Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX U.P. LUCKNOW
Vs.
RESPONDENT:
M/S. GANGADHAR BAIJNATH GENERAL GANG, KANPUR
DATE OF JUDGMENT23/08/1972
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
REDDY, P. JAGANMOHAN
KHANNA, HANS RAJ
CITATION:
1973 AIR 1011 1973 SCR (1) 928
CITATOR INFO :
R 1987 SC 500 (38)
ACT:
Income-tax Act (11 of 1922), s.10-Partners of two
Partnerships joining to form a third partnership-Partners of
one partnership going out of new firm-Receipt of payments as
compensation-If capital or eevenue.
HEADNOTE:
Six persons, three of whom were partners of B-firm having a
selling agency of S-company, and three others who were
partners of J-firm having quota rights in the S-company,
formed a partnership the BJ-firm. There was, no deed of
partnership and the partnership of the BJ-firm was
terminable at will. The B-firm continued to exist carrying
on various other business activities. The BJ-firm was
appointed as managing agents of the S-company. Later, the
three persons belonging to B-firm went out of the BJ-firm
and for doing so, they were paid a sum of money which
included compensation as per the terms of an agreement
between the B and J groups. The BJ-firm continued as ,he
managing agents of the S-company. The appellant, B-firm, in
appeal to this Court, while admitting that the portion of
the compensation which represented profits was a revenue
receipt, contended, that the remaining portion purporting to
be made up of compensation for giving up (a) its mianaging
agency rights, (b) its selling agency rights, and (c) its,
goodwill, was not a revenue receipt but a capital receipt.
HELD : The entire sum reecived by the appellant was a
revenue receipt assessable under s. 10 of the Income Tax
Act, 1922. [938F-G].
(1) The question whether a particular receipt is capital or
revenue is largely a question of fact. [935A]
(2 ) (a) The BJ-firm was not a partnership of two firms
because two firms cannot join in a partnership, but was
really a partnership consisting of six partners. The
appellant-firm had various business activities one of which
was to join the BJ-firm to carry on certain business
activities. The appellant’s representatives by entering
into the partnerG; 937D-E ship were merely carrying on a
trading activity. [935F-H; 937A-D-E]
(b) The managing agency rights as well as any goodwill
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vested with the BJ-firm. By going out of the BJ-firm the
partners representing the appellant-firm had surrendered
their rights in the partnership to the remaining partners
and obtained payments for surrendering their rights. it was
a case of cancellation of a contract which had been entered
into the ordinary course of business, and not one of parting
with any managing agency right. The payment received in
settlement as a result of the termination, of the contract
represents the profits which the assessee would have made
had the contract been performed. [936G-H; 937A-B, D-E]
Commissioner of Income-tax, Nagpur v. R. B. Jairam Valli and
Ors. 35 I.T.R. 148, followed.
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(c) It was not a case of the only trading activity of the
appellantfirm coming to an end. Only one of its trading
activities had been put an end to and hence, the amount
received could not be considered as compensation for
stopping its business. [937E-F]
Therefore, the compensation paid for the termination of the
contract is not a capital receipt. [937F]
(3) (a) The selling agency of the appellant firm bad been
transferred to the BJ-firm even at the time when the BJ-firm
was formed. On the day when the partners of the B-firm left
the BJ-firm it was an asset of the BJ-firm and hence the
compensation paid could only relate to the termination of
the contract of partnership and not to the transfer of sell-
ing agency. [937F-G]
(b) Assuming that indirectly the selling agency right of the
appellant firm was affected, it was only one of several
trading activities of the appellant firm and the trading
structure of the assessee-firm was not at all affected. The
appellant-firm merely replaced one trading activity by
another by utilising the compensation for acquiring
controlling shares in two other companies. In such cases.
the amount received for the cancellation of an agency, does
not represent the price paid for the lose of a capital
asset, but is in the nature of income. [937G-H; 938A]
Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-
tax, Calcutta, 53 I.T.R. 28B, and Kettlewell Bullen and Co.
