V.S. Desai, J.
1. This is a reference made by the Income-tax Tribunal to this court under section 66(1) of the Indian Income-tax Act at the instance of the assessee.
2. The assessee carried on his business in the name and style of Milkhiram Brothers. His business consisted of imports and sale of silk goods like nylons and parachute silk and other types of luxury articles like crockery, etc. On the 29th of October, 1946, the assessee made an offer of Messrs. Tata Aircraft Limited of purchase from them a whole lot of parachutes on certain terms and conditions as contained in the said letter of offer. Some of the terms of this offer were that the purchase price was to be Rs. 95,00,000; deposit of Rs. 5 lakhs was to be made by the purchaser and delivery of the goods purchased was to be completed by the 31st January, 1947. In anticipation of the contract the purchase of parachutes materialising, the assessee entered into an arrangement with three financiers, Messrs. Nathmal Nihalchand, Pokhraj Hirachand and Hiralal Hargovindas. This arrangement was as contained in the letter written by the assessee to Messrs. Nathmal Nihalchand and Pokhraj Hirachand on the 31st of October, 1946. The letter stated that the assessee was agreeing to purchase about 1,29,000 parachutes from Messrs Tata Aircraft Limited in partnership on the terms as stated thereafter. Under these terms Messrs. Nathmal Nihalchand and Pokhraj Hirachand were to pay Rs. 10 lakhs as deposit towards the transaction, which was to be paid to Messrs. Tata Aircraft Ltd. as deposit and they were to be given a net profit share of nine annas in a rupee in the transaction and the balance was to go to the assessee. They were not to be responsible for any loss in the transaction and the assessee was to be wholly responsible for the same. Messrs. Nathmal Nihalchand and Pokhraj Hirachand also were entitled to withdraw after the acceptance of the goods if they so chose and they were in that event to take 5 per cent. commission on the entire value of the goods. They were not to invest more than 10 lakhs in the transaction and on the 10 lakhs paid by them they were to get interest at 6 per cent. per annum and the first moneys received from the transaction were to be paid to them until the money invested by them was realised; that all the goods received under the contract were to be made security for the moneys advanced by Messrs. Nathmal Nihalchand and Pokhraj Hirachand and the goods were to be sold by mutual consent; that a joint account in the Dena Bank was to be opened and all the rights and powers in respect of that account were to be of Nathmal Nihalchand and Pokhraj Hirachand; and the account was to be operated by joint signature. On the first of November, 1946, Messrs. Tata Aircraft Limited wrote to the assessee offering their terms for the sale of 1,28,419 parachuted from the lot which the assessee had offered to purchase by his letter of the 29th of October, 1946. The price stated in these terms for the goods agreed to be sold was Rs. 93,50,000; the deposit required to be made was Rs. 10 lakhs; the delivery was to be completed by the 31st of January, 1947, and if not completed within that time, the time was agreed to be extended by a further period of two months provided storage charges of Rs. 5,000 per month were paid for the period of extension. The purchase price was to be paid in three instalments : the first by the 30th of November, 1946, the second by the 31st of December, 1946, and the balance by the 31st of January, 1947. The assessee agreed to the terms proposed by Messrs. Tata Aircraft Ltd. and by his letter of 1st November, 1946, concluded the contract and asked them to appropriate the sum of Rs. 10 lakhs which he had already deposited with them as deposit as and by way of earnest money towards the contract under clause 4 of the terms and conditions contained in their letter. It appears that it was thereafter agreed between the assessee and the financiers that the arrangement entered into between them on the 31st October, 1946, should be cancelled in view of the assessee having agreed to transfer the benefit of the agreement which he had made with Messrs. Tata Aircraft Ltd. in favour of Messrs. Pokhraj Hirachand by receiving a sum of Rs. 3 lakhs and having further agreed to have the name of Messrs. Pokhraj Hirachand substituted for his name in the contract made by him with the Tata Aircraft Ltd. Accordingly, on the 13th of November, 1946, the three financiers, viz., Nathmal Nihalchand, Pokhraj Hirachand and Hiralal Hargovindas, gave to the assessee a letter recording that in consideration of the assessee having agreed to transfer the benefits of the agreement made by him with Messrs. Tata Aircraft Ltd., for purchase of parachutes at their request, they had cancelled the arrangement arrived at between them and the assessee and recorded in the assessee's letter addressed to them of the 31st October, 1946. The letter further stated that since the assessee had agreed that the sum of Rs. 10 lakhs which had been paid by them to the assessee and which the assessee had deposited in pursuance of the agreement of purchase with Messrs. Tata Aircraft Ltd. was to be handed over to Messrs. Pokhraj Hirachand by the Tata Aircraft Ltd. and that they had no claim for the said amount against the assessee. In pursuance of this new arrangement, the assessee wrote to the Tata Aircraft Ltd. requesting them to substitute the name of Messrs. Pokhraj Hirachand for his name in the contract for the purchase of the parachutes on certain terms and conditions as stated in the said letter. This letter was endorsed by Messrs. Pokhraj Hirachand signifying their willingness to be substituted as the