# COIVIMISSIONER OF INCOME TAX U.P. LUCKNOW v. M/S. GANGADHAR BAIJNATH GENERAL GANG, KANPUR

- **Citation:** [1973] 1 S.C.R. 928
- **Court:** Supreme Court of India
- **Decided:** 1972-08-23
- **Case number:** C. A. Nos. 1746 .and ' 2022 of 1968
- **Bench:** K. S. Hegde, P. Jaganmohan Reddy, H. R. Khanna1
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/coivimissioner-of-income-tax-u-p-lucknow-v-m-s-gangadhar-baijnath-general-gang-5744
- **Pages:** 11

## Headnote

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 managing 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 agreement 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 represente-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 partnership ,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
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E
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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 appellantfirm 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 selling agency. [937F-G]
·
·c
(bf As.sum.in~ that .indirectly the seilin:::: agency right of the appc1li:! 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 activity 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

## Text

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 managing 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 agreement 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 represente-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 partnership ,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 appellantfirm 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 selling agency. [937F-G]
·
·c
(bf As.sum.in~ that .indirectly the seilin:::: agency right of the appc1li:! 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 activity 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. 28B, and Kettlewell Bullen and Co. Ltd. v. CommisJioner of Income-tax Calcutt_a, 53 I.T.R. 261, followed.·
CIVIL APPELLATE JURISDICTION: C. A. Nos. 1746 .and
' 2022 of 1968 ..
Appeal by certificate from the judgment and order dated
""
E
October 22, 1965 of the Allahabad High Court in Income-tax
.. Reference No. 286 of 1960.
·
-... ·.
•
S. T. Desai and S. Mitra, B. B. Ahuja and B. D. Sharma for
the appellant. (in C.A. No.1746 of 1968.)
H. K. Puri, for the respondent (in C.A. No. 1746 of 1968.)
F
1-J. K. Puri and S. K. Dl1ingra, for the. appellant (in C.A.
No. 2022 of 1968). ·
·
· S. T. Desai, S. Mitra, 0. P. Malhotra and B. B. Ahuja and
B. D. Sharma, for the responden~ (in (::.A. No.- 2022/68).
The Judgment of the Court_ was delivered by.
G
Hegde, J. These are appeals by certificate from the decision
of the High Court of Allahabad in a Reference under s. 66 ( 1) of
the Income-tax Act, 1922 (to be hereinafter referred to as the Act) .
.
·~
·-
._.....
The Income·tax Appellate Tribunal (Allahabad bench) referred to the High Court for its opinion the following questions :
11
'' ( 1) whether on the facts and in the circumstances of
the case, the receipt of,Rs. 35,01,000/-
constituted income liable to tax under section 1 0 of
the Income-tax ~ct ?
1 0-LI72Sup c l/73
930
SUPREME COURT REPORTS
r 1 973] 1 ;;,c. It.
( 2) Whether it was competent to the Appellate
Assistant Commissioner to invoke the provisions of section 12-B for the ·assessment of
Rs. 35,01,000/- when the Income-tax Officer had
assessed. the amount under Section I 0 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
12-B of the Income-tax
Act?''
·
The High Court answered the first and the second question
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 s. 12-B 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 frt··n the
statement of case are these : The assessee is a partnership finn
carrying on business. of financing, moneylending, selling agencies
and the like pursuits. The relevf!nt assessment year is 19-1&-49,
the concerned accounting year ending October, 194 7. On April
29, 1946 the three partners of the assessee firm entered into an
agreement w1th Gajadhar Jaipuria, R. S. Puran Mal Jaipuria and
Mangloo Ram Jaipuria.
The tenns of the agreement as fcund by
the Tribunal, were :
( 1 ) That the partners should acquire on joint
account, the shares of the Swadeshi Cotton Mills
Co. Ltd. and Eland Ltd.
