{"id":17112,"date":"1972-08-23T00:00:00","date_gmt":"1972-08-22T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-u-p-vs-ms-gangadhar-baijnath-general-on-23-august-1972"},"modified":"2017-04-19T21:02:24","modified_gmt":"2017-04-19T15:32:24","slug":"commissioner-of-income-tax-u-p-vs-ms-gangadhar-baijnath-general-on-23-august-1972","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-u-p-vs-ms-gangadhar-baijnath-general-on-23-august-1972","title":{"rendered":"Commissioner Of Income-Tax U.P. … vs M\/S. Gangadhar Baijnath General … on 23 August, 1972"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income-Tax U.P. … vs M\/S. Gangadhar Baijnath General … on 23 August, 1972<\/div>\n
Equivalent citations: 1973 AIR 1011, \t\t 1973 SCR (1) 928<\/div>\n
Author: K Hegde<\/div>\n
Bench: Hegde, K.S.<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME-TAX U.P. LUCKNOW\n\n\tVs.\n\nRESPONDENT:\nM\/S.  GANGADHAR BAIJNATH GENERAL GANG, KANPUR\n\nDATE OF JUDGMENT23\/08\/1972\n\nBENCH:\nHEGDE, K.S.\nBENCH:\nHEGDE, K.S.\nREDDY, P. JAGANMOHAN\nKHANNA, HANS RAJ\n\nCITATION:\n 1973 AIR 1011\t\t  1973 SCR  (1) 928\n CITATOR INFO :\n R\t    1987 SC 500\t (38)\n\n\nACT:\nIncome-tax   Act   (11\tof  1922),  s.10-Partners   of\t two\nPartnerships joining to form a third partnership-Partners of\none partnership going out of new firm-Receipt of payments as\ncompensation-If capital or eevenue.\n\n\n\nHEADNOTE:\nSix persons, three of whom were partners of B-firm having  a\nselling\t agency\t of  S-company, and three  others  who\twere\npartners  of  J-firm having quota rights in  the  S-company,\nformed\ta  partnership the BJ-firm.  There was, no  deed  of\npartnership   and  the\tpartnership  of\t the   BJ-firm\t was\nterminable at will.  The B-firm continued to exist  carrying\non  various  other  business activities.   The\tBJ-firm\t was\nappointed  as managing agents of the S-company.\t Later,\t the\nthree  persons belonging to B-firm went out of\tthe  BJ-firm\nand  for  doing\t so, they were paid a  sum  of\tmoney  which\nincluded  compensation\tas  per the terms  of  an  agreement\nbetween\t the B and J groups.  The BJ-firm continued  as\t ,he\nmanaging agents of the S-company.  The appellant, B-firm, in\nappeal\tto this Court, while admitting that the\t portion  of\nthe  compensation  which represented profits was  a  revenue\nreceipt, contended, that the remaining portion purporting to\nbe  made up of compensation for giving up (a) its  mianaging\nagency\trights, (b) its selling agency rights, and (c)\tits,\ngoodwill, was not a revenue receipt but a capital receipt.\nHELD  :\t The  entire sum reecived by  the  appellant  was  a\nrevenue\t receipt  assessable under s. 10 of the\t Income\t Tax\nAct, 1922. [938F-G].\n(1)  The question whether a particular receipt is capital or\nrevenue is largely a question of fact. [935A]\n(2   )\t(a) The BJ-firm was not a partnership of  two  firms\nbecause\t two  firms cannot join in a  partnership,  but\t was\nreally\ta  partnership\tconsisting  of\tsix  partners.\t The\nappellant-firm had various business activities one of  which\nwas  to\t join  the  BJ-firm to\tcarry  on  certain  business\nactivities.   The  appellant's representatives\tby  entering\ninto  the  partnerG; 937D-E ship were merely carrying  on  a\ntrading activity. [935F-H; 937A-D-E]\n(b)  The  managing  agency rights as well  as  any  goodwill\nvested\twith the BJ-firm.  By going out of the\tBJ-firm\t the\npartners  representing\tthe appellant-firm  had\t surrendered\ntheir  rights in the partnership to the\t remaining  partners\nand obtained payments for surrendering their rights. it\t was\na case of cancellation of a contract which had been  entered\ninto the ordinary course of business, and not one of parting\nwith  any  managing agency right.  The payment\treceived  in\nsettlement  as a result of the termination, of the  contract\nrepresents  the profits which the assessee would  have\tmade\nhad the contract been performed. [936G-H; 937A-B, D-E]\nCommissioner of Income-tax, Nagpur v. R. B. Jairam Valli and\nOrs.