the English Companies Act, 1908 and
1913 with its registered office in London. It collects
royalties for the issue of licences, granting permission for
performing right in the works of its members and distributes
the royalties to its .members. The Society entered into an
agreement in England with the President of India by which it
granted to the All India Radio (the licensee) authority to
broadcast from its sound broadcasting stations in India the.
musical works of the Society. Under the agreement the licen-
see had to pay in England annual licence fee payable to the
Society.
The appellant contended (i) that the agreement between the
appellant and the licensee having been executed in England
and the royalties being also payable in England, the income
out of this agreement was not liable to be taxed in India
and (ii) the Society being under an obligation to distribute
the income to its members, royalties realised are hot really
income of the Society.
Rejecting the contentions,
HELD: (1)(a) Whether a certain income accrued or arose
in India within the meaning of s. 5(2) is a question of fact
"which should be looked at and decided in the light of
commonsense and plain thinking." The Society is a non-
resident company and though it received the income: out of
the agreement executed, not in India but England, the income
undoubtedly accrued or arose. in India. [175H and F]
(b) The question whether the agreement is the source of
the income is not relevant because s. 5(2) provides that all
income "from whatever source derived" is to be included in
the total income of the non-resident assessee if the
income accrues or arises in India during the relevant year.
The income in this case had infact accrued in India and by
virtue of s. 9 no question arises whether it should be
"deemed" to. accrue or arise in India. [175 G]
In the matter of V.G. Every: (19’37) 5 I.T.R. 216 approved.
(2) Article 48 of the Society’s Articles of Association
shows that the royalties payable by the licensee under the,
agreement are realised by the Society as its income. Out of
the receipts are deducted the expenses and also such other
sums as in the discretion of the General Council should be
set aside for the purposes mentioned in that article. This
is a case where the assessee having received the income,
applies it in a particular Way; it is not a case of diver-
sion of income by an overriding charge. [177 C]
Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax,
Bengal (1933) 1 I.T.R., 135, P.C. Mullick and another
(Executors) v. Commissioner of Income-tax, Bengal (1938)
6 I.T.R. 206 and Commissioner of Income-tax, Bombay City v.
Sitaldas Tirathdas [1961] 41 I.T.R. 367 (pp. 374-375) dis-
tinguished.
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 488 of 1975.
(Appeal by Special Leave from the Judgment and Order
dated 24-9-1973 of the Calcutta High Court in Appeal from
Original Order & No. 335/73).
172
Hardayal Hardy, for appellant No. 1.
K. Sen, S.K. Mehta, M. Qamaruddin and P.N. Puri, for
respondent No. 2.
S.C. Manchanda, P.L. Juneja and S.P. Nayar, for respondents.
The Judgment of the Court was delivered by
GUPTA, J. The first appellant, performing Right Society
Limited, (hereinafter called the Society) is a company
incorporated under the (English) Companies Acts, 1908 and
1913, having its registered office at Copyright House, 33
Margaret Street, Cavendish Square, London a company limited
by guarantee and having no share capital. The Society is an
association of composers, authors and publishers of copy-
right musical works established to grant permission for the
performing right in such works. ’Performing right’ means
the right of performing in public, broadcasting and causing
to be transmitted to subscribers to a diffusion service, in
all parts of the world. The members of the Society are
required to assign to the Society the performing right in
their works, and the Society exercises and enforces on their
behalf all rights and remedies in respect of any exploita-
tion of such works. The Society collects royalties for the
issue of licences granting such permission and distributes
the royalties to the members of the society, namely, the
composers, authors, music publishers and other persons
having an interest in the copyright in proportion to the
extent to which a member’s work is publicly performed or
broadcast after a pro-rata deduction of the expenses. Arti-
cle 43 of, the Articles of Association of the Society pro-
vides that the business and operations of the Society shall
be conducted and managed by a General Council, and Article
48 authorises the General Council to apply the receipts also
for certain other purposes. Article 48 reads as follows:
"48. The General Council may, before making any distri-
bution among the Members:
(a) Apply out of the receipts such sums as
it thinks proper or has agreed to contribute as :-
(i) Gratuities, donations, pensions and emolu-
ments to any Member or ex-Member of the Society or
any person at any time in the employment of the
Society, or engaged in any business acquired by the
Society, and the ’wives, widows, families and
dependants of any such person;
(ii) Contributions to any benevolent, pension
or similar fund which may be established for the
benefit of Members, ex-Members or employees of the
Society or their wives, widows, families or depend-
ants .
(b) Set aside out of the receipts such sums as it
thinks proper as subscriptions, donations, loans,
gifts other payments for any of the purposes for
which powers is given by paragraphs (iii) and (iv)
of Clause 3(f) of the Memorandum of Association,
provided
173
that without the assent of the Society in General
Meeting the aggregate of all such payment shall not
in any one year exceed the sum of one thousand
pounds and four thousand pounds ’under the provi-
sions of those paragraphs respectively.
