Commissioner of Income-Tax U.P.
Lucknow Vs. M/S. Gangadhar Baijnath General Gang, Kanpur  INSC 184 (23
REDDY, P. JAGANMOHAN KHANNA, HANS RAJ
CITATION: 1973 AIR 1011 1973 SCR (1) 928
CITATOR INFO :
R 1987 SC 500 (38)
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.
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 managing
agency rights, (b) its selling agency rights, and (c) its, goodwill, was not a
revenue receipt but a capital receipt.
HELD : The entire sum received by the
appellant was a revenue receipt assessable under s. 10 of the Income Tax Act,
(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 partner G; 937D-E ship was merely carrying
on a trading activity. [935F-H; 937A-D-E] (b) The managing agency rights as
well as any goodwill 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.
929 (c) It was not a case of the only trading
activity of the appellant firm 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 selling 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.
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) referred to, the High Court for its opinion the following questions :
"(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
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
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 interalia 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 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. 12B. 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
(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
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 (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 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
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
35,01,000/is a capital receipt or a revenue
receipt. The ques935 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 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
"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
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)  3 I.T.R.
(Eng. Cas.) 17.
(3)  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 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
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
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 repre937 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
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.
Now we come to the transfer of the selling
agency to BaglaJaipuria & 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
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 affecting 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
they were of the nature of income.
In Kettlewell Bulleun and Co. Ltd. v.
Commissioner of Income-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 Civil Appeal No. 1746 of 1968. It is
accordingly dismissed with no order as to costs.