<\/a> 35 I.T.R. 148, followed.\n929\n(c)  It\t was not a case of the only trading activity of\t the\nappellantfirm  coming  to an end.  Only one of\tits  trading\nactivities  had\t been put an end to and\t hence,\t the  amount\nreceived  could\t not  be  considered  as  compensation\t for\nstopping its business. [937E-F]\nTherefore, the compensation paid for the termination of\t the\ncontract is not a capital receipt. [937F]\n(3)  (a)  The selling agency of the appellant firm bad\tbeen\ntransferred to the BJ-firm even at the time when the BJ-firm\nwas formed. On the  day when the partners of the B-firm left\nthe  BJ-firm  it was an asset of the BJ-firm and  hence\t the\ncompensation  paid could only relate to the  termination  of\nthe contract of partnership and not to the transfer of sell-\ning agency. [937F-G]\n(b) Assuming that indirectly the selling agency right of the\nappellant  firm\t was affected, it was only  one\t of  several\ntrading\t activities  of the appellant firm and\tthe  trading\nstructure of the assessee-firm was not at all affected.\t The\nappellant-firm\tmerely\treplaced  one  trading\tactivity  by\nanother\t  by  utilising\t the  compensation   for   acquiring\ncontrolling  shares in two other companies. In\tsuch  cases.\nthe amount received for the cancellation of an agency,\tdoes\nnot  represent\tthe  price paid for the lose  of  a  capital\nasset, but is in the nature of income. [937G-H; 938A]\nGillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-<\/a>\ntax, Calcutta, 53 I.T.R. 28B, and Kettlewell Bullen and\t Co.\nLtd. v. Commissioner  of Income-tax Calcutta,<\/a> 53 I.T.R. 261,\nfollowed.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL  APPELLATE JURISDTCTION: C. A. Nos. 1746 and  2022  of
\n1969.\n<\/p>\n
Appeal\tby  certificate from the judgment  and\torder  dated
\nOctober 22, 1965 of, the Allahabad High\t Court in Income-tax
\nReference No. 286 of 1960.\n<\/p>\n
S. T. Desai and S. Mitra, B. B. Ahuja and B. D. Sharma for
\n\t  the appellant. (in C.A. No. 1746 of 1968.)
\nH.   K. Puri, for the respondent (in C.A. No. 1746 of 1968.)
\nH. K. Puri and S. K. Dhingra, for the appellant (in  C.A.No.
\n2022 of 1968).\n<\/p>\n
S.   T. Desai, S. Mitra, O. P. Malhotra and B. B. Ahuja and
\nB.   D. Sharma, for the respondent (in C.A. No. 2022\/68).
\nThe Judgment of the Court was delivered by
\nHegde, J. These are appeals by certificate from the decision
\nof the High Court of Allahabad in a Reference under s. 66(1)
\nof  the Income-tax Act, 1922 (to be hereinafter referred  to
\nas the Act).\n<\/p>\n
The Income-tax Appellate Tribunal (Allahabad bench) refer-
\nred  to,  the  High  Court for\tits  opinion  the  following
\nquestions :\n<\/p>\n
\t      “(1)   whether  on  the  facts  and   in\t the
\n\t      circumstances of the case, the receipt  of.Rs.
\n\t      35,01,000\/-  constituted income liable to\t tax
\n\t      under section 10 of the Income-tax Act ?
\n\t      10–L172Sup.c I\/73
\n\t      930<\/span>
\n\t      (2)   Whether   it   was\tcompetent   to\t the
\n\t      Appellate Assistant Commissioner to invoke the
\n\t      provisions of section 12-B for the  assessment
\n\t      of Rs. 35,01,000\/- when the Income-tax Officer
\n\t      had  assessed the amount under Section  10  of
\n\t      the Income-tax Act ?\n<\/p><\/blockquote>\n
\t      (3)   Whether   on  the  facts  and   in\t the
\n\t      circumstances  of the case the receipt of\t Rs.
\n\t      35,01,000\/- was taxable under section 12-B  of
\n\t      the Income-tax Act ?”\n<\/p><\/blockquote>\n
The High Court answered the first and the second question in
\nfavour\t  Revenue and on the third question it recorded\t its
\nopinion\t that on the facts and in the circumstances  of\t the
\ncase, the receipt in question was not taxable under S.\t12-B
\nof the Act.\n<\/p>\n
Aggrieved by the decision of the High Court the Commissioner
\nof Income-tax has brought Civil Appeal No. 1746 of 1968\t and
\nthe assessee Civil Appeal Ng. 2022 of 1968.