Ltd. v. Commissioner of Income-tax Calcutta, 53 I.T.R. 261,
followed.
JUDGMENT:
CIVIL APPELLATE JURISDTCTION: C. A. Nos. 1746 and 2022 of
1969.
Appeal by certificate from the judgment and order dated
October 22, 1965 of, the Allahabad High Court in Income-tax
Reference No. 286 of 1960.
S. T. Desai and S. Mitra, B. B. Ahuja and B. D. Sharma for
the appellant. (in C.A. No. 1746 of 1968.)
H. K. Puri, for the respondent (in C.A. No. 1746 of 1968.)
H. K. Puri and S. K. Dhingra, for the appellant (in C.A.No.
2022 of 1968).
S. T. Desai, S. Mitra, O. P. Malhotra and B. B. Ahuja and
B. D. Sharma, for the respondent (in C.A. No. 2022/68).
The Judgment of the Court was delivered by
Hegde, J. These are appeals by certificate from the decision
of the High Court of Allahabad in a Reference under s. 66(1)
of the Income-tax Act, 1922 (to be hereinafter referred to
as the Act).
The Income-tax Appellate Tribunal (Allahabad bench) refer-
red to, the High Court for its opinion the following
questions :
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"(1) whether on the facts and in the
circumstances of the case, the receipt of.Rs.
35,01,000/- constituted income liable to tax
under section 10 of the Income-tax Act ?
10--L172Sup.c I/73
930
(2) Whether it was competent to the
Appellate Assistant Commissioner to invoke the
provisions of section 12-B for the assessment
of Rs. 35,01,000/- when the Income-tax Officer
had assessed the amount under Section 10 of
the Income-tax Act ?
(3) Whether on the facts and in the
circumstances of the case the receipt of Rs.
35,01,000/- was taxable under section 12-B of
the Income-tax Act ?"
The High Court answered the first and the second question in
favour Revenue and on the third question it recorded its
opinion that on the facts and in the circumstances of the
case, the receipt in question was not taxable under S. 12-B
of the Act.
Aggrieved by the decision of the High Court the Commissioner
of Income-tax has brought Civil Appeal No. 1746 of 1968 and
the assessee Civil Appeal Ng. 2022 of 1968.
The material facts of. the case as could be gathered from
the statement of case are these: The is a partnership firm
carrying on business of financing, moneylending, selling
agencies and the like pursuits. The relevant assessment
year is 1948-49, the concerned accounting year ending
October, 1947. On April 29, 1946 the three partners of the
assessee firm enterred into an agreement with Gajadhar
Jaipuria, R. S. Puran Mal Jaipuria and Mangloo Ram Jaipuria.
The terms of the agreement as found by the Tribunal, were
(1) That the partners should acquire on
joint account, the shares of the Swadeshi
Cotton Mills Co. Ltd. and Eland Ltd.
(2) The partners, of the assesse firm (who
will hereinafter be referred to as the ’Bagla
Group’) and the remaining three partners (who
will hereinafter be referred to as the
"Jaipuria Group") were to invest the amount
required to acquire the shares in question
equally and all benefits including the
managing agency, selling agency, quota rights
should be enjoyed in joint account but the
selling agency which was in the hands of the
assessee firm should continue to be in its
hands till the Dussebra of that year.
Similarly the quota rights which were in the
hands of the Jaipuria Group should continue in
the hands of that Group till the Dussehra of
that year.
931
(3) Neither party should acquire any share
in his separate account or have any interest
directly or indirectly to the exclusion of the
other.
Till the date of the formation of this partnership, the
assesee firm consisting of "Bagla Group" were the selling
agents of the Swadeshi Cotton Mills Co., Ltd. The "Jaipuria
Group" which was a different firm were enjoying some quota
rights in that mill. In pursuance of the agreement above
referred to the new partnership "Bagla-Jaipuria and Co."
purchased shares of the Swadeshi Cotton Mills Co. Ltd. For
that purpose both the groups contributed equally. But no
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partnership deed as such was entered into by the partners.
