GANGADHAR BAIJNATH Vs. COMMISSIONER OF INCOME TAX
LAWS(ALL)-1965-10-19
HIGH COURT OF ALLAHABAD
Decided on October 22,1965

GANGADHAR BAIJNATH Appellant
VERSUS
COMMISSIONER OF INCOME-TAX, LUCKNOW Respondents


Cited Judgements :-

SETH BANARSI DAS GUPTA VS. COMMISSIONER OF INCOME TAX [LAWS(ALL)-1970-9-2] [REFERRED TO]
ADDITIONAL COMMISSIONER OF INCOME TAX VS. MAHINDERPAL BHASIN SMT [LAWS(ALL)-1978-1-50] [REFERRED TO]
COMMISSIONER OF INCOME TAX W B III VS. CHUNILAL PRABHUDAS AND CO DEFUNCT FIRM [LAWS(CAL)-1969-9-29] [REFERRED TO]


JUDGEMENT

M.C.DESAI, J. - (1.)THIS is a statement of case submitted under section 66(1) of the Income-tax Act by the Income-tax Appellate Tribunal, Allahabad Bench, partly the instance of the assessee and partly at the instance of the Commissioner of Income-tax, U.P. It arises out of an order passed by the Tribunal on June 27, 1959, in respect of assessment of the assessee to income-tax for the assessment year 1948-49, the accounting been framed by the Tribunal and are to be answered by us are as follows :
(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 ?

(2) Whether it was competent to the Appellate Assistant Commissioner to invoke the provisions of section 12B for the assessment of Rs. 35,01,000 when the Income-tax Officer has 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 12B of the Income-tax Act ?

(2.)THE first question is the question that requires to be answered first and it was framed at the instanace of the Commissioner. THE other two questions arise only if the first question is answered against the Commissioner. THE second question is framed at the instance of the assessee and is to be answered before the third question framed at the instnace of the Commissioner. THE third question is to be answered only if the second question is answered against the assessee; otherwise it does not arise.
The assessee is a firm consisting if three partnerships belonging to the Bagla firm of Kanpur and carrying on the business of financing, money-lending, working as selling agent, etc. On April 29, 1946, the assessee entered into an agreement with three members of the Jaipuria family for constituting a partnership known as Bagla Jaipuria and Co. with the object of acquiring controlling shares in Swadeshi Cotton Mills and another mill. The three Baglas constituting the assessee-firm owned half-share in the partnership and the three Jaipurias owned the other half. They were to invest equally in the business of the partnership. The assessee was the selling agent of the Swadeshi Cotton Mills Co. Ltd. and it was agreed in the deed of partnership that they would cease to hold the selling agency with effect from October 6, 1946, and that the partnership would acquire the selling agency rights from the mills with effect from October 6, 1946. The Jaipurias held quote rights from the Swadeshi Cotton Mills Ltd. and they also were to hold them till October 5, 1946; thereafter, the quota rights were to be held by the partnership. The partnership commenced its business and acquired controlling shares in the Swadeshi Cotton Mills. On July 16, 1946, the Swadeshi Cotton Mills Ltd. appointed the partnership as its managing agents for 20 years. By an agreement dated October 7, 1946, the assessee retired from the partnership with effect from October 6, 1946, after receiving from the surviving partners the compensation of Rs. 35,01,000 in addition to the capital of Rs. 97 lakhs and odd invested by it in the partnership business and the interest accured thereon. The amount of compunction was fixed in an auction held under an agreement between the assessee and the Jaipurias. The Jaipurias offered to pay Rs. 35,01,000 if the assessee retired and the assessee did not offer a higher sum to be paid to the Jaipurias if they retired. The assessee received the amount of compensation under a receipt dated October 17, 1946, which described it as solatium and compensation for surrendering to the Jaipuria group our right, title and interest in running concern of Bagla Jaipuria Co., who, inter alia, were appointed the managing agents of the Swadeshi Cotton Mills Co. Ltd. for a period of twenty years... with expectation of further renewals of like period. The assessee thus lost its half share in the partnership and also gave up its selling agency rights held from the Swadeshi Cotton Mills Ltd. During the assessment of the assessee for the assessment year 1948-49, the Income-tax Officer treated the sum of 35 lakhs and odd as income received by the assessee and included it in the taxable income. The assessees contention was that it was a casual income but the contention was rejected. The Appellate Assistant Commissioner confirmed the assessment order on the basis that the compensation was income and alternatively on the basis that it was a capital gain within the meaning of section 12B. The Commissioner had not contended before the Income-tax Officer, and the latter had not decided, that the compensation amounted to a capital gain. On further appeal the Tribunal held that the compensation was not income from the business but was a capital receipt, that the Appellate Assistant Commissioner had jurisdiction to decide that it was a capital gain within the meaning of section 12B even though this claim had not been made by the department before the Income-tax Officer and that it was not a capital gain because there was no sale, exchange or any other kind of transfer by the assessee by its act of retiring from the partnership. There were two applications under section 66(1) for reference of the questions of law arising out of its order, one by the assessee and the other by the Commissioner and it allowed both the applications and referred the three questions.