(2) The partners of the assessee firm
(who will
hereinafter be referred to as the 'Bagla Group')
·and the remaining three partners (who will hereinafter be referred to as the "Jaipuria Group")
A
B
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E
F
were to invest the amount required to acquire
G
the shares in question equally and all benefits
including the managing agency, selling agency,
quota rights should be enjoyed in joint account
but the selling agency which was in the hands
of the assessee firm should continue to be in its
hands tiJl the Dussebra of that year.
Similarly
H
the quota rights which were in the hands of the
J aipuria Group should continue in the hands of
that Group till the Dussehra of that year-
I .
A
B
.c.I.T. v. GANGADHAR (Hegde, 1.).
( 3) Neither party should acquire any share in his
separate account or have any interest directly or
indirectly to the. exclusion of the other.
931
Till the date of the formation of tbis partnership, the assessee
firm consisting of "Bagla Group" were the selling agents of the
Swadeshi Cotton Mills Co., Ltd. The "Jaipuria Group" which
was a different firm were enjoying some quota· rights in that mill.
In pursuance of the agreement ~bove referred to the new partner~
ship "Bagla-Jaipwia and Co." purchased shares of the Swadeshi
Cotton Mills Co. Ltci For that purpose both the groups oontri~
C
buted equally. But no partnership deed as such was entered into
by the partners.
<;>n July 16, 1946, an agreement was entered
into between the Swadeshi CottQn Mills Co., Ud. and the Bagla
Jaipuria and Co. appointing. the latter as the managing agents of
tho Company for a period of twenty years. On October 7, 1946,
allother agreement was entered into by, the partners of the Bagla
1aipwia and Co. whereby it was decided that one of the two
D
Groups woUld retire. from" the business with effect from October 6,
1 946 subject to the terms and conditions specified in that agreement. lbe relevant clauses of that agreement read thus :
E
F
G
H
"'It is agreed that one or other of the Bagla or Jaipuria groups shall retire from the said partnership' with
effect from 6th Ocr'ober, 1946. The continuing grOl!P
shall pay to the retiring group their shares of the ~pital
and interest thereon and compensation which shall
include the price of goodwill' and- the share of the retir:-
ing partner in the profits of the finn upto 5th October
1946. The question as to whiib 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 auctio.n 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 ~r. B. P. Khaitan, Solicitor
of Calcutta.
Only p~rtners shall be entitled to attend
auction: Rai 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
nominee.
The group offering to pay the highest compensation shall continue as partners in the finn and the
other gro~p 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:
932
SUP REM r:. COUl~T REPORTS
(1973] 1 S.C.R
(a ) The amount of capital contributed by the retiring
group with i11tcrest calculated at the rate of ·
4t%.
{b) And compensation money ascertained a5 aforesaid;· ~
ln the auction held in pur~uancc of this agreement the Jaipuria Group outbid the Bag1a Group.
Co~sequently
th~
Ba~a
Group retircll from the business on recc1pt of the fo110W11lf!
amounts:
Rs. 97, lJ ,699-on account of capital invc~tmcnt
Rs. 1,77,232-on account of intere'st on capital investnient and
Rs. 35,01,000-{)n account of compensa-tion as provided
in the agreement.
The Jaipuria Group paid those amounts to the .Bagla Group
on Octob~r 7 ~ 1946. A separate reccipt was executed by the
Bagla Gl'oup in respect of the receipt of Rs.
35~01,000/ -. That
receipt recites :
"Received (rom Seth Gajadhar J aipuria, Rui Sahib
Puranmull Jaipuria and Seth Mungturam Jaipuria the
sum of Rs. 35,01,000/- as solatium and compensation
for surrendering to the Jaipuria group our right) title and
interest in running concern of Bagla Jaipuria & C'). who
inter dlia were appointed the Managing agents of the
Swadeshi Cotton Mills Co., Ltd. for a period of twenty
years under an agreement dated 16th July, 1946 and,.
With expectation' of further renewals of like period."
The assessP.e firm resigned as selling agents with effect ftom
Cctober 5, 1946. Jaipuria group continued in ·the name and style
of Bag1a Jaipuria and Co.