On July 16, 1946, an agreement was entered into between the
Swadeshi Cotton Mills Co., Ltd. and the Bagla Jaipuria and
Co. appointing the latter as the managing agents of the
Company for a period of twenty years. On October 7, 1946,
another agreement was entered into by the partners of the
Bagla Jaipuria and Co. whereby it was decided that one of
the two Groups would retire from the business with effect
from October 6, 1946 subject to the terms and conditions
specified in that agreement. The relevant clauses of that
agreement read thus :
"It is agreed that one or other of the Bagla
or Jaipuna groups shall retire from the said
partnership with effect from 6th October,
1946. The continuing group shall pay to the
retiring group their shares of the capital and
interest thereon and compensation which shall
include the price of goodwill, and the share
of the retiring partner in the profits of the
firm upto 5th October 1946. The question as
to which of the said two groups shall retire
and what amount of compensation shall be paid
by the continuing group to the retiving group
shall be determined by auction held in the
manner-set out hereinafter. Such auction
shall be held forthwith. The auction shall be
conducted by Dr. Brijendra Swarup, Advocate of
Kanpur and Mr. B. P. Khaitan, Solicitor of
Calcutta. Only partners shall be entitled to
attend auction. Rai Bahadur Rameshwar Prasad
Bagla and Sjt. Mangtoram Jaipuria will give
bids on behalf of their respective groups and
the respective groups shall be bound by bids
so given by their aforesaid respective
nominee. The group offering to pay the
highest compensation shall continue as
’partners in the firm and the other group
shall retire as herein provided."
The continuing group shall pay to the retiring group within
10 days from the date of the auction the following:
932
(a) The amount of capital contributed by the retiring group
with interest calculated at the rate of 4 1/2%.
(b) And compensation money ascertained as aforesaid."
In the auction held in pursuance of this agreement the
Jaipuria Group outbid the Bagla Group. Consequently the
Bagla Group retired from the business on receipt of the
following amounts
Rs. 97,11,699-on account of capital. investment
Rs. 1,77,232-on account of interest on capital investment
and
Rs. 35,01,000-on account of compensation as provided in the
agreement.
The Jaipuria Group paid those amounts to the Bagla Group on
October 7, 1946. A separate receipt was executed by the
Bagla Group in respect of the receipt of Rs. 35,01,000/-
That receipt recites :
"Received from Seth Gajadhar Jaipuria, Rai Sahib PuranmuU
Jaipuria and Seth Mungturam Jaipuria the sum of Rs.
35,01,000/- as solatium and compensation for surrendering to
the Jaipuria group our right, title and interest in running
concern of Bagla Jaipuria & Co. who inter- alia were
appointed the Managing agents of the Swadeshi Cotton Mills
Co., Ltd. for a period of twenty years under an agreement
dated 16th July, 1946 and with expectation of further
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renewals of like period."
The asessee firm resigned as selling agents with effect from
October 5, 1946. Jaipuria group continued in the name and
style of Bagla Jaipuria and Co.
In the course of the assessment for the assessment year
1948-49 the Income-tax Officer brought to tax the sum of Rs.
35,01,000/as mcome. He overruled the objection of the
assessee that it,was a compensation for giving up the
managing agency right. Aggrieved by the decision, the
assessee took up the matter in appeal to the Appellate
Assistant Commissioner. The Appellate Assistane
Commissioner affirmed the decision of the Income-tax
Officer. He further held that the case also fell within the
scope of s. 12-B of the Act. Thereafter the assessee took
up the matter in appeal to the Income-tax Appellate
Tribunal. It was contended before the Tribunal that the
receipt in question cannot be considered as income coming
within s. 10 of the Act as the same was a capital receipt.
It was further contended that the Appellate Assistant
933
Commissioner had no competence to convert the assessment
made under s. 10 into one under s. 12-B and at any rate the
receipt in question does not come within the scope of s. 12-
B. The Tribunal rejected the first two contentions. But it
agreed with the assessee that the receipt in question cannot
be brought to tax under s. 12-B. At the instance of the
assessee, the Tribunal submitted for the opinion of the High
Court questions 1 and 2 referred to earlier and at the
instance of the Commissioner of income-tax, it referred to
the High Court Question No. 3.
