1960 (10) TMI 95 - HC - Income Tax

Income from Rs. 35,01,000 receipt deemed taxable under Income-tax Act, not as capital gain. Commissioner wins.

Gangadhar Baijnath Versus Commissioner of Income-tax

Gangadhar Baijnath Versus Commissioner of Income-tax - [1966] 60 ITR 626 Issues Involved:1. Whether 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 for the Appellate Assistant Commissioner to invoke the provisions of Section 12B 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 the receipt of Rs. 35,01,000 was taxable under Section 12B of the Income-tax Act.Issue-wise Detailed Analysis:1. Whether the receipt of Rs. 35,01,000 constituted income liable to tax under Section 10 of the Income-tax Act:The primary issue was to determine whether the amount of Rs. 35,01,000 received by the assessee constituted income liable to tax under Section 10 of the Income-tax Act. The assessee, a firm engaged in financing, money-lending, and selling agency businesses, entered into a partnership with the Jaipuria family to acquire controlling shares in Swadeshi Cotton Mills. The partnership agreement stipulated that the assessee would retire from the partnership after receiving compensation of Rs. 35,01,000. The Tribunal held that the compensation was not income from business but a capital receipt. However, the court examined various precedents and legal principles, emphasizing that the nature of the business carried on by the firm was crucial. It was found that the firm's business included acquiring and selling managing agency rights for profit, thus making the receipt a revenue income. The court concluded that the amount received was a revenue income and not a capital receipt, answering the first question in the affirmative.2. Whether it was competent for the Appellate Assistant Commissioner to invoke the provisions of Section 12B 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:The second issue arose only if the first question was answered against the Commissioner. The court examined the powers of the Appellate Assistant Commissioner under Section 31 of the Income-tax Act, which allows the Commissioner to confirm, reduce, enhance, or annul the assessment or set it aside and direct the Income-tax Officer to make a fresh assessment. It was noted that the Appellate Assistant Commissioner could confirm the assessment on grounds other than those given by the Income-tax Officer. The court referred to several precedents, including Narrondas Manordass v. Commissioner of Income-tax and Commissioner of Income-tax v. McMillan & Co., which supported the broad powers of the Appellate Assistant Commissioner. The court concluded that it was competent for the Appellate Assistant Commissioner to invoke the provisions of Section 12B, answering the second question in the affirmative.3. Whether the receipt of Rs. 35,01,000 was taxable under Section 12B of the Income-tax Act:The third issue was considered only if the second question was answered against the assessee. The court examined whether the receipt of Rs. 35,01,000 constituted a capital gain under Section 12B. It was found that the relinquishment of the firm's share in the partnership was neither a sale nor a transfer and was not an exchange. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Provident Investment Company Ltd., which held that relinquishment is neither a sale nor a transfer under Section 12B. The court emphasized the legal distinction between retirement or relinquishment and sale, concluding that the firm's act of relinquishing its share could not be deemed a sale. The court answered the third question in the negative, stating that the receipt was not taxable under Section 12B.Conclusion:The court answered the three questions as follows:1. Yes, the receipt of Rs. 35,01,000 constituted income liable to tax under Section 10.2. Yes, it was competent for the Appellate Assistant Commissioner to invoke the provisions of Section 12B.3. No, the receipt of Rs. 35,01,000 was not taxable under Section 12B.The judgment emphasized the importance of the nature of the business carried on by the firm and the broad powers of the Appellate Assistant Commissioner in confirming assessments on different grounds. The ultimate result was in favor of the Commissioner, with costs assessed at Rs. 1,000 from the assessee.