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TMI Blog1960 (10) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act ? (3)Whether, on the facts and in the circumstances of the case, the receipt of ₹ 35,01,000 was taxable under section 12B of the Income-tax Act ? The first question is the question that requires to be answered first and it was framed at the instance of the Commissioner. The other two questions arise only if the first question is answered against the Commissioner. The second question is framed at the instance of the assessee and is to be answered before the third question framed at the instance of the Commissioner. The third question is to be answered only if the second question is answered against the assessee ; otherwise it does not arise. The assessee is a firm consisting of three partnerships belonging to the Bagla firm of Kanpur and carrying on the business of financing, money-lending, working as selling agent, etc. On April 29, 1946, the assessee entered into an agreement with three members of the Jaipuria family for constituting a partnership known as Bagla Jaipuria and Co. with the object of acquiring controlling shares in Swadeshi Cotton Mills and another mill. The three Baglas constituting the assessee-firm owned half-share in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e compensation was income and alternatively on the basis that it was a capital gain within the meaning of section 12B. The Commissioner had not contended before the Income-tax Officer, and the latter had not decided, that the compensation amounted to a capital gain. On further appeal the Tribunal held that the compensation was not income from the business but was a capital receipt, that the Appellate Assistant Commissioner had jurisdiction to decide that it was a capital gain within the meaning of section 12B even though this claim had not been made by the department before the Income-tax Officer and that it was not a capital gain because there was no sale, exchange or any other kind of transfer by the assessee by its act of retiring from the partnership. There were two applications under section 66(1) for reference of the questions of law arising out of its order, one by the assessee and the other by the Commissioner and it allowed both the applications and referred the three questions. The first important fact to be noticed is that the assessee is the firm, Gangadhar Baijnath, and not the partnership, Bagla Jaipuria and Co. We are not concerned with the question whether anythi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surviving partners, but it would be a sale or transfer of another kind of its right, title and interest in the partnership and not in the managing agency. It never surrendered its whatever right, title and interest it had in the managing agency. The next fact to be noticed is that the firm carries on business in diverse lines. According to the statement of case, the business consists of financing, money-lending, selling agencies and like pursuits. The Appellate Assistant Commissioner had found that the acquisition of the controlling interest and the managing agency in various companies is also a part of its normal business operation but the Tribunal did not agree with this finding because there was no evidence to prove that the acquisition and sale of interest in the managing agencies is one of the incidents of the financing and money-lending activities of the assessee. The finding expressly recorded by the Tribunal is that the investment by the firm of nearly a crore of rupees in the partnership business was with the intention of selling the managing agency rights with a view to make a profit. There is no dispute about the firm being a partner of the partnership. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Anglo-Persian Oil Co. Ltd.2 Rankin C.J. stated that the nature of a receipt depends upon the character of the business of the recipient. In Kettlewell Bullen and Co. Ltd.'s case3 the assessee's business was found to be of acquiring and operating managing agencies, and not dealing in managing agencies, i.e., buying and selling them. A managing agency acquired by it in accordance with its object was a fixed asset and not a stock-in-trade. It was for this reason that the Supreme Court held that the compensation received for relinquishing the managing agency before the expiry of its term was a capital receipt. In the case of Jairam Valji (supra) the Supreme Court said at page 164 that the determining factor must be the nature of the trade in which the asset is employed. The question posed in the cases of Kettle-well Bullen and Co. Ltd. 's case (supra), Wiseburgh 's case (supra ), Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax [1964] 53 ITR 283 (SC) and Commissioner of Income-tax v. South India Pictures Ltd. [1956] 29 ITR 910 (SC) was whether the transaction resulting in a receipt affected the trading structure of the assessee or merely affect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally to cripple the whole structure of the recipient's profit-making apparatus, involving the serious dislocation of the normal commercial organisation and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilisation of a capital asset and is, therefore, a capital and not a revenue receipt. Accepting this as a general principle G.S.A. Wheatcroft writes in his British Tax Encyclopaedia, volume I, at page 1250 : Except where the compensation can be regarded as capital on this basis, the normal rule is that compensation for the non-performance of a business contract is taxed on the same footing as the profits for the loss of which the compensation is paid. ... In order to establish that the compensation on termination is a capital receipt, it appears necessary to show that the rights and advantages surrendered are such as to destroy, or materially to cripple, the whole structure, of the recipient's profit-making apparatus. One way of distinguishing capital from revenue receipts is to take the classical economists' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng agency does not affect the business, for the dealer is left free to carry on the business, in respect of other agencies or the agencies constitute his stock-in-trade. In the case of Kettlewell Bullen and Co. Ltd. ( supra) it was pointed out at page 275 that compensation for loss of one of several agencies is income and at page 280, that when an assessee's business consists of acquiring agencies and dealing with them compensation for termination of one may be a revenue receipt and that the test is whether the agency was in the nature of a capital asset or only a part of the stock-in-trade. In the case of Wiseburgh ( supra) Harman J. said at page 191 that if an assessee had carried on no business other than his agency... and they provided his sole work, it might well be that its loss would have been the loss of a capital asset... if it is his entire livelihood one might say that that is the man's capital asset. He held that Wiseburgh's business structure was not affected by the wrongful termination of one agency agreement because he had other agencies from time to time and carried on business as an agent, and one of the incidents of such business is that one agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the partnership affected its trading operation and not its trading structure in the language of Shah J. in the case of Kettlewell Bullen Co. Ltd. 