This case came up for hearing before this Court on an
earlier occasion. By our order dated August 12, 1971, we
called upon the Tribunal to submit a supplementary statement
of case on certain points viz. :
(1 ) Was any compensation payable under the
agreement either directly or by implication in
respect of the assessee’s surrender of its
share in the managing agency. If so, what is
the amount of compensation payable in that
regard.
(2) Was any compensation payable under the
agreement directly or by implication in lieu
of the assessee giving up its selling agency.
If so what is the amount of compensation
payable in respect of that right.
(3) Did the assessee give up any other
rights under the agreement. If so, what are
those rights and what is the value of those
rights ?
(4) The agreement says that the compensation
includes "the price of goodwill and the share
of the retiring partner in the profits of the
firm upto 5th October, 1946".
(a) was there any goodwill; if so what was
its value and
(b) What part of the compensation received
by ’the assessee as can be attributed towards
the profits earned by the association of
persons calling itself M/s. Bagla Jaipuria
Company uptill 5th October, 1946.
The Tribunal submitted the supplementary statement of case
called for on November 24, 1971. Dealing with the first
question, the Tribunal observed:
"It will thus be seen that compensation was
paid by the Jaipuria Group to the Bagla Group
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(a) partly for the surrender of its share in
the Managing Agency
934
right, (b) partly for giving up its selling
agency right and (c) partly for the profits
earned by the Bagla Group upto 5th October,
1946. There is, however, no material on the
record on the basis of which it may be possi-
ble to split up the quantum of compensation in
respect of each of the above three items at
(a), (b) and (c). Therefore, our answer to
query No. (1) is that the com- pensation was
payable under the agreement dated 7-10-1946
not directly but by implication in respect of
the assessee’s surrender of its share in the
Managing Agency right but it is not possible
to determine the quantum for want of material
on the point."
Dealing with point No. 2, the Tribunal’s answer is the same
as of point No. 1. Dealing with point No. 3, the Tribunal
observed that the only other right given up by the assessee
under the agreement was the goodwill but there is no
material on record on the basis of which its value could be
ascertained. On point No. 4 (a), the Tribunal observed:
"Regarding query No. (iv) (a), made by the
Supreme Court, there was certainly, in our
opinion goodwill of the partnership firm M/s.
Bagla Jaipuria & Co. as it was appointed not
only the Managing Agents of a very big cotton
mill for a period of 20 years in 1946, at a
time when there was Government control over
cloth and textile Mills and their managing
agents were making huge profits, but had also
the sole-selling agency of the Co. viz.
Swadeshi Cotton Mills’Ltd. The goodwill of
M/s. Bagla Jaipuria & Co., also included
besides, right to managing agency commission
etc. the selling agency of the Baglas, which
they were holding since 1911 and the quota
rights of the Jaipurias, which they had been
holding since the quota system was introduced
by the Central Government, during the Second
World War. There is, however, no material to
value the goodwill separately."
On point No. 4(b), this is what the Tribunal
has observed:
"Regarding query No. (iv) (b) the compensation
of Rs. 35,01,000/- no doubt includes payment
towards the share of its profit in the
partnership firm of M/s. Bagla Jaipuria & Co.
from 29-4-1946 to 5-10-1946 but it is again
regretted that there is no material on the
basis of which the compensation can be
computed as attributable to this aspect of the
matter."
The question for decision is whether the receipt of Rs.
35,01,000/- is a capital receipt or a revenue receipt. The
ques-
935
ion whether a particular receipt is a capital or revenue is
largely question of fact but often we come across border
line cases which do present difficulties in arriving at a
conclusion. As oberved by this Court in Commissioner of
Income-tax, Nagpur v. ,Z. B. Jairam Valji and Ors.(1).-
"The question whether a receipt is capital or
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income has frequently come up for
determination before the courts. Various
rules have been enunciated as furnishing a key
to the solution of the question, but
as often
observed by the highest authorities, it is not
possible to lay down any single test as
infallible or any single criterion as decisive
in the determination of the question, which
must ultimately depend on the facts of the
particular case, and the authorities bearing
on the question are valuable only as
indicating the matters that have to be taken
into account in reaching a decision. Vide Van
Den Berghs Ltd. v. Clark(2). That, however,
is not to say that the question is one of
fact, for, as observed in Davies (H. M.
