Case: Commissioner Of Income-Tax U.P. Lucknow Vs. M/S. Gangadhar Baijnath General Gang, Kanpur

that one of the rights that the assessee firm parted within under that agreement was the good-will of the company which is also a capital asset. Consequently compensation paid in respect of the same must also be considered as capital receipt.20. In our opinion the aforementioned arguments are fallacious. The managing agency rights vested with the Bagla Jaipuria and Co. Similar is the case so far as the good-will is concerned assuming that any good-will had been built up by that time. Bagla Jaipuria and Co. continues to be in existence.It had not parted with managing agency rights nor its good-will taken away. What has happened is that the partners representing the assessee firm in Bagla Jaiprua and 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 been 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 represents the profits which the assessee would have made had the contract been performed. As observed by this Court in Jairam Valjis case, 35 ITR 148 = (AIR 1959 SC 291 ) (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."21. 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. Consequently the possibility of termination of a partnership of the type with which we are concerned is inherent in the very course of business.22. The facts set out in the statement of case show that the assessee firm had various business activities; one of its business activity was to join Bagla Jaipuria and Co. to carry on certain business activities. The assessees 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.23. 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.24. Now we come to the transfer of the selling agency to Bagla-Jaipuria and Co. This is not a right transferred under the agreement dated October 7, 1946. That right had been transferred to Bagla Jaipuria and Co. even at the time the partnership was formed. On October 7, 1946, the assessee was no more the owner of that selling agency. On that day it was an asset of Bagla Jaipuria and 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 effected the selling agency right of the assessee, the same was one of the several trading activities of the assessee firm. On the basis of the material on record, the High Court held that after the Bagla Group gave up its interest in the Bagla Jaipuria and Co., the assessee firm with the aid of Rs. 35,01,000/- received as compensation acquired controlling shares in two others companies namely the India United Mills Ltd. and the Muir Mills Ltd. From this it is clear that the trading structure of the assessee firm was not affected. It merely replaced one trading activity by another.In Gilanders Arbuthnot and Co. Ltd. v. Commr. of Income-tax, Calcutta, (1964) 53 ITR 283 this Court held that 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 affecting or impairing its trading structure. In such cases the amount received for the cancellation of an agency does not represent the price paid for the loss of a capital asset; they were of the nature of income.25. In Kettlewell Bullen and Co. Ltd. v. Commr. of Income-tax Calcutta, 53 ITR 261 = (AIR 1965 SC 65 ) 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 satisfactory 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 is 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 assessees income the payment made to compensate for cancellation of the agency agreement is normally a capital receipt".26. 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 Section 10.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]20. In our opinion the aforementioned arguments are fallacious. The managing agency rights vested with the Bagla Jaipuria and Co. Similar is the case so far as the good-will is concerned assuming that any good-will had been built up by that time. Bagla Jaipuria and Co. continues to be in existence.It had not parted with managing agency rights nor its good-will taken away. What has happened is that the partners representing the assessee firm in Bagla Jaiprua and 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 been 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 represents the profits which the assessee would have made had the contract been performed. As observed by this Court in Jairam Valjis case, 35 ITR 148   = (AIR 1959 SC 291  ) (supra)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. Consequently the possibility of termination of a partnership of the type with which we are concerned is inherent in the very course of business.22. The facts set out in the statement of case show that the assessee firm had various business activities; one of its business activity was to join Bagla Jaipuria and Co. to carry on certain business activities. The assessees 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.23. 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.24. Now we come to the transfer of the selling agency to Bagla-Jaipuria and Co. This is not a right transferred under the agreement dated October 7, 1946. That right had been transferred to Bagla Jaipuria and Co. even at the time the partnership was formed. On October 7, 1946, the assessee was no more the owner of that selling agency. On that day it was an asset of Bagla Jaipuria and 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 effected the selling agency right of the assessee, the same was one of the several trading activities of the assessee firm. On the basis of the material on record, the High Court held that after the Bagla Group gave up its interest in the Bagla Jaipuria and Co., the assessee firm with the aid of Rs. 35,01,000/- received as compensation acquired controlling shares in two others companies namely the India United Mills Ltd. and the Muir Mills Ltd. From this it is clear that the trading structure of the assessee firm was not affected. It merely replaced one trading activity by another.In Gilanders Arbuthnot and Co. Ltd. v. Commr. of Income-tax, Calcutta, (1964) 53 ITR 283     this Court held that 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 affecting or impairing its trading structure. In such cases the amount received for the cancellation of an agency does not represent the price paid for the loss of a capital asset; they were of the nature of income.