In the course of the assessment for the assessment year 1948-49.
the Income-tax Officer brought to tax the sum of Rs. 35,01,000/-
as income. He overruled the objection of the assessee that it was
a compensation for giving up the managing agency right. Aggrieved
by tl1e decision, the assessee took up the. matter in appeal to the
Appellate Assistant Commissioner. The Appellate Assistant
Commissioner affirmed the decision of the Income-tax Officer. He
further held that the case alro fell within the scope of s. 12-B of
the Act.
Thereaft~r the assessee took up the matter in appeal to
the Income-tax Appellate Tribunal. It was contended before the
Tribunal that the receipt in question cannot be considered a~ income coming within s. 10 of the Act as the same was a capital
receipt. Ir was further contended that the Appellate Assistant
..
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G
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C.I.T. v. GANGADHA~ (Hegde, ].)
933
Commissioner had no competence to convert the assessment made
under s. 10 into one under s. 12-B and at any rate the receipt iA
questio.n does not come within the scope of s. 12-B. The Tribu ..
aal rejected the first two contentions_.
But it agreed with the
assessee that the receipt in question cannot be brought to tax
under s. 12-B. At- the instance of the assessee, the Tribunal
submitted for the opinion of the High Court questions 1 and 2
referred to earlier and at the instance of the Commissioner of
Jncoine-t~, 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 ~r~
tain 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 those rights ?
( 4) The agreement says that the compensation in·
eludes "the price of goodwill and the shar~ of
the retiring partner in the profits of the finn upto
5th October, 1946',.
(a) was. there any goodwill, if so what was it~
value and
(b) What part of the compensation received by
the assessee as can be attributed towardi
the profits earned by the association of persons calling itself M/s.
Bagl~ Jaipuria
Company uptill Sth October, 19 •&.
The Tribunal submitted the supplementary statement of ollSe
called for on November 24, 1971. Dealing with the first que&-
tion~ the Tribunal observed :
-
·
"It will thus be seen that compensation was paid by
lhe J aipuria Group to the Bagla Group (a) partly for
.the surrender of its share in the Managing. Agency
934
SUPREME COURT REPORTS.
[1973] 1 S.C.R
right, (b) partly for giving up its selling agency right
and (c) partly for the profits earned by the Bagla Group
upto 5th October, 1946. The.re i~, however, no material on the record on the basis of which it may be possible to split up the quantum of compensation in resp~ct
of each of the above three items at (a), (b) and (c).
Therefore, our answer to query No. ( 1) is. that the compensation was payable under the agreement dated
7-10-1946 not directly but by implication in respect of
the assessee's surrender of its share in the Managing
Agency right but it is not possible to determine the quantum for want of material on the point."
Dealing with point No. 2, the Tribunal's answer .is the same a~
of point No. 1. Dealing with point No. 3, the Tribunal observed
that the only other right given up by th~ assessee under the agree~
ment was the goodwill but there is no material on record on thebasis of which its value could be ascertained. On point No. 4(a).
the Tribunal observed :
"Regarding query
~No. (iv) (n), made by the
Supremt; Court, there was certainly, in our opinion
goodwill of the partnership firm· M.'s. Bagla Jaipuria &
Co. as it was appointed not only the Managing Agents
of a very big cotton mill for a period of 20 years in
1946, at a time when there was Government control
over cloth a.nd textile Mills and their managing agents
were making huge· profits, but had also t.he sole-selling
agency of the Co. viz. Swadeshi Conon Mills Ltd. The
goodwiJI of M/s. Bagla Jaipuria & Co., also included
besides, right to managing agency commission etc. the
selling agency of the Baglas, which they were holding
since 1911 and the quota rights of the Jaipurias, which
they had been holding since the quota system was introduced by the Central Government, during the Second
World War: There is, however, no material to value
the goodwill separately.~·
On pojnt 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
mare of is profit in the partnership firm of M/s. Bagla
Jaipuria & Co. fro1n 29-4-1946 to 5·10·1946 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 quesc
D
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G
C.I.T. v. GANGADHAR (Hegde, J.)