Inspector of Taxes) v. Shell Company of China
Ltd.(").
"these questions between capital and income, trading profit
or no trading profit, are questions which, though they may
depend no doubt to a very great extent on the particular
facts of each case. do involve a conclusion of law to be
drawn from those facts."
As we are of opinion, for the reasons to be presently
stated, that the receipt of Rs. 35,01,000/- is an income
from business and as such was liable to be brought to tax
under s. 10, we have not thought it necessary to go into
other two questions.
Before examining the legal position, it is necessary to
emphasise certain. salient features of this case. The new
partnership named Bagla Jaipuria and Co. is not a
partnership of two firms. Two firms cannot join in a
partnership. Really it was a partnership consisting of six
partners; three of whom were partners of one firm and the
other three partners of another firm. This new partner.,hip
came into existence on April 29, 1946. These partners did
not enter into a deed of partnership. This partnership took
over as managing agents of the Swadeshi Cotton Mills Co.
Ltd. on July 16, 1946. Three of the partners belonging to
Bagla Group went out of the partnership on October 6, 1946.
Though the three named members of the Bagla Group were
partners of the new firm, the benefit of the new partnership
was to enure to the old firm of which those three persons
were partners.
(1) 35 I.T.R. 148. (2) [1935] 3 I.T.R.
(Eng. Cas.) 17.
(3) [1952] 22 I.T.R. (Supp.) 1
936
That old firm not only continued to be in existence but
continued to carry on various business activities. It may
be noted that the firm Bagla Jaipuria & Co. continued to be
in existence. It coatinued to be the managing agents of
Swadeshi Cotton Mills Co. Ltd. Its goodwill, it any, was
not parted with. What really happened was that three of the
partners of that firm went out of the partnership and for
doing so they were paid Rs. 35,01,000/which sum also
included the profits earned by the Bagla Jaipuria & Co. from
the date it came into existence, till the three partners
belonging to the Bagla Group went out of the partnership
leaving the partnership firm intact. There is no dispute
that the portion of the compensation which represents past
profits is a revenue receipt. The only question is whether
the remaining portion was a Revenue receipt or Capital
receipt. The remaining portion of the receipt purports to
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be compensation given to the three partners for giving up
what are called (i) the managing agency rights (it) the
selling agency rights and (iii) the goodwill. We shall
first take up the question relating to the goodwill and the
mananaging agency rights.
It was urged on behalf of the assessee that as a result of
the agreement dated October 7, 1946, the assessee firm
parted, with its managing agency rights which but for that
agreement would have continued for a period of twenty years
with a possibility of renewal. The managing agency right
given up under that agreement is a capital asset of the firm
and therefore any compensation paid for the extinguishment
of that right is a capital receipt. It was also argued that
one of the rights that the assessee firm parted with under
that agreement was the goodwill of the company which is also
a capital asset. Consequently compensation paid in respect
of the same must also be considered as capital receipt.
In our opinion the aforementioned arguments are fallacious.
The managing agency rights vested with the Bagla Jaipuria &
Co. Similar is the case so far as the goodwill is concerned
assuming that any goodwill had been built up by that time,
Bagla Jaipuria & Co. continues to be in existence. It had
not parted with managing agency rights nor its goodwill
taken away. What has happened is that the partners
representing the assessee firm in Bagla Jaipuria & Co. had
surrendered their rights in the partnership to the remaining
partners and obtained certain payments for surrendering
their rights. This is not a case of parting with any agency
rights. This is really a case of cancellation of a contract
which had beet entered into in the ordinary course of
business. Such contracts are liable, in the ordinary course
of business, to be altered or terminated on terms and any
payment received in settlement of the rights as a result of
the termination of the contract really repre-
937
sents the profits which the assessee would have made had the
contract been performed. As osberved by this Court in
Jairam Valji’s case (supra) :
"when once it is found that a contract was
entered into in the ordinary course of
business, any compensation received for its
termination would be a revenue receipt,
irrespective of whether its performance was to
consist of a single act or a series of acts
spread over a period, and in this respect, it
differs from an agency agreement."