's case (supra) There is a distinction between the existence of a business and the carrying on of a business similar to the distinction between the existence of jurisdiction and the exercise of jurisdiction ; it was pointed out by the Supreme Court in the case of Kettlewell Bullen Co. Ltd. ( supra). A contract entered into by a dealer in certain goods for buying or selling the goods from, or to, another person is a contract entered into in the course of carrying on the business and is not the business itself. Any profit made out of such a contract or any compensation received for wrongful termination of it is a revenue income and not a capital receipt. A managing agency is said to be different in nature from a contract, but merely because it is different compensation received for termination of it is not always a capital receipt. Even the compensation for wrongful termination of a contract is not always a revenue income. It is a capital receipt if the entering into the contract is the sole business or if the contract is te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts from exploiting the managing agency of the Swadeshi Cotton Mills Co. Ltd. Normally receipt for loss of a capital asset is a capital receipt and that for loss of a revenue income is a revenue income : vide the cases of Kettlewell Bullen Co. Ltd. 's case (supra) and Van den Berghs 's case (supra). In Kelsall Parsons Co. Ltd. v. Commissioners of Inland Revenue [1938] 21 Tax Cas. 608 an agency contract of Kelsall Parsons Co. doing business of acting as an agent of manufacturers was held to be incidental to the normal course of its business and compensation received by it for termination of it one year before the date of its expiry, as a surrogatum for one year's profits and, therefore, taxable. In Short Bros. Ltd. v. Commissioners of Inland Revenue [1927] 12 Tax Cas. 955 compensation received for cancellation of a contract entered into by Short Bros. Ltd. for building two steamers was held to be a revenue income. Rowlatt J. said that it was in no material sense compensation for not being allowed to make its profit and was simply a receipt, in the course of a going business, from that going business-nothing else (page 968). Lord Hanworth M.R., on appeal, approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is a revenue income. The contract of partnership was held to have been entered into in the ordinary course of the business and to have not formed the structure of the profit-making apparatus. In the instant case, the Appellate Assistant Commissioner has recorded the finding of fact that the contract of partnership between the assessee and the Jaipurias was a normal contract in the course of the carrying on of the money-lending and share investment business of the.... firm. The case of Kettlewell Bullen Co. Ltd. (supra) in which the compensation was held to be capital receipt is distinguishable because we are not concerned here with compensation for wrongful termination of any managing agency agreement or even any contract and the firm never acquired any managing agency and never received any compensation on account of its termination. The Supreme Court itself emphasised a special circumstance which existed in that case, namely, that the compensation was received by the assessee not from the company with which it had entered into the managing agency agreement but from a third person, who intended to take its place as a managing agent. The Supreme Court treated the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership was identifiable with the business of the partner and, therefore, the price was price of a share in the business. In V. Rangaswami Naidu v. Commissioner of Income-tax [1957] 31 ITR 711 and A.K. Sharfuddin v. Commissioner of Income-tax [1960] 39 ITR 333 compensation received by a partner for relinquishing his share in the partnership from the surviving partners was held to be a capital receipt. In Sharfuddin's case (supra) Rajagopalan and Ramachandra Iyer JJ. merely followed Rangaswami Naidu 's case (supra)to which Rajagopalan J. was a party. In the case of Rangaswami Naidu's case (supra) it was laid down that a share in a partnership is a capital asset within the meaning of section 2(4A) of the Income-tax Act. This decision is relevant only when we have to consider section 12B and not when we have to consider whether compensation paid for relinquishment of a share in a partnership is a capital receipt or a revenue income. I would, therefore, hold that the amount of ₹ 35 lakhs and odd received by the firm was a revenue income and not a capital receipt and answer question No. 1 in the affirmative. Questions Nos. 2 and 3 do not arise in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g authority against the decisions of the Income-tax Officer ; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal............. but.... in the sense that once the appeal is before him he can revise not only the ultimate computation.... but he can revise every process which led to the ultimate computation.... he is entitled to revise the various decisions given by the Income-tax Officer.... and also the various incomes or deductions which came in for consideration... In Commissioner of Income-tax v. McMillan Co. [1958] 33 ITR 182 (SC) the Supreme Court held that an Appellate Assistant Commissioner can apply the proviso to section 13 of the Act even though it has not been applied by the Income- tax Officer. The disputed amount was received on October 17, 1946, the assessment year was 1948-49, the Income-tax Officer passed the assessment order on October 23, 1951, and the Appellate Assistant Commissioner disposed of the appeal on March 9, 1956. It was contended that the Appellate Assistant Commissioner could not tax the disputed amount after the expiry of four years, but there is no such limit on his power. The period of four years i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the doctrine of substance. Where two different acts producing the same effect can be done lawfully, the parties have the right to decide which of them to do and if they purport to do one, they cannot be deemed to have done the other, and certainly not on the ground that by doing the former they escape a statutory obligation. If by doing the former they escape a statutory obligation to which they would have been subject if they had done the latter it is the fault of the legislature, inasmuch as it imposes an obligation on the doing of one act and not on the doing of the other (so that there is a temptation to do the latter) or does not prohibit the latter. This may be called the doctrine of legal form. Here the firm could either relinquish its share in favour of the surviving partners or sell it to them ; both the acts could be done lawfully. If it had sold it there would be a sale within the meaning of section 12B but as it merely relinquished it there was no sale. According to the theory of legal form it could not be deemed to have sold its share so that the sale price could be taxed as a capital gain. There is no question of applying the doctrine of substance because the act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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