The first important fact to be is that the assessee is the firm, Gangadhar Baijnath, and not the partnership, Bagla Jaipuria and Co. We are not concerned with the question whether anything paid by the partnership (I shall refer to Bagla Jaipuria and Co. as the partnership and the assessee as the firm) or anything received by it is a capital receipt or a revenue expenditure or income. The question before us is whether the amount of Rs. 35 lakhs and odd received by the firm is a capital receipt or a revenue (or taxable) income. Since the nature of a receipt, whether it is a capital receipt or a revenue income, depends upon the recipients business, we are concerned with the nature of the business carried on by the firm and not at all with the nature of the business carried on by the partnership. It is the partnership that had acquired the managing agency (of Swadeshi Cotton Mills C0. Ltd.) and not the firm. If the managing agency had been terminated prematurely and the money had been paid for the premature termination it would have been received by the partnership and not by the firm and the question of its nature would be wholly irrelevant.

(3.)ANOTHER important fact to notice is that the managing agency acquired by the partnership has not been terminated and it has received no compensation from the Swadeshi Cotton Mills Co. Ltd. for its premature termination and there does not arise any question of the nature of the compensation received for termination of a managing agency agreement. The managing agency agreement continues (I am speaking with reference to the accounting year) and the only alteration that has taken place is in the constitution of the partnership, which holds the managing agency. No assistances is, therefore, to be obtained from the decisions laying down that compensation paid for terminating a managing agency agreement is a capital receipt or a revenue income. Similarly, the question whether managing agency is a capital asset or something acquired in the course of carrying on a business also is irrelevant; it could have arisen only if the partnership were the assessee. So also the question whether something recevied for sale of managing agency is a capital receipt or a revenue income is irrelevant. It is irrelevant for another reason also, it being that there is no sale or any other kind of transfer of the managing agency; it was acquired by the partnership and continues to be with it. The relinquishment by the firm of its half share in the partnership may be a sale or transfer of another kind to the Jaipurias, the surviving partners, but it would be a sale or transfer of another kind of its right, title and interest in the partnership and not in the managing agency. It never surrendered its whatever right, title and interest it had in the managing agency.
The next fact to be noticed is that the firm carries on business in diverse lines. According to the statement of case, the business consists of financing, money-lending, selling agencies and like pursuits. The Appellate Assistant Commissioner had found that the acquisition of the controlling interest and the managing agency in various companies is also a part of its normal business operation but the Tribunal did not agree with this finding because there was no evidence to prove that the acquisition and sale of interest in the managing agencies is one of the incidents of the financing and money-lending activities of the assessee. The finding expressly recorded by the Tribunal is that the investment by the firm of nearly a crore of rupees in the partnership business was with the intention of selling the managing agency rights with a view to make a profit.

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