SUPREME COURT OF INDIA

Before:- K.S. Hegde and A.N. Grover, JJ.

Civil Appeal No. 1746 and 2022 of 1968. D/d. 12.8.1971.

C.I.T., U.P., Lucknow - Appellant

Versus

Gangadhar Baijnath, General Gang, Kanpur - Respondent

Income Tax Act, 1922, Section 66 - Capital Receipt or Revenue Receipt - Under the agreement the assessee had given up its selling agency right as well as the shares in the managing agency etc. right - Tribunal starting the case and making a reference without considering the implications of important clauses of the agreement - Tribunal called upon to submit Supplementary statement of case.

[Paras 4 and 5]

ORDER

K.S. Hegde, J. - These are connected appeals brought here on the strength of certificates granted by the High Court of Allahabad. The High Court was requested to give its opinion on three of the questions herein below noted:

'(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 10 of the Income Tax Act?

(2) Whether it was competent to the Appellate Asstt. Commissioner to invoke the. provisions of Section 122 for the assessment of Rs 35,01,000 when the Income Tax Officer had assessed the amount under Section 10 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 12B of the Income Tax Act?'

2. The High Court answered Questions 1 and 2 in favour of the Revenue and Question 3 in favour of the assessee.

3. The controversy in this case is as to whether the payment of Rs 35,01,000 made to the assessee under agreement dated October 7, 1946 between the Jaipuria group and the assessee group, is a capital receipt or a revenue receipt. The Tribunal has come to the conclusion that the said receipt was a capital receipt. But the High Court had disagreed with that view. Under the agreement the assessee had given up its selling agency right as well as the shares in the managing agency etc. right. Clause 9 of the agreement provided as follows:

'It is agreed that one or other of the Bagla or Jaipuria groups shall retire from the said partnership with effect from 6th October, 1946. The continuing group shall pay to the retiring group their shares of the capital and interest thereon and compensation which shall include the price of goodwill and the share of the retiring partner in the profits of the firm up to 5th October, 1946. The question as to which 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 auction 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 Mr B.P. Khaitan, Solicitor of Calcutta. Only partners shall be entitled to attend the auction. Rai Bahadur Rameshwar Prasad Bagla and Smt 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 firm and the other group 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:

(a) The amount of capital contributed by the retiring group with interest calculated at the rate of 4�%.

(b) And compensation money ascertained as aforesaid.'

4. The implication of this clause does not appear to have been considered by the Tribunal. As seen from the terms of the agreement, four different aspects were required to be considered by the Tribunal:

(i) 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.

(ii) 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.

(iii) 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.

(iv) The agreement says that the compensation includes 'the price of goodwill and the share of the retiring partner in the profits of the firm up to 5th October, 1946.

(a) Was there any goodwill, if so what was its value and

(b) what part of the compensation received by the assessee as can be attributed towards the profits earned by the association of persons calling itself M/s Bagla Jaipuria company uptil 5th October, 1946.'

5. These aspects have not been considered by the Tribunal in arriving at its findings. Hence it is necessary to call upon the Tribunal to submit a supplementary statement of the case on the points mentioned earlier. The Tribunal will now submit a supplementary statement of case within six months from this date.