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

1. These are appeals by certificate from the decision of the High Court of Allahabad in a Reference under Section 66 (1) of the Income-tax Act, 1922 (to be hereinafter referred to as the Act).2. The Income-tax Appellate Tribunal (Allahabad Bench) referred to the High Court for its opinion the followingWhether 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 ?(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 ActThe High Court answered the first and the second question in favour of the 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 Section 12-B of the Act.4. 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 No. 2022 of 1968.5. The material facts of the case as could be gathered from the statement of case are these : The assessee 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 in October, 1947. On April 29, 1946 the three partners of the assessee firm entered 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, wereThat the partners should acquire on joint account, the shares of the Swadeshi Cotton Mills Co. Ltd. and Eland Ltd.(2) The partners of the assessee 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 Dussehra 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.(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 assessee firm consisting of "Bagla Group" were the selling agents of the Swadeshi Cotton Mills Co. Ltd. The "Jaipuria Group" whichh was a different firm were enjoying some 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 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 thusis agreed that one or other of the Bagla or Jaipuria 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 good-will 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 retiring 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 the auction. Rai Bahadur Rameshwari Prasad Bagla and Sit. Mangturam 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 offerning to pay the highest compensation shall continue as partners in the firm and the other group shall retire as hereincontinuing group shall pay to the retiring group within 10 days from the date of the auction the following:(a) The amount of capital contributed by the retiring group with interest calculated at the rate of 41/2 per cent.(b) And compensation money ascertained as aforesaid."7. 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.8. 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 recitesfrom Seth Gajadhar Jaipuria, Raj Sahib Puranmull 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 and 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 renewals of like period.The assessee firm resigned as selling agents with effect from October 5, 1946. Jaipuria group continued in the name and style of Bagla Jaipuria and Co.10. 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 income. 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 Assistant Commissioner affirmed the decision of the Income-tax Officer. He further held that the case also fell within the scope of Section 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 Section 10 of the Act as the same was a capital receipt. It was further contended that the Appellate Assistant Commissioner had no competence to convert the assessment made under Sec. 10 into one under Section 12-B and at any rate the receipt in question does not come within the scope of Section 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 Section 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. 3.11. 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 vizWas any compensation payable under the agreement either directly or by implication in respect of the assessees 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 good-will and the share of the retiring partner in the profits of the firm upto 5th October, 1946."(a) Was there any good-will, 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 uptil 5th October, 1946.The Tribunal submitted the supplementary statement of case called for on November 24, 1971. Dealing with the first question, the Tribunalwill thus be seen that the compensation was paid by the Jaipuria Group to the Bagla Group (a) partly for the surrender of its share in the Managing Agency 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 possible 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 compensation was payable under the agreement dated 7-10-1946 not directly but by implication in respect of the assessees 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 Tribunals 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 assessee under the agreement was the good-will but there is no material on record on the basis of which its value could be ascertained. On point No. 4 (a), the Tribunal observedquery No. (iv) (a), made by the Supreme Court there was certainly, in our opinion good-will of the partnership firm M/s. Bagla Jaipuria and 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 good-will of M/s. Bagla Jaipuria and 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 good-will separately.On point No. 4 (b), this is what the Tribunal has observedquery 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 and 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."

Court's reasoning:
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.