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Issues: Taxability of a lump sum payment of goodwill received by the assessee from a partner in consideration of waiving royalty on steel supply.
Analysis: The case involved a limited liability company that shifted its business to Bombay post-partition and entered into a partnership agreement with a factory owner to utilize quotas of steel and coal. The partnership agreement was modified in 1954, where the assessee received a lump sum of Rs. 60,000 as goodwill in exchange for waiving royalty on steel supply after June 30, 1954. The Income-tax Officer taxed the Rs. 60,000 amount in the hands of the assessee, leading to an appeal. The Appellate Assistant Commissioner viewed the modification as a change in payment structure but upheld the taxability. The Income-tax Appellate Tribunal criticized the approach but dismissed the appeal, considering the lump sum as a revenue receipt for services rendered. The Tribunal referred the question of taxability to the High Court. The High Court analyzed the original and modified partnership agreements. It noted that under the original agreement, the assessee was entitled to Rs. 50 per ton of steel supplied and agreed to supply all received coal and steel for partnership business. The modified agreement changed the payment structure to a lump sum of Rs. 60,000, leading to the question of whether it constituted a revenue or capital receipt. The assessee argued that the Rs. 60,000 was for transferring quota rights, making it a capital receipt. However, the Court found no intention to transfer quota rights in the modified agreement. The Court emphasized that the modification merely changed the payment method from per ton to a lump sum without altering the nature of the transaction. It noted that the agreement did not convey quota rights to the partnership and concluded that the Rs. 60,000 was a revenue receipt. The Court rejected arguments that the amount was goodwill or part of the partnership's assets, affirming its taxability. Consequently, the Court held that the Rs. 60,000 received by the assessee was a revenue receipt and subject to tax, ruling in favor of the Commissioner of Income-tax for costs.
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