As seen earlier no deed of partnership had been entered
into.’ Therefore the same was terminable at will. Any of
the partners of the firm could have brought the partnership
to an end. Consecluently the possibility of termination of
a partnership of the type with which we are concerned is
inherent in the very course of business.
The facts set out in the statement of case show that the
assesseefirm had various business activities; one of its
business activity was to join Bagla Jaipuria & Co. to carry
on certain business activities. The assessee’s
representatives by entering into that agreement were merely
carrying on a trading activity. Such being the case, it is
not possible to hold that the compensation paid for the
termination of the contract is a capital receipt.
It is not the case of the assessee that its only trading
activity had come to an end. It had several activities.
Just one of its trading activity had been put an end to.
Hence the amount received cannot be considered as
compensation for stopping its business.
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Now we come to the transfer of the selling agency to Bagla-
Jaipuria & Co. This is not a right transferred under the
agreement dated October 7, 1946. That right had been
transferred to Bagla Jaipuria & Co. even at the time the
partnership was formed. On October 7, 1946, the was no more
the owner of that selling agency. On that day it was an
asset of BaglaJaipuria & Co. Hence the compensation paid can
only relate to the termination of the contract of
partnership and not to the transfer of the selling agency.
Assuming that agreement of October 7, 1946 has indirectly
affected the selling agency right of the assesse , the same
was one of the several trading activities of the assessee
firm. On the basis of the material on record, the Hi& Court
held that after the Bagla Group gave up its interest in the
Bagla Jaipuria & Co., the assessee firm with the aid of Rs.
35,01,000/- received as compensation acquired controlling
sham in two other companies namely the India United Mills
Ltd. and the Muir Mills Ltd. From this it is clear that the
trading
938
structure of the assessee firm was not affected. It merely
replaced one trading activity by another. In Gillanders
Arbuthnot and Co. Ltd. v. Commissioner of Income-tax,
Calcutta(1), this Court held in the case of an assessee
having vast array of business including acquisition of
agencies in the normal course of business, the determination
of an individual agency is a normal incident not affect-ing
or impairing its trading structure. In such cases the
amount received for the cancellation of an agency does not
represent theprice paid for the loss of a capital asset;
they were of the nature of income.
In Kettlewell Bulleun and Co. Ltd. v. Commissioner of In-
come-tax Calcutta(1), this Court after considering, various
decisions rendered by the courts in U.K. and in this country
about the principles which govern the determination of the
nature of compensation received on the termination of an
agency observed:
"On an analysis of these cases which fall on
two sides of the dividing line, a sat
isfactory
measure of consistency in principle is
disclosed. Where, on a consideration of the
circumstances payment is made to compensate a
person for cancellation of a contract which
does not affect the trading structure of his
business, nor deprive him of what in substance
is his source of income, termination of the
contract being a normal incident of the
business and such cancellation leaves him free
to carry on his trade (freed from the contract
terminated) the receipt is revenue; where by
the cancellation of an agency the trading
structure of the assessee is impaired, or such
cancellation results in loss of what may be
regarded as the source of the assessee’s
income the payment made to compensate for
cancellation of the agency agreement is
normally a capital receipt."
For the reasons mentioned above we hold that the entire sum
of Rs. 35,01,000/- received by the assessee was a revenue
receipt assessable under s. 10.
In the result Civil Appeal No. 2022 of 1966 is dismissed
with costs. On our indicating our tentative conclusion on
the first question referred to the High Court the learned
SolicitorGeneral appearing for the revenue did not press
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Civil Appeal No. 1746 of 1968. It is accordingly dismissed
with no order as to costs.
V.P.S.
939