935
tion whether a pat1icular receipt is a capital or revenue is largely
a question of fact but often we come across border line caqes
which do present difficulties in arriving at a conclusion. As observed by this Court in Commissionet of lncame-tax, Nagpm' v.
R. B. Jairam Valji and Ors.(:.).-
"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
obscrvea by the highest aufr .. orities, it is not possible to
lay down any single test as infallible or any single crite~
don as decisive in the determination of the question,
which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have
to be taken into account in reaching a decision.
Vide
Van Den Berghs Ltd. v. Clark(2 ). That, however, i"
not to say that the question is one of fact, for, as observed in Dav;es (H. M. Inspector of Taxes) v. Shell Company of China Ltd.(a).
··these questions between capital and income, trading profit or no
trading profit, are questions which, though they may depend no
doubt to a very great extent on the particular facts of each case.
do involve a conclusion of law to be drawn from those facts.:'
As we are of opinion, for the reasons to be presently stated.
that the receipt of Rs. 35,01,000/- is an income from business and
as such was liable to be brought to tax under s. 10, we have not
thought it necessary to go into other two questions.
Before examining the legal position, it is .necessary to emphasise
certajn salient features of this case.
The new partnership named
Bagla Jaipuria and Co. is not a partnership of two finns.
Two
finns cannot join in a partnership. Really it was a partnership
consisting of six partners; three of whom were partners of one finn
and the other three partn~rs of another finn.
This new partnership came into existence on April 29, 1946. The3e partners did
not enter into a deed of partnership. This partnership took over
a:. managing agents of the Swadeshi Cotton Mills Co. Ltd. on Julv
16~ 1946. Three of the partners belonging to Bagla Group went
out of the partnership on October 6, 1946.
Though the three named members of the Bagla Group were
partners of the new firm, the benefit of the new partnership was to
enure to the old finn of which those three persons were partners.
(1) 35 l.T.R. 148.
(2) [1935] 3 I.T.R. (Eng. Cas.) 17.
(3) [1952] 22 J.T.R. (Supp.) t.
936
SUPREME COURT RBPORt'S
I
[1973] 1 S.C.lt.
That old finn not only continued to be in existence but continued
to carry on vanous ousmess activities. lt may be noted that the
firm Ragla J aipuria & Co. continued to be in existence. it con-
~inued to be the managing ag~nts of Swadeshi Cotton Mills. Co.
Ltd.
Its goodwill, tf any, was not parted with.
What really
happened was that three of the p.artners of that firm went out of
the partnership and for doing so they were paid Rs. 35,01,000/~
which sum also included the profits earned by the Bagla Jaipuria
& Co. from the date it came into existence, till the three partners
belonging to the Bagla Group went out of the partnership leaving
the partJ;lership firm intact. There is no dispute that the portion
of the compensation which represents past profits is a revenue re·
ceipt. The only question js whether the remaining portion was a
Revenue receipt or Capital receipt The remaining. portion of ~he
receipt purports to be compensation given to the three partner')
for giving up what are called (i) the managing agency rights (ii)
the selling agency rights and (iii) the goodwill. We shall fuat
take up the qu~stion relating to the goodwill and the managin!
agency rights.
It· was urged on behalf of tlle assessee that as a result of tAe
agreement dated October 7, 1946, the assessee finn parted witk
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 agreementis 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 capital asset.
Consequently compensation paid in respect
of the same must also be considered as capital receipt.
In our opinion the aforementioned arguments are fallacioui.
The managing agency rights vested With the Bagla J aipuria & Co.
Similar is the case so far as the gooowill is concerned assuming that
any goodwill had been built up by that time, Bagla Jaipuria & Co.
continues to be in existence. It had not parted with managin&.
agency rights nor its goodwill taken away. What ba~ happened
is that the partners representing the assessee firm in Bagla J aipuria
.& Co. had surrendered their rights in the partnership to the remaining partners and obtained certain payments for surrend~
their rights. This is not a case of parting with any agency. righti.
