DEPUTY COMMISSIONER OF INCOME TAX Vs. COCHIN SHIPPING CO COCHIN LTD
INCOME TAX APPELLATE TRIBUNAL
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G. Santhanam, Accountant Member -
(1.) THIS is an appeal by the revenue.
(2.) The assessee is a limited company. The previous year of the assessee ended on 31-3-1982, relevant to the assessment year 1982-83. In Part III of the return of income, the assessee has stated that it was in receipt of Rs. 5,23,079 as "net amount of share in goodwill and agency rights of Mangalore branch of Cochin Shipping" (firm) and claimed it to be exempt from tax as capital receipt. The assessment was completed on 20-10-1984 without bringing to tax the impugned amount. Then by an order under Section 154 of the Income-tax Act, the Assessing Officer rectified the assessment by bringing to tax the impugned amount as follows :
In the course of the discussion, the Assessing Officer adverted to the history of the case as follows :
The firm of M/s. Cochin Shipping Company was in existence right from 1966. It had two business places, viz.. the head office at Cochin and the Branch office at Mangalore. The head office at Cochin was discontinued during the previous year relevant to assessment year 1977-78. The business of the head office at Cochin was taken over by the assessee-company on its incorporation by paying a goodwill of Rs. 2 lakhs to the firm. Thereafter the said firm continued with only one place of business at Mangalore. The assessee-company became a partner in the firm with effect from 1-4-1980 and retired from the partnership with effect from 1-4-1981. On its retirement from the firm, the assessee-company received a sum of Rs. 5,64,346 consisting of Rs. 2,44,925 as its share of goodwill and Rs. 3,19,421 as share in the valuation of agency rights of the firm.
The Assessing Officer noticed that the company became a partner in the Cochin Shipping Company by virtue of an agreement dated 1-4-1980 and retired from the partnership as per agreement dated 1-4-1981. Therefore, he held that the contract was alive only for one year and it was a case of cancellation of contract which had been entered into in the ordinary course of the business. The assessee's contention that the receipt is in capital nature as it was deprived of its very source of income was not found tenable. Further the impugned payment was in the nature of a benefit or advantage within the meaning of Section 28(iv) of the Income-tax Act. It was only a case of termination of contract in the ordinary course of the business and hence the amount was held to be taxable in the ratio of the decision of the Supreme Court in the case of CIT v. Gangadhar Baijnath  86 ITR 19. The assessee carried the matter in appeal. The CIT (Appeals) after tracing the history of the case held that this is a case where the assessee retired from the partnership firm and obtained payment towards goodwill and agency rights. He further held that this is not a case where the assessee was indulging in entering into partnership and withdrawing therefrom. In other words, it is not the business of the assessee to enter into partnerships now and then and withdraw therefrom now and then. Goodwill was a valuable asset and equally so the agency rights. Therefore, he held that the facts of the case before the Supreme Court in Gangadhar Baijnath's case [supra] relied on by the Assessing Officer were not on all fours with the assessee's case. He relied on the decision of the Allahabad High Court in the case of Addl. CIT v. Smt. Mahinderpal Bhasin  117 ITR 26 and also the decision of the Rajasthan High Court in the case of Addl. CIT v. Brahm Swaroop & Bros.  163 ITR 321 and upheld the contention of the assessee that what the assessee had received upon retirement from the firm was only in the nature of compensation for destruction or extinguishment or loss of interest of the assessee in the partnership firm. As there was no cost to such assets it cannot be brought to tax in the ratio of the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty  128 ITR 294. Turning to the contention of the Assessing Officer that the payments were in the nature of benefit or advantage within the meaning of Section 28(iv) of the Income-tax Act, the learned CIT (Appeals) held that if the advantage or benefit was in the capital field it could not be brought within the mischief of Section 28[iv). Further he held that the question whether the impugned receipts were taxable or not is not clear on the face of it and involves a long drawn out process of reasoning and, therefore, action under Section 154 would not lie in the ratio of the decision of the Supreme Court in the case of T.S. Balaram, ITO v. Volkart Bros.  82 ITR 50. Thus, he allowed the appeal of the assessee. The revenue is on appeal before us.