\nThe  material facts of. the case as could be  gathered\tfrom
\nthe  statement of case are these: The is a partnership\tfirm
\ncarrying  on  business of financing,  moneylending,  selling
\nagencies  and  the like pursuits.  The\trelevant  assessment
\nyear  is  1948-49,  the\t concerned  accounting\tyear  ending
\nOctober, 1947.\tOn April 29, 1946 the three partners of\t the
\nassessee  firm\tenterred  into an  agreement  with  Gajadhar
\nJaipuria, R. S. Puran Mal Jaipuria and Mangloo Ram Jaipuria.
\nThe terms of the agreement as found by the Tribunal, were
\n\t      (1)   That  the  partners\t should\t acquire  on
\n\t      joint  account,  the shares  of  the  Swadeshi
\n\t      Cotton Mills Co. Ltd. and Eland Ltd.\n<\/p>\n
\t      (2)   The\t partners, of the assesse firm\t(who
\n\t      will hereinafter be referred to as the  ‘Bagla
\n\t      Group’) and the remaining three partners\t(who
\n\t      will   hereinafter  be  referred\tto  as\t the
\n\t      “Jaipuria\t Group”) were to invest\t the  amount
\n\t      required\tto  acquire the shares\tin  question
\n\t      equally\tand  all  benefits   including\t the
\n\t      managing agency, selling agency, quota  rights
\n\t      should  be  enjoyed in joint account  but\t the
\n\t      selling  agency which was in the hands of\t the
\n\t      assessee\tfirm  should continue to be  in\t its
\n\t      hands   till  the\t Dussebra  of\tthat   year.\n<\/p>\n
\t      Similarly\t the quota rights which were in\t the
\n\t      hands of the Jaipuria Group should continue in
\n\t      the  hands of that Group till the Dussehra  of
\n\t      that year.\n<\/p>\n
\t      931<\/span><\/p>\n
\t      (3)   Neither  party should acquire any  share
\n\t      in  his separate account or have any  interest
\n\t      directly or indirectly to the exclusion of the
\n\t      other.\n<\/p>\n
Till  the  date of the formation of  this  partnership,\t the
\nassesee\t firm consisting of “Bagla Group” were\tthe  selling
\nagents of the Swadeshi Cotton Mills Co., Ltd.  The “Jaipuria
\nGroup”\twhich was a different firm were enjoying some  quota
\nrights\tin that mill.  In pursuance of the  agreement  above
\nreferred  to  the new partnership “Bagla-Jaipuria  and\tCo.”
\npurchased shares of the Swadeshi Cotton Mills Co. Ltd.\t For
\nthat  purpose both the groups contributed equally.   But  no
\npartnership  deed as such was entered into by the  partners.
\nOn July 16, 1946, an agreement was entered into between\t the
\nSwadeshi  Cotton Mills Co., Ltd. and the Bagla Jaipuria\t and
\nCo.  appointing\t the latter as the managing  agents  of\t the
\nCompany\t for a period of twenty years.\tOn October 7,  1946,
\nanother\t agreement was entered into by the partners  of\t the
\nBagla  Jaipuria and Co. whereby it was decided that  one  of
\nthe  two Groups would retire from the business\twith  effect
\nfrom  October  6, 1946 subject to the terms  and  conditions
\nspecified  in that agreement.  The relevant clauses of\tthat
\nagreement read thus :\n<\/p>\n
\t       “It is agreed that one or other of the  Bagla
\n\t      or  Jaipuna groups shall retire from the\tsaid
\n\t      partnership  with\t effect\t from  6th  October,
\n\t      1946.   The continuing group shall pay to\t the
\n\t      retiring group their shares of the capital and
\n\t      interest thereon and compensation which  shall
\n\t      include  the price of goodwill, and the  share
\n\t      of the retiring partner in the profits of\t the
\n\t      firm  upto 5th October 1946.  The question  as
\n\t      to  which of the said two groups shall  retire
\n\t      and what amount of compensation shall be\tpaid
\n\t      by the continuing group to the retiving  group
\n\t      shall  be\t determined by auction held  in\t the
\n\t      manner-set  out  hereinafter.   Such   auction
\n\t      shall be held forthwith.\tThe auction shall be
\n\t      conducted by Dr. Brijendra Swarup, Advocate of
\n\t      Kanpur  and  Mr. B. P. Khaitan,  Solicitor  of
\n\t      Calcutta.\t Only partners shall be entitled  to
\n\t      attend auction.  Rai Bahadur Rameshwar  Prasad
\n\t      Bagla  and Sjt.  Mangtoram Jaipuria will\tgive
\n\t      bids on behalf of their respective groups\t and
\n\t      the  respective groups shall be bound by\tbids
\n\t      so   given  by  their   aforesaid\t  respective
\n\t      nominee.\t The  group  offering  to  pay\t the
\n\t      highest\tcompensation   shall   continue\t  as
\n\t      ‘partners\t in  the firm and  the\tother  group
\n\t      shall retire as herein provided.”\n<\/p><\/blockquote>\n
The continuing group shall pay to the retiring group  within
\n10 days from the date of the auction the following:\n<\/p>\n
\t\t\t    932<\/span><\/p>\n
(a)  The amount of capital contributed by the retiring group
\nwith interest calculated at the rate of 4 1\/2%.\n<\/p>\n
(b)  And compensation money ascertained as aforesaid.”