This is really a case of cancell~tion of a contract which· had beea
entered into in the ordinary course of .. business.. Such contract£
are lia~le, in the. ordinary course of business, to be altered or
tonnin.atod on terms· and any payment received in settlement of the
rights as a result of the rennination of the contract ·really repreA
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C.I.T. v. GANGADHAR (HegdeJ J.)
937
sents the profits which the assessee would have made had the contract been performed. As osberved by this Court in Jairam
V alji's case (supra) :
"when once it is found that a contract was entered
· into in the ordinary course of business, any compensation received for its termination would be a revenue
receipt, irrespective of whether its performance was to
consist of .a single act or a series of acts spread over a
period, and in this respect, it differs from an agency
agreement."
·
As seen earlier no deed of partnership had been entered into.
Therefore the same was tenninable at will.
Any of the· partners
of the firm could have brought the partnership to an end. Consequently the possibility of termination of a partnership of the
type with which we are concerned is inherent in the very course
of business.
The facts set out in the statement of case show that the assessee
finn had various business activities; one of its business activity was
to join Bagla Jaipuria & Co. to carry on certain business activitiee.
The assessee's. representatives by entering into that agreement wert
merely carrying on a· trading activity. Such being the case, it i5
not possible to hold that the compensation paid for the termination of the contract is a capital receipt.
It is not the case of the assessee that its oniy trading 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 BaglaJ aipuria · & Co. . This is not a right transferred under the
agree~
ment dated October 7, 1946. That right had been transferred
to Bagla Jaipuria & Co. even at the time the partnership wl6
fanned. On October 7, 1946, the assessee was no more the owner
or that selling agency. On that day it was an asset of BaglaJaipuria & Co. Hence the compensation paid can only relate to
the termination of the contract of partnership and not to the tran~
fer of the selling agency. Assuming. that agreement Qf 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 the
Bagla Jaipuria & Co., the assessee firm · with the aid of
Rs. 35,01,000/-.. received as compensation acquired controllicg
shares in two other companies namely the India United Mills Ltd.
and the Muir Mills Ltd. From this it is clear that the trading
938
SUPREME COURT REPORTS
[1973]1 s.c.~.
structure of the assessee firm was not affected.
It .merely replaced
one trading activity by another. In' Gil/anders Arbuthnot and Co.
Ltd. v. Commissioner of Income-tax, Calcuuae.>) this Court held
in the case of an assessee having vast array of business including
acquisition of agencies in the normal course of business, the determination of an individual agency is a normal incident not affecting or impairing its tradfug structure. In such cases the amount
received for the cancellation of an agency does not represent the
price paid for the loss of a capital asset; they were of the nature
of income.
In Kettlewell ]Julleun and Co. Ltd. v. Commissioner of Income-tax Calcutta(2), this Court after considering, various decisions rendered by the courts in U.K. and in this country about the
principles which govern the determinaJion of the nature of " ~m
pensation received on the tennination of an agency observed :
"On an analysis of these cases which fall on two
sirles of the dividing line, a satisfactory measure of con·
sistency in principle is disclosed. Where, on a consideration of the circumstances payment is made to compensate a person for canceUation of a contract which
does not affect the trading stn1cture of his busi-
· ness, nor deprive_ him of what in substance is his
source of income, tennination of the- contract being a
nonnal incident of the business and such cancellation
leaves him free to carry on his trade (freed from the
contract ~terminated) the receipt is revenue; where by
the cancellation of an agency the trading structure of
the assessee is impaired, or such cancellation results
in loss c-~ what may be re£arded as the source of the
assessee's income the payment made to compensate for
cancellation of the agency agreement is nonnally a
capital receipt."
For the reasons mentioned .above we hold that the entiru sum
of Rs. 35,01,000/- received by the assessee was a revenue receipt
assessable under s. 10.
In the result Civil Appeal No. 2022 of 1966 is dismissed
with costs.
On our indicating our tentative conclusion on the
first· question referred to the High Cpurt the
learne~ . SolicitorGeneral appearing for the revenue dtd not press Ctvil Appeal
No. 1746 of 1968. It is accordingly dismissed with no order
as to costs.
V.P.S.
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