We have heard rival submissions and perused the records, which included the partnership deed and the agreement governing the retirement of the assessee-company. We do not see any parallel between the facts in the case of Gangadhar Baijnath (supra) and the facts in the assessee's case. In the former case, there was no partnership deed. In the instant case, the relationship was governed by a duly executed indenture of partnership dated 1-4-1980. In the former case their Lordships of the Supreme Court have observed that it was one at will; whereas in the instant case it is found that the partnership shall not stand dissolved on the insolvency of any of the partners or on the death of any of the partners other than the assessee-partner which is a limited company. In the former case one group of partners called Bagalas were carrying on the business of financing and money-lending and selling agencies and the other group of partners called Jaipurias were enjoying quota rights and they formed into a new group without execution of any agreement and on those facts the Apex Court came to the conclusion that the group representing the Bagalas were trading in partnership and also the rights therein. In the instant case it has not been shown or at least there is no material before us to say that the assessee's business consisted of entering into partnerships now and then. As a matter of fact, the assessee-company had purchased the head office (at Cochin) of the firm of M/s. Cochin Shipping Company soon after its incorporation in 1976 on payment of Rs. 2 lakhs towards goodwill. It was only in 1980 that it entered into a partnership in respect of the Mangalore business of the firm, M/s. Cochin Shipping Co., on payment of capital of Rs. 97,000 out of a total capital of Rs. 1 lakh. It was also stipulated in the agreement of partnership that any additional investment that may be required for the purpose of the business of the firm should be raised either by way of further capital in the same proportion in which the partners brought in the capital or by way of loans from them in such manner as may be decided by the partners. The partnership was to continue notwithstanding the death or insolvency of the partners. Therefore, it cannot be said that the assessee-company was indulging in or retiring from the partnership as part of its normal trading activity. Thus, there is no parallel in the facts of the case relied on by the revenue and the facts of the case before us. On the other hand, the learned CIT (Appeals) has rightly placed reliance in the decision of the Allahabad High Court in the case of Smt. Mahinderpal Bhasin (supra) and of the Rajasthan High Court in the case of Brahm Swaroop & Bros. (supra) to hold that the payment that were received by the assessee-company on its retirement towards goodwill and agency rights of the partnership firm was only in the nature of capital receipt. It must be stated in this context that in the case before the Supreme Court when the Bagalas received the payment it was not under an agreement; whereas in the instant case, the payment is witnessed by an agreement dated 1-4-1981. Further, this is not a case of the assessee just receiving payment towards goodwill and agency rights and nothing more from the firm in which it was a partner. In fact, the deed of retirement almost reads like a deed of dissolution so far as the Mangalore establishment is concerned. There were four partners under the deed of partnership dated 1-4-1980 and they are-
The capital was to be brought in the proportion in which the partners share the profits or losses. By indenture dated 1-4-1981, M/s. Cochin Shipping Co. (Cochin) Ltd., and K. Alex Antony retired from the firm leaving two other partners to continue in business. Clauses 3, 4, 5, 6 & 7 of the deed of retirement are as follows :
3. For the purpose of ascertaining the amount payable to the outgoing partners it is hereby mutually agreed between the parties hereto that the goodwill of the Branch of the firm at Mangalore shall be valued at Rs. 2,52,500 and that the Agency rights held by the said Branch of the firm from various Shipping Companies shall be valued at Rs. 3,28,300 and that the share of the outgoing partners in the said shares of goodwill and the value of Agency rights shall be credited to their respective accounts in their profit sharing ratio and paid off to them by continuing partners together with all other amounts standing to their credits in the books of the firm.
(3.) THE party of the first part hereto to take over from the firm such of the assets and liabilities listed in the Schedule 'A' annexed hereto (including the balance standing to the credit of the fourth party hereto and after effecting the adjustments as stated above) at the respective book values as on 1st April, 1981 and the value of the assets so agreed to be taken over by the first party shall be set off against the amounts payable as stated in clause 3 above.;
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