TMI Blog1979 (11) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... e was not carrying on business and income from royalty could not be treated as business income. The Income, the CIT stated, could be assessed only under the head 'Other sources' and he further stated that in the absence of business there is no question of any partnership and the ITO erred in taking the status as that of a registered firm. The CIT also referred to his predecessor's order for the asst. yr. 1974-75 and his predecessor's findings that income from royalty was assessable only under the head 'other sources' and as there was no business, the status could not be taken as a registered firm and the correct status would be that of an AOP. He stated that he was agreeing with the reasonings of his predecessor and eventually he observed "In the result, the assessment order for the asst. yr. 1975-76 is set aside. The ITO is directed to make a fresh assessment after taking into account the directions given above. The assessment stands enhanced accordingly". 2. The assessee is in appeal. The first ground urged is that the CIT has no power to cancel registration under s. 263. In cancelling the assessment order for the year. 1975-76, according to the assessee, the circumstances req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after referred to as the company. Some of the partners were also shareholders therein. The relevant portion of this agreement stated as under:— "And whereas the Vendors are desirous or selling to the Company the selective assets and liabilities. And whereas the Vendors had also authorised the Company to negotiate and take up the rights of sole selling agency of 'Macdowells'. And whereas the Company has been formed with a view inter alia to act as sole selling agents of 'Macdowells'. And whereas by cl. III B(3) of the Memorandum of Association of the Company, it is provided that the Company shall enter into the agreement herein referred to, being this agreement. Now the parties to this agreement to hereby agree and covenant as follows:— 1. The Vendors shall sell and the Company shall purchase as a going concern assets and rights and undertake to discharge liabilities, both the assets and liabilities described in Schedule, and also the right to carry on business as sole selling agents of Macdowells, Shertallay, with the right to carry on the said business in continuation of the Vendors business with all rights mentioned in the Schedule to this agreement and all debts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinued cannot also be accepted in view of the development in the case of the Pvt. Ltd. companies. The AAC has found after perusal of the various agreements between M/s. Jacobs and M/s. Jacobs Pvt. Ltd. that the firm has not allowed exploitation of any licence, rights or distribution ship obtained by them or M/s. Mc. Dowell Co. in return for which the amount has been received by the assessee. The firm had no right or any property in the form of selling rights or any products and therefore, the question of transferring any right or receiving royalty in return did not arise in this case. The right was obtained by M/s. Jacobs Pvt. Ltd. by its own direct negotiations. These finding of the AAC disprove the theory of the assessee that the assessee had some interest in commercial asset which he was exploiting himself during the previous years and during these years he allowed this commercial asset to be exploited by a third party receiving royalty in return therefrom. Hence the contention of the assessee that whatever was received by the assessee by way of exploitation of commercial asset either through his own or through some other agency should be treated as business income cannot stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gents of Mcdowell and Company, Shertallai, together with the right to carry on the said business in continuation of the vendors' business. Cl. (2) again unequivocally proceeds on the basis that there was an assignment of the sole selling agency business and that the consideration for the same is one rupee per case of liquor sold by the Company. Cl. (3) provides that Rs. 2,31,000 shall be the consideration of the 'the said sale'. What is the meaning to be attributed to the term "the said sale"? It might, in one sense, comprehend the composite sale or the sale of the two different assets, indicated in cl. (1) which we have earlier described. But, having regard to the intervening clause viz. cl. (2), which expressly deals with assignment of the right to carry on the sole selling agency of Mcdowell and Company, it appears to us that cl. (3) can only deal with the residue, or the remaining part of what was sold, viz. the assets and the rights of the vendors, the consideration provided by cl. (2) represents a consideration for sale of the right of the sole selling agency." 11. It is in the aforesaid background that we have to determine whether the order of the CIT in revision has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod for which royalty was to be paid. Of course no limit had been prescribed in the terms of agreement of 24th Sept., 1970 but the fact that the sole selling agency was resumed in relation to the asst. yr. 1976-77 is not in dispute. As we have already mentioned in terms of agreements the assessee had not parted with its entire assets. To the extent almost of Rs. 3 lakhs assets were retained by the assessee. This is thus not a case where the entire assets and liabilities of the assessee were taken over by the firm. The assessee had parted with the rights of the sole selling agency for an indefinite period in terms of the agreement but in fact it resumed such rights after a period of two years. Under these circumstances, we consider that the royalty which was received by the assessee was really income from allowing the user of a business asset for a particular period i.e. as long as royalty was paid. The conduct of the assessee was one of earning income by way of royalty @ rupee one per case of liquor during the period when the rights of sole selling agency stood transferred to the company and in our view such activity would fall within the concept of 'Business' (see in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X
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