\nIn  the\t auction  held in pursuance of\tthis  agreement\t the
\nJaipuria  Group\t outbid the Bagla Group.   Consequently\t the
\nBagla  Group  retired from the business on  receipt  of\t the
\nfollowing amounts
\nRs. 97,11,699-on account of capital. investment
\nRs.  1,77,232-on account of interest on\t capital  investment
\nand
\nRs. 35,01,000-on account of compensation as provided in\t the
\nagreement.\n<\/p>\n
The Jaipuria Group paid those amounts to the Bagla Group  on
\nOctober\t 7,  1946.  A separate receipt was executed  by\t the
\nBagla  Group  in respect of the receipt of  Rs.\t 35,01,000\/-
\nThat receipt recites :\n<\/p>\n
“Received  from Seth Gajadhar Jaipuria, Rai  Sahib  PuranmuU
\nJaipuria  and  Seth  Mungturam\tJaipuria  the  sum  of\t Rs.
\n35,01,000\/- as solatium and compensation for surrendering to
\nthe Jaipuria group our right, title and interest in  running
\nconcern\t of  Bagla  Jaipuria  & Co.  who  inter-  alia\twere
\nappointed  the Managing agents of the Swadeshi Cotton  Mills
\nCo.,  Ltd. for a period of twenty years under  an  agreement
\ndated  16th  July,  1946 and  with  expectation\t of  further
\nrenewals of like period.”\n<\/p>\n
The asessee firm resigned as selling agents with effect from
\nOctober\t 5, 1946.  Jaipuria group continued in the name\t and
\nstyle of Bagla Jaipuria and Co.\n<\/p>\n
In  the\t course of the assessment for  the  assessment\tyear
\n1948-49 the Income-tax Officer brought to tax the sum of Rs.
\n35,01,000\/as  mcome.   He  overruled the  objection  of\t the
\nassessee  that\tit,was\ta compensation\tfor  giving  up\t the
\nmanaging  agency  right.   Aggrieved by\t the  decision,\t the
\nassessee  took\tup  the matter in appeal  to  the  Appellate
\nAssistant    Commissioner.     The    Appellate\t   Assistane
\nCommissioner   affirmed\t the  decision\tof  the\t  Income-tax
\nOfficer.  He further held that the case also fell within the
\nscope  of s. 12-B of the Act.  Thereafter the assessee\ttook
\nup  the\t matter\t in  appeal  to\t the  Income-tax   Appellate
\nTribunal.   It\twas contended before the Tribunal  that\t the
\nreceipt\t in question cannot be considered as  income  coming
\nwithin\ts. 10 of the Act as the same was a capital  receipt.
\nIt was further contended that the Appellate Assistant
\n\t\t\t    933<\/span>
\nCommissioner  had  no competence to convert  the  assessment
\nmade under s. 10 into one under s. 12-B and at any rate\t the
\nreceipt in question does not come within the scope of s. 12-
\nB.  The Tribunal rejected the first two contentions.  But it
\nagreed with the assessee that the receipt in question cannot
\nbe  brought  to tax under s. 12-B.  At the instance  of\t the
\nassessee, the Tribunal submitted for the opinion of the High
\nCourt  questions  1  and 2 referred to earlier\tand  at\t the
\ninstance  of the Commissioner of income-tax, it referred  to
\nthe High Court Question No. 3.\n<\/p>\n
This  case  came  up for hearing before\t this  Court  on  an
\nearlier\t occasion.  By our order dated August 12,  1971,  we
\ncalled upon the Tribunal to submit a supplementary statement
\nof case on certain points viz. :\n<\/p>\n
\t      (1 )  Was\t any compensation payable under\t the
\n\t      agreement either directly or by implication in
\n\t      respect  of  the assessee’s surrender  of\t its
\n\t      share in the managing agency.  If so, what  is
\n\t      the  amount  of compensation payable  in\tthat
\n\t      regard.\n<\/p><\/blockquote>\n
\t      (2)   Was\t any compensation payable under\t the
\n\t      agreement\t directly or by implication in\tlieu
\n\t      of the assessee giving up its selling  agency.
