TMI Blog1972 (8) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... to invoke the provisions of section 12B 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 12B of the Income-tax Act?" The High Court answered the first and the second questions in favour of the 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 section 12B 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 No. 2022 of 1968. The material facts of the case as could be gathered from the statement of case are these: The assessee is a partnership firm carrying on business of financing, money-lending, selling agencies and the like pursuits. The relevant assessment year is 1948-49, the concerned accounting year ending in October, 1947. On April 29, 1946, the three partners of the assessee-firm entered into an agreement with Gajadhar Jaipuria, R.S. Puran Mal Jaipuria a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare of the retiring partner in the profits of the firm up to 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 retiring 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 the auction. Raj 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 nominees. 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: " (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal submitted for the opinion of the High Court questions Nos. 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, viz.: (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 selling agency. 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 these 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 up to 5th October, 1946". (a) Was there any goodwill? If so, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll 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 April 29, 1946, to October 5, 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 Rs. 35,01,000 is a capital receipt or a revenue receipt. The question whether a particular receipt is a capital or revenue is largely a question of fact but often we come across borderline cases which do present difficulties in arriving at a conclusion. As observed by this court in Commissioner of Income-tax v. R. B. Jairam Valji: " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elonging 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 a 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, (ii) the selling agency rights, and (iii) the goodwill. We shall first take up the question relating to the goodwill and the managing agency rights. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 Bagla-Jaipuria 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 assessee was no more the owner of that selling agency. On that day it was an asset of Bagla-Jaipuria Co. Hence, the compensation paid can only relate to the termination of the contract of partnership and not to the transfer of the selling agency. Assuming that the agreement of October 7, 1946, has indirectly affected the selling agency right of the assessee, the same was one of the several trading activities of the assessee-firm. On the basis of the material on record, the High Court held that after the Bagla Group gave up its interest in Bagla-Jaipuria Co., the assessee-firm with the aid of Rs. 35,01,000 received as compensation acquired controlling shares in two other companies, namely, the India Unite ..... X X X X Extracts X X X X X X X X Extracts X X X X
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