LexCOMMISSIONER OF INCOME -TAX U.P. LUCKNOW versus M/S. GANGADHAR BAIJNATH GENERAL GANG, KANPUR
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928 COIVIMISSIONER OF INCOME .. TAX U.P. LUCKNOW A v. M/S. GANGADHAR BAIJNATH GENERAL GANG, KANPUR August 23, 1972 [K. S. HEGDE, P. JAGANMOHAN REDDY AND H. R. KHANNA1 JJ.] Income-tax Act (11 of 1922), s.10-Partners of two partnerships joining to form a third partnership-Partners of one partnetship goin~ out oj nell' firm-Receipt of payments as compensation-]/ capi:al or revenue. Six per~ons, three of whom were partners of B·firm having. a se1ling agc1~cy of S-company, and three others who were partners of J-tirm havin,g quota rights in the S-company, formed a partnership the BJ-firm. There w~s no deed of partnership and the partnership of the BJ-firm was terminable at will. The_ B-firm continued to ex·ist carrying on various other business acti,;ties. The BJ -firm was appointed as manag- ing agents of the S-company. Later, the three persons belonging to B-firm went out of the BJ-firm and for doing so, they were paid a sum of monev which included oompensation as per the terms of an agree- ment between the B and J groups. The BJ-firm conti·nued rts the manag~ ing ag-~nts of the S-camp-any. The appellant, B-firm, in appeal to this Court, while .admitting that the portion of the compensation which re- presente-d profits was a revenue receipt, contended, that the remaining portion purporting to be made up of compensation for giving up (a) its managing agency rights, ( u) its selling agency rights, and ( c•) its good will. was not a revenue receipt but a capital receipt. HELD : The en'ire sum received by the appellant was a revenue receipt assessable under s. 10 of the Income Tax Act, 1922. [938F-G). ( 1) The que~tion whether a particu1ar receipt is oapital or revenue is lar~e1y a question of fact. [935AJ (2) (a) The BJ-firm was not a partnership of two tirms because two firms cannot join in a partnership, but was really. a part~ership c?t;t· sisting of six partners. The. appellant-firm had vanous busn~ess ac:-hvi~ tics one of which was to jom the BJ -fi.rm to carry on c.ertam bu~·;mess acti..,;ties. The appellant's representatives by entering into the partner- ship ,ver~ merely carrying on a trading activity. [935F-G; 937D-E] (b) The managing agency rights as well as any goodwill vest~d with the BJ-firm. By going Ol,lt of the BJ-firm the partners representmg the appellant-firJh had surrende~d their rights in the pat~ershi~ to. the remaining partners and obtamed payments for surrendenng theu tights. It was a case of cancellation of a contract which had been entered into the ordin::~ry course of busin~ss, and not one of parting witb any managing agency right. The payment received in settlem~nt as a result of the termination of the contract represents the profits which the assessee would have made had the contract been performed. [9360-H; 937A-B, D·E] Commissioner of Income-tax, Nagpur v. R. B. Jaitam Valji and Ors. 35 I.T.R. 148, followed. B c D E F G H ,., . -f. A n • C.I.T. v. GANGADHAR (Hegde, J.) .. 92~ / (c) It wa! not a. case of the only trading activity of the appellant- firm coming to an end. Only one of its\ trading activities had been put an end to and hence. the amount received could not b~ conr,idercd as compensation: for stopping its business. [937E-F] . . .· . . Therefore, the compensation· paid. for· the termination.· of the contract is not a capital receipt. [937F] · · (3)(a) The selling agency of the appellant .firm had bccrl transferred to the BJ-firm even at t~tirnc when the BJ-firm was formed. On the uay when the partners of the B-firm left the BJ..fum it was an asset of the BJ-firm and hence the compensation· paid could only relate to the t.cnnination of the contract of partnership and not to the transfer of sell- ing agency. [937F-G] · ·c (bf As.sum.in~ that .indirectly the seilin:::: agency right of the appc1- li:! n t firm was affected, it was only one of several trading activities of the appcJiant firm- and the trading structure or the alisessce-firm wa~ not at all affected. The appellant-firm merely replaced cr.e trading acti- vity bv another bv ualisin,g the c:lom.pensation for acquiring controlling shares in two other companies. In such cases. the amount received for the cancellation of an a~ncy, does not represent the price paid for the 1os~ of a capital asset, but is in the nature of inc-ome. [937G·H; 938A] 0 Gil[(lnders Arbdthnot and Co. Ltd. v. Commissioner cf. Income-tax, Calcutta, 53 I.T.R. 2
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