\n\t      If  so  what  is the  amount  of\tcompensation
\n\t      payable in respect of that right.
\n\t      (3)   Did\t the  assessee\tgive  up  any  other
\n\t      rights  under the agreement.  If so, what\t are
\n\t      those  rights and what is the value  of  those
\n\t      rights ?\n<\/p><\/blockquote>\n
\t      (4)   The agreement says that the compensation
\n\t      includes “the price of goodwill and the  share
\n\t      of the retiring partner in the profits of\t the
\n\t      firm upto 5th October, 1946”.\n<\/p><\/blockquote>\n
\t      (a)   was\t there any goodwill; if so what\t was
\n\t      its value and\n<\/p><\/blockquote>\n
\t      (b)   What  part of the compensation  received
\n\t      by ‘the assessee as can be attributed  towards
\n\t      the  profits  earned  by\tthe  association  of
\n\t      persons  calling itself M\/s.   Bagla  Jaipuria
\n\t      Company uptill 5th October, 1946.\n<\/p><\/blockquote>\n
The  Tribunal submitted the supplementary statement of\tcase
\ncalled\tfor  on November 24, 1971.  Dealing with  the  first
\nquestion, the Tribunal observed:\n<\/p>\n
\t      “It  will thus be seen that  compensation\t was
\n\t      paid by the Jaipuria Group to the Bagla  Group\n<\/p><\/blockquote>\n
\t      (a)  partly for the surrender of its share  in
\n\t      the Managing Agency
\n\t      934<\/span>
\n\t      right,  (b) partly for giving up\tits  selling
\n\t      agency  right and (c) partly for\tthe  profits
\n\t      earned  by the Bagla Group upto  5th  October,
\n\t      1946.   There is, however, no material on\t the
\n\t      record on the basis of which it may be  possi-
\n\t      ble to split up the quantum of compensation in
\n\t      respect  of each of the above three  items  at\n<\/p><\/blockquote>\n
\t      (a),  (b) and (c).  Therefore, our  answer  to
\n\t      query  No. (1) is that the com- pensation\t was
\n\t      payable  under the agreement  dated  7-10-1946
\n\t      not directly but by implication in respect  of
\n\t      the  assessee’s surrender of its share in\t the
\n\t      Managing\tAgency right but it is not  possible
\n\t      to determine the quantum for want of  material
\n\t      on the point.”\n<\/p><\/blockquote>\n
Dealing with point No. 2, the Tribunal’s answer is the\tsame
\nas  of point No. 1. Dealing with point No. 3,  the  Tribunal
\nobserved that the only other right given up by the  assessee
\nunder  the  agreement  was  the goodwill  but  there  is  no
\nmaterial on record on the basis of which its value could  be
\nascertained.  On point No. 4 (a), the Tribunal observed:\n<\/p>\n
\t      “Regarding  query\t No. (iv) (a), made  by\t the
\n\t      Supreme  Court,  there was certainly,  in\t our
\n\t      opinion goodwill of the partnership firm\tM\/s.
\n\t      Bagla  Jaipuria & Co. as it was appointed\t not
\n\t      only the Managing Agents of a very big  cotton
\n\t      mill  for a period of 20 years in 1946,  at  a
\n\t      time  when there was Government  control\tover
\n\t      cloth  and  textile Mills and  their  managing
\n\t      agents were making huge profits, but had\talso
\n\t      the  sole-selling\t agency\t of  the  Co.\tviz.
\n\t      Swadeshi\tCotton Mills’Ltd.  The\tgoodwill  of
\n\t      M\/s.   Bagla  Jaipuria &\tCo.,  also  included
\n\t      besides,\tright to managing agency  commission
\n\t      etc.  the selling agency of the Baglas,  which
\n\t      they  were  holding since 1911 and  the  quota
\n\t      rights  of the Jaipurias, which they had\tbeen
\n\t      holding since the quota system was  introduced
\n\t      by  the Central Government, during the  Second
\n\t      World War.  There is, however, no material  to
\n\t      value the goodwill separately.”
