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Issues Involved:
1. Whether the sum of Rs. 1,00,000 received by the assessee can be assessed to tax under section 12B of the Indian Income-tax Act. 2. Whether the sum of Rs. 1,00,000 was paid as consideration for the transfer of a capital asset or as compensation for loss of future profits. Issue-wise Detailed Analysis: Issue 1: Taxability under Section 12B of the Indian Income-tax Act The primary question was whether the sum of Rs. 1,00,000 received by the assessee during the year of account could be assessed to tax under section 12B of the Indian Income-tax Act. The Departmental Authorities treated this sum as capital gains, liable to tax under section 12B, which subjects to tax the profits and gains arising from the sale, exchange, or transfer of a capital asset effected after March 31, 1946, and before April 1, 1948. The assessee contended that the right of a partner in a partnership with a managing agency was not a capital asset as defined by section 2(4A) of the Act. However, the court held that the term "property" in section 2(4A) must be given its ordinary meaning in the English language, and a share in a partnership is indeed property. The court referred to precedents like J.K. Trust, Bombay v. Commissioner of Income-tax and Excess Profits Tax and Guruwswami Naidu v. Commissioner of Income-tax, which supported the view that a share in a partnership is a profit-yielding asset and thus property within the meaning of section 2(4A). Further, the court highlighted that the managing agency agreement between R.G.S. Naidu and Company and the Coimbatore Spinning and Weaving Company Limited provided transferable rights, reinforcing that the assessee's share in the partnership was a capital asset. The court concluded that the share which the assessee had in each of the three partnership concerns was a capital asset within the meaning of section 2(4A) of the Act. Issue 2: Nature of the Payment - Consideration for Transfer of Capital Asset or Compensation for Loss of Future Profits The second issue was whether the sum of Rs. 1,00,000 was paid as consideration for the transfer of a capital asset or as compensation for loss of future profits. The court observed that the managing agency agreement was left unimpaired by the transfer effected by the assessee in favor of Gopal Naidu. Although the assessee would no longer be entitled to claim any share in the profits earned by R.G.S. Naidu and Company, the transaction could not be viewed as compensation for loss of future profits. The court noted that the transaction involved all the elements of a sale, which included both exchange and transfer of capital assets. The sum of Rs. 1,00,000 was paid by Gopal Naidu as consideration in part for the transfer of a capital asset, along with the transfer of his share in the other two partnership concerns to the assessee. Conclusion: The court answered the first question in the affirmative and against the assessee, confirming that the sum of Rs. 1,00,000 was assessable to tax under section 12B of the Indian Income-tax Act. The court also answered the second question by stating that the sum of Rs. 1,00,000 was paid as consideration for the transfer of a capital asset. Consequently, the assessee was ordered to pay the costs of the reference, with counsel's fee fixed at Rs. 250. The reference was answered accordingly.
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