(c) Set aside out of the receipts such sums as it
thinks proper as a reserve fund to meet contingen-
cies, or for future distribution, or for repairing,
improving and maintaining any of the property or
premises of the Society and for such other purposes
as the General Council shall in its absolute dis-
cretion think necessary or conducive to the inter-
ests of the Society, and may invest for the several
sums so set aside in such investments as it may
think fit, and from time to time deal with or vary
such investments and dispose of all or any part
thereof for the benefit of the Society, and may
divide the reserve fund into such special funds as
it thinks fit, and employ the reserve fund or any
part thereof for the general purposes of the Socie-
ty, and that without being bound to keep the same
separate from the other assets."
On December 13, 1953 the Society entered into
an agreement with the President of India owning and
controlling broadcasting stations in India and
organizing and conducting the same under the name
of All India Radio (hereinafter referred to as the
licensee) whereby the Society granted to the licen-
see the authority, (a) to broadcast from the licen-
see’s sound broadcasting stations in India all
musical works included in the repertoire of the
Society, and (b) to utilize, solely, for the pur-
pose of sound broadcasting as aforesaid, any origi-
nating performance of such musical works, irrespec-
tive of the source of such performance and the
means whereby the such performance is conveyed to
the point of broadcast transmission from the licen-
see’s stations. The agreement was executed in
England. It may be stated here that previous to
this agreement the parties had entered into a
similar agreement in the year 1940. The agreement
of 1953 states that the licence granted thereby
"shall be deemed to have come into force on April
1, 1949 and shall continue from year to year until
determined by either party giving to the other
three calendar months’ notice in writing to expire
on March 31 in any year". The agreement provides
that the licensee shall send to the Society at its
registered office in London, the lists of all
musical works broadcast in each week during the
term of the licence from each of the licensee’s
main stations (Delhi, Bombay, Calcutta and Madras)
and the external services, and requires the licen-
see to furnish a return after the first day of
April every year during the period of licence,
stating the agreegate number of hours occupied
during the period ended on the previous 31st March,
in broadcasting Western music from each of the
licensee’s main and external Service Stations.
The agreement further provides that for the rights
granted, the licensee will pay to the Society
annually a sum calculated at the rate of 2 (Two
pounds) per hour of broadcasting Western music from
each of the licensee’s
174
main and external Service Stations and that such
annual payments must be made to the Society in
London.
The second appellant, M/s. Natsin India Private
Limited is a private limited company incorporated
under the (Indian) Companies .Act having its office
at 26, Chowringhee Road, Calcutta. The second
appellant was appointed by the Society to be its
lawful attorney in India by virtue of a power of
attorney granted by the Society to the, second
appellant in July, 1967. As agent in India for the
Society, the second appellant realises on its
behalf royalties from cinema houses and other
sources where music over which the Society has
copyright is played in this country, and has, inter
alia, the power to commence and prosecute suits and
other proceedings, engage lawyers, and sign
plaints, petitions etc. Prior to July, 1967 the
Society, a non-resident company, used to file its
returns of income before the Income-tax Officer,
Madras, through its former agent in India, M/s.
Vernon and Company of Madras. The royalties or
fees realised from the licensee were not included
in its returns for the assessment years 1947-48 to
1950-51. Later, the .Income-tax Officer, Madras,
issued notices under section 34(1) of the Income-
Tax Act, 1922 and assessed the said income after
deducting the proportionate administrative ex-
penses. The appeals taken by Vernon and Company
against the supplementary assessment orders for the
aforesaid years were dismissed by the Appellate
Assistant Commissioner, Madras. The matter rested
there and the Society had been paying tax on its
income in India including the income from royal-
ties. received from the licensee without objection
until the assessment year 1967-68 for which the
accounting year ended December 31, 1966. In the
said assessment year also the Income-tax Officer,
Companies Circle L(II), Madras by his order dated
October 23, 1963 assessed the total income of the
Society treating the income arising out of the
agreement with the licensee as chargeable as was
being done all these years. Against this order of
assessment, the Society through the second appel-
lant made a revisional application under section
264 of the Income-Tax Act, 1961 (hereinafter re-
ferred to as the Act) to the Commissioner of In-
come-tax, West Bengal, where the Society’s income-
tax file had been transferred in the meantime. The
Additional Commissioner of Income-tax who dealt
with the application dismissed the same by his
order dated July 18, 1970. The Society then moved a
writ petition before the Calcutta High Court chal-
lenging the order of the Additional Commissioner of
Income-tax. A rule nisi was issued on the petition
by a learned Judge of the High CoUrt but ultimately
the rule was discharged and the petition was dis-
missed. On appeal by the Society, a Division Bench
of the High Court affirmed the view taken by the
learned single Judge and dismissed the appeal on
September 24, 1973. In this appeal by special
leave the appellants question the correctness of
that decision and challenge the order of assessment
on two grounds:
(1 ) the agreement between the Society and the
Licensee having been executed in England and the
royalties being also payable in England, the income
out of this agreement is not liable to be taxed in
India;
175
(2) the Society being under an obligation to
distribute the income to its members, the royalties
realised are not really the income of the Society.