\n\t      On  point No. 4(b), this is what the  Tribunal
\n\t      has observed:\n<\/p><\/blockquote>\n
\t      “Regarding query No. (iv) (b) the compensation
\n\t      of  Rs. 35,01,000\/- no doubt includes  payment
\n\t      towards  the  share  of  its  profit  in\t the
\n\t      partnership firm of M\/s.\tBagla Jaipuria & Co.
\n\t      from  29-4-1946 to 5-10-1946 but it  is  again
\n\t      regretted\t that  there is no material  on\t the
\n\t      basis   of  which\t the  compensation  can\t  be
\n\t      computed as attributable to this aspect of the
\n\t      matter.”\n<\/p><\/blockquote>\n
The  question  for decision is whether the  receipt  of\t Rs.
\n35,01,000\/- is a capital receipt or a revenue receipt.\t The
\nques-\n<\/p>\n
935<\/span><\/p>\n
ion whether a particular receipt is a capital or revenue  is
\nlargely\t question  of fact but often we come  across  border
\nline  cases which do present difficulties in arriving  at  a
\nconclusion.   As  oberved by this Court in  Commissioner  of
\nIncome-tax, Nagpur v. ,Z. B. Jairam Valji and Ors.(1).-\n<\/p>\n
\t      “The question whether a receipt is capital  or
\n\t      income\thas   frequently   come\t   up\t for
\n\t      determination  before  the  courts.    Various
\n\t      rules have been enunciated as furnishing a key
\n\t\t\t    to\tthe solution of the question, but
\nas  often
\n\t      observed by the highest authorities, it is not
\n\t      possible\tto  lay\t down  any  single  test  as
\n\t      infallible or any single criterion as decisive
\n\t      in  the determination of the  question,  which
\n\t      must  ultimately\tdepend on the facts  of\t the
\n\t      particular  case, and the authorities  bearing
\n\t      on   the\t question  are\tvaluable   only\t  as
\n\t      indicating  the matters that have to be  taken
\n\t      into account in reaching a decision.  Vide Van
\n\t      Den  Berghs Ltd. v. Clark(2).  That,  however,
\n\t      is  not  to say that the question\t is  one  of
\n\t      fact,  for,  as  observed in  Davies  (H.\t  M.
\n\t      Inspector of Taxes) v. Shell Company of  China
\n\t      Ltd.(“).\n<\/p><\/blockquote>\n
“these questions between capital and income, trading  profit
\nor  no trading profit, are questions which, though they\t may
\ndepend\tno  doubt to a very great extent on  the  particular
\nfacts  of  each case. do involve a conclusion of law  to  be
\ndrawn from those facts.”\n<\/p>\n
As  we\tare  of opinion, for the  reasons  to  be  presently
\nstated,\t that  the receipt of Rs. 35,01,000\/- is  an  income
\nfrom  business and as such was liable to be brought  to\t tax
\nunder  s.  10, we have not thought it necessary to  go\tinto
\nother two questions.\n<\/p>\n
Before\texamining  the legal position, it  is  necessary  to
\nemphasise  certain. salient features of this case.  The\t new
\npartnership   named  Bagla  Jaipuria  and  Co.\tis   not   a
\npartnership  of\t two  firms.  Two firms\t cannot\t join  in  a
\npartnership.  Really it was a partnership consisting of\t six
\npartners;  three of whom were partners of one firm  and\t the
\nother three partners of another firm.  This new partner.,hip
\ncame  into existence on April 29, 1946.\t These partners\t did
\nnot enter into a deed of partnership.  This partnership took
\nover  as  managing agents of the Swadeshi Cotton  Mills\t Co.
\nLtd.  on July 16, 1946.\t Three of the partners belonging  to
\nBagla Group went out of the partnership on October 6, 1946.
\nThough\tthe  three  named members of the  Bagla\t Group\twere
\npartners of the new firm, the benefit of the new partnership
\nwas  to enure to the old firm of which those  three  persons
\nwere partners.\n<\/p>\n
(1)  35 I.T.R. 148.\t\t\t(2) [1935] 3  I.T.R.\n<\/p>\n
(Eng.  Cas.) 17.\n<\/p>\n
(3)  [1952] 22 I.T.R. (Supp.) 1
\n936<\/span>
\nThat  old  firm not only continued to be  in  existence\t but
\ncontinued  to carry on various business activities.  It\t may
\nbe noted that the firm Bagla Jaipuria & Co. continued to  be
\nin  existence.\t It coatinued to be the managing  agents  of
\nSwadeshi  Cotton Mills Co. Ltd.\t Its goodwill, it  any,\t was
\nnot parted with.  What really happened was that three of the
\npartners  of that firm went out of the partnership  and\t for
\ndoing  so  they\t were  paid  Rs.  35,01,000\/which  sum\talso
\nincluded the profits earned by the Bagla Jaipuria & Co. from
\nthe  date  it came into existence, till the  three  partners
\nbelonging  to  the Bagla Group went out of  the\t partnership
\nleaving\t the partnership firm intact.  There is\t no  dispute
\nthat  the portion of the compensation which represents\tpast
\nprofits is a revenue receipt.  The only question is  whether
\nthe  remaining\tportion\t was a Revenue\treceipt\t or  Capital
\nreceipt.   The remaining portion of the receipt purports  to
\nbe  compensation given to the three partners for  giving  up
\nwhat  are  called (i) the managing agency  rights  (it)\t the
\nselling\t agency\t rights and (iii) the  goodwill.   We  shall
\nfirst take up the question relating to the goodwill and\t the
\nmananaging agency rights.\n<\/p>\n
It  was urged on behalf of the assessee that as a result  of
\nthe  agreement\tdated  October 7, 1946,\t the  assessee\tfirm
\nparted,\t with its managing agency rights which but for\tthat
\nagreement would have continued for a period of twenty  years
\nwith  a possibility of renewal.\t The managing  agency  right
\ngiven up under that agreement is a capital asset of the firm
\nand  therefore any compensation paid for the  extinguishment
\nof that right is a capital receipt.  It was also argued that
\none  of the rights that the assessee firm parted with  under
\nthat agreement was the goodwill of the company which is also
\na capital asset.  Consequently compensation paid in  respect
\nof the same must also be considered as capital receipt.
\nIn our opinion the aforementioned arguments are\t fallacious.
\nThe managing agency rights vested with the Bagla Jaipuria  &
\nCo. Similar is the case so far as the goodwill is  concerned
\nassuming  that any goodwill had been built up by that  time,
\nBagla  Jaipuria & Co. continues to be in existence.  It\t had
\nnot  parted  with managing agency rights  nor  its  goodwill
\ntaken  away.   What  has  happened  is\tthat  the   partners
\nrepresenting  the assessee firm in Bagla Jaipuria & Co.\t had
\nsurrendered their rights in the partnership to the remaining
\npartners  and  obtained certain\t payments  for\tsurrendering
\ntheir rights.  This is not a case of parting with any agency
\nrights.\t This is really a case of cancellation of a contract
\nwhich  had  beet  entered into in  the\tordinary  course  of
\nbusiness.  Such contracts are liable, in the ordinary course
\nof  business, to be altered or terminated on terms  and\t any
\npayment received in settlement of the rights as a result  of
\nthe termination of the contract really repre-\n<\/p>\n
937<\/span><\/p>\n
sents the profits which the assessee would have made had the
\ncontract  been\tperformed.   As osberved by  this  Court  in
\nJairam Valji’s case (supra) :\n<\/p>\n
\t      “when  once  it is found that a  contract\t was
\n\t      entered\tinto  in  the  ordinary\t course\t  of
\n\t      business,\t any compensation received  for\t its
\n\t      termination   would  be  a  revenue   receipt,
\n\t      irrespective of whether its performance was to
\n\t      consist  of a single act or a series  of\tacts
\n\t      spread over a period, and in this respect,  it
\n\t      differs from an agency agreement.”\n<\/p><\/blockquote>\n
As  seen  earlier no deed of partnership  had  been  entered
\ninto.’\tTherefore the same was terminable at will.   Any  of
\nthe partners of the firm could have brought the\t partnership
\nto an end.  Consecluently the possibility of termination  of
\na  partnership\tof the type with which we are  concerned  is
\ninherent in the very course of business.
\nThe  facts  set out in the statement of case show  that\t the
\nassesseefirm  had  various business activities; one  of\t its
\nbusiness activity was to join Bagla Jaipuria & Co. to  carry
\non    certain\tbusiness   activities.\t   The\t  assessee’s
\nrepresentatives by entering into that agreement were  merely
\ncarrying on a trading activity.\t Such being the case, it  is
\nnot  possible  to hold that the compensation  paid  for\t the
\ntermination of the contract is a capital receipt.
\nIt  is\tnot the case of the assessee that its  only  trading
\nactivity  had  come to an end.\tIt had\tseveral\t activities.
\nJust  one  of its trading activity had been put an  end\t to.