The first point seems to be covered by the provi-
sions of section 5(2) (b) of the Act. Section 5(2)
reads as follows:
"5. Scope of total income:
(1) x x x
(2) Subject to the provisions of this Act,
the total income of any previous year of a person
who is a non-resident includes all income from
whatever source derived which-
(a) is received or is deemed to be received in
India in such year by or on behalf of such person;
or
(b) accrues or arises or is deemed to accrue or
arise t0 him in India during such year.
Explanation-1 .--Income accruing or arising
outside India shall not be deemed to be received in
India within the meaning of this section by reason
only of the fact that it is taken into account in a
balance sheet prepared in India.
Explanation 2.--For the removal of doubts, it
is hereby declared that income which has been
included in the total income of a person on the
basis that it has accrued or arisen or is deemed to
have accrued or arisen to him shall not again be so
included on the basis that it is received or deemed
to be received by him in India ."
The Society is a non-resident company, and though
it receives the income out of the agreement execut-
ed not in India but in England, the income undoubt-
edly accrues or arises in India. On behalf of the
appellants it was contended that the source of
income was really the agreement which was entered
into in England. We do not think that the question
as to the source of the income is relevant because
subsection (2) of section 5 provides that all
income "from whatever source derived" is to be
included in the total income of the non-resident
assessee if the income accrues or arises in India
during the relevant year. Reference was also made
to section 9 of the Act which enumerates the in-
comes that shag be "deemed to accrue or arise in
India" though actually accruing elsewhere, to
establish that the income in question could not be
deemed to accrue or arise in India. But the income
in this case has in fact accrued in India and no
question arises whether it should be "deemed" to
accrue or arise in India. ’Whether a certain income
accrued or arose in India within the meaning of
section 5(2) is a question of fact "which should be
looked at and decided in the light of commonsense
and plain thinking" as the Calcutta High Court
considering a similar question under section 4(1)
176
of the Income-Tax Act, 1922 observed.(1) In the
case before us the High Court and the income-tax
authorities considered it a hard matter of fact
that the income derived from broadcast of copyright
music from the stations of All India Radio arose in
India. In our opinion this was the correct view to
take and we find no reason to differ from it.
The next question is whether the income from
the royalties was the Society’s own income. It was
Contended on the authority of Raja Bejoy Singh
Dudhuria v. Commissioner ofIncome-Tax, Bengal,(")
that the obligation to disburse the sum among its
members diverted the income from the Society to the
members, and it could not be called the income of
the Society. In Bejoy Singh Dudhuria’s case there
was a decree of the court charging the appellant’s
whole resources with a specific payment to his
step-mother, the Privy Council held that the decree
had to that extent diverted his income from him and
directed it to his step mother, and that to that
extent what he received for her was not his income.
But where payments are made by the assessee after
he has received the income as his, the position is
different. This was pointed out by the Judicial
Committee in a later case, P.C. Mullick and another
(Executors)v. Commissioner of Income-tax,
Bengal,(1) where the executors in accordance with
the directions in the will had paid Rs. 5,537/- to
the person who performed the testator’s addya
Sradh, and another sum of Rs. 1,25,000/- for pro-
bate duty out of the income of the estate. It was
held that this was not a case in which a portion of
the income was by an overriding title diverted from
person who would otherwise have received it as in
Bejoy Singh Dudhuria’s case but it was "simply a
case in which the executors having received the
whole income of the estate apply a portion in a
particular way pursuant to the directions of their
testator, in whose shoes they stand". The true test
for the application of the rule of diversion of
income by an overriding title has been explained by
this Court in Commissioner l,come-tax, Bombay City
v. Sitaldas Tirathdas(4)
"In our opinion, the true test is whether the
amount sought to be deducted, in truth, never
reached the assessee as his income. Obligations,
no doubt, there are in ever), case, but it is the
nature of the obligation which is the decisive
fact. There is a difference between an amount which
a person iS obliged to apply out of his income and
an amount which by the nature of the
obligation .cannot be said to be a part of the
income of the assessee. Where by the obligation
income is diverted before it reaches the assessee,
it is deductible; but where the income is required
to be applied to discharge an obligation after such
income reaches the assessee, the same consequence,
in law, does not follow. It is the first kind of
payment which can truly be excused and not the
second. The second payment is merely an obligation
to pay another
(1) In the matter of V. G. Every. (1937) 5 I.T.R.
216 (Coskello J.)
(2) [1933] 1 I.T.R. 135
(3) (1938) 6 I.T.R. 206.
(4) (1961) 41 I.T.R. 367 (pp. 374-375).
177
a portion of one’s own income, which has been
received and is since applied. The first is a case
in which the income never reaches the assessee, who
even if he were to collect it, does so, not as part
of his income, but for and on behalf of the person
to whom it is payable."
On the facts of the present case it is clear
that the royalties payable by the licensee under
the agreement are realised by the Society as its
income; Article 48 of the Society’s Articles of
Association puts the matter beyond doubt. Out of
the receipts are deducted the expenses and also
such other sums as in the discretion of the General
Council should be set aside for the purposes men-
tioned in Article 48. This is a case where the
assessee having received the income applies it in a
particular way; it is not a case of diversion of
income by an overriding charge.
The appeal is accordingly dismissed. There
will be no order as to costs.
P.B.R. Appeal
dismissed.
178