\nHence\tthe   amount  received\tcannot\tbe   considered\t  as
\ncompensation for stopping its business.
\nNow we come to the transfer of the selling agency to  Bagla-
\nJaipuria  &  Co. This is not a right transferred  under\t the
\nagreement  dated  October  7, 1946.   That  right  had\tbeen
\ntransferred  to\t Bagla Jaipuria & Co. even at the  time\t the
\npartnership was formed.\t On October 7, 1946, the was no more
\nthe  owner  of that selling agency.  On that day it  was  an
\nasset of BaglaJaipuria & Co. Hence the compensation paid can
\nonly   relate  to  the\ttermination  of\t the   contract\t  of
\npartnership  and not to the transfer of the selling  agency.
\nAssuming  that agreement of October 7, 1946  has  indirectly
\naffected the selling agency right of the assesse , the\tsame
\nwas  one of the several trading activities of  the  assessee
\nfirm.  On the basis of the material on record, the Hi& Court
\nheld that after the Bagla Group gave up its interest in\t the
\nBagla Jaipuria & Co., the assessee firm with the aid of\t Rs.
\n35,01,000\/-  received as compensation  acquired\t controlling
\nsham  in two other companies namely the India  United  Mills
\nLtd. and the Muir Mills Ltd.  From this it is clear that the
\ntrading
\n938<\/span>
\nstructure of the assessee firm was not affected.  It  merely
\nreplaced  one  trading activity by another.   In  Gillanders
\nArbuthnot  and\tCo.  Ltd.  v.  Commissioner  of\t Income-tax,
\nCalcutta<\/a>(1),  this  Court held in the case  of\tan  assessee
\nhaving\tvast  array  of business  including  acquisition  of
\nagencies in the normal course of business, the determination
\nof an individual agency is a normal incident not  affect-ing
\nor  impairing  its  trading structure.\tIn  such  cases\t the
\namount\treceived for the cancellation of an agency does\t not
\nrepresent  theprice  paid for the loss of a  capital  asset;
\nthey were of the nature of income.\n<\/p>\n
In  Kettlewell Bulleun and Co. Ltd. v. Commissioner  of\t In-
\ncome-tax Calcutta(1), this Court after considering,  various
\ndecisions rendered by the courts in U.K. and in this country
\nabout  the principles which govern the determination of\t the
\nnature\tof  compensation received on the termination  of  an
\nagency observed:\n<\/p>\n
\t      “On  an analysis of these cases which fall  on
\n\t\t\t    two sides of the dividing line, a  sat
\nisfactory
\n\t      measure\tof  consistency\t in   principle\t  is
\n\t      disclosed.   Where, on a consideration of\t the
\n\t      circumstances payment is made to compensate  a
\n\t      person  for cancellation of a  contract  which
\n\t      does  not affect the trading structure of\t his
\n\t      business, nor deprive him of what in substance
\n\t      is  his source of income, termination  of\t the
\n\t      contract\tbeing  a  normal  incident  of\t the
\n\t      business and such cancellation leaves him free
\n\t      to carry on his trade (freed from the contract
\n\t      terminated)  the receipt is revenue; where  by
\n\t      the  cancellation\t of an\tagency\tthe  trading
\n\t      structure of the assessee is impaired, or such
\n\t      cancellation  results in loss of what  may  be
\n\t      regarded\tas  the\t source\t of  the  assessee’s
\n\t      income  the  payment made\t to  compensate\t for
\n\t      cancellation   of\t the  agency  agreement\t  is
\n\t      normally a capital receipt.”\n<\/p>\n
For the reasons mentioned above we hold that the entire\t sum
\nof  Rs. 35,01,000\/- received by the assessee was  a  revenue
\nreceipt assessable under s. 10.\n<\/p>\n
In  the\t result Civil Appeal No. 2022 of 1966  is  dismissed
\nwith  costs.  On our indicating our tentative conclusion  on
\nthe  first question referred to the High Court\tthe  learned
\nSolicitorGeneral  appearing  for the revenue did  not  press
\nCivil Appeal No. 1746 of 1968.\tIt is accordingly  dismissed
\nwith no order as to costs.\n<\/p>\n
V.P.S.\n<\/p>\n
\t  939<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income-Tax U.P. … vs M\/S. Gangadhar Baijnath General … on 23 August, 1972 Equivalent citations: 1973 AIR 1011, 1973 SCR (1) 928 Author: K Hegde Bench: Hegde, K.S. 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: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-17112","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income-Tax U.P. ... vs M\/S. 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