purchasers of the parachutes in the said contract. The Tata Aircraft Ltd. agreed to the substitution of the name of Messrs. Pokhraj Hirachand by their letter of the 14th of November, 1946, and informed the assessee that they would accept Messrs. Pokhraj Hirachand as purchasers of the parachutes on the terms and conditions set out in the assessee's letter in that connection. Thereafter on the 22nd of November, 1946, a partnership deed was executed between six partners including Nathmal Nihalchand, Pokhraj Hirachand and Hiralal Hargovindas as the director of Messrs. Shapoorji & Co, Ltd. (a private limited company) and three others. This partnership took over the contract of purchase of the parachutes entered into by Messrs. Pokhraj Hirachand. In the assessment of the assessee in the assessment year 1947-48 for the accounting year ending on the 31st of March, 1947, the assessee in his returns had not shown the sum of Rs. 3 lakhs or any other sum received by him from Messrs. Pokhraj Hirachand they claimed a deduction of Rs. 3 lakhs in their assessment being the payment alleged to have been made by them to the assessee under the arrangement relating to the transfer of the benefits of the contract of the assessee with the Tata Aircraft Limited for the purchase of parachutes. The deduction was not allowed by the income-tax authorities on the ground that it was a capital payment. In the appeal before the Tribunal, however, the Tribunal held in the place that only a payment of Rs. 1,87,000 had been proved to have been made by Messrs. Pokhraj Hirachand to the assessee and that the said payment could be allowed to be deducted as the cost of the goods purchased.
3. Now, the income-tax authorities having learnt that the assessee had received a sum of Rs. 3 lakhs from Messrs. Pokhraj Hirachand the assessment of the assessee for the assessment year 1947-48 was reopened under section 34 of the Indian Income-tax Act on the ground that the assessee's said income of Rs. 3 lakhs had escaped assessment. The assessee contended before the income-tax authorities that he had not received the amount of Rs. 3 lakhs. He also contended that it was not a receipt of income earned in the course of business. It was contended by him before the Income-tax Officer that the receipt, if any, was a casual and non-recurring one and was exempt under section 4(3)(vii) of the Act. His contentions were negatived by the Income-tax Officer and the amount of Rs. 3 lakhs was held to be income from the business of the assessee and brought to tax. In the appeal before the Appellate Assistant Commissioner, the same contentions were raised by the assessee and it was also further argued that the transaction of the assessee being merely a transfer of the benefits of the agreement was really a sale of the right to carry on the business and, therefore, the amount received by the assessee was for the sale of the source of his business and as such it was not an income receipt. The Appellate Assistant Commissioner did not accept any of the contentions raised by the assessee and dismissed the appeal. In the appeal before the Tribunal, the Tribunal held that the assessee had only received Rs. 1,87,000 and not Rs. 3 lakhs as held by the department. It further held that this amount, which the assessee received, was his profit from a business venture and was, therefore, income received by the assessee, which was liable to income-tax. In view of these conclusions, the Tribunal allowed the assessee's appeal in part and directed the Income-tax Officer to treat the sum of Rs. 1,87,000 as the income of the assessee, which was subject to tax. On an application made by the assessee under section 66(1) of the Indian Income-tax Act, the Tribunal drew up a statement and referred to this court the following question :
'Whether on the facts and circumstances of the case the receipt of Rs. 1,87,000 in the hands of the assessee is a revenue receipt and liable to income-tax ?'
4. Mr. Kolah, learned counsel for the assessee, has argued that the sum of Rs. 1,87,000 received by the assessee could not be regarded as an income receipt. He has argued that the agreement, which the assessee had entered into with the Tata Aircraft Ltd., was a capital asset or a source of possible income. What was transferred by the assessee was not the goods, which he had purchased under this contract, because no goods were actually purchased by the assessee under the said contract. What he had transferred to Messrs. Pokhraj Hirachand was the benefit of the agreement, which, in its working out, was to produce profits. The transfer of the benefit of the agreement, therefore, was a transfer of the benefit of the source of income and was, therefore, a transfer of a capital asset. According to Mr. Kolah, therefore, the amount of Rs. 1,87,000, which the assessee got for disposing of the source of his income, was a capital receipt and not a revenue receipt. He has, in support of his submissions, invited our attention to a decision of the Supreme Court in E.D. Sassoon & Co Ltd. v. Commissioner of Income-tax and a decision of this court in Commissioner of Income-tax v. Asiatic Textile Co. Ltd. These two decisions related to the managing agency or selling agency rights and it was held in these cases that a managing agency or a selling agency was a source of profit and, therefore, a capital asset. Mr. Kolah has argued that the agreement entered into by the assessee with the Tata Aircraft Limited was a source of income as a managing agency or selling agency is and the consideration received by the assessee for the transfer of the benefit under that agreement was like the consideration received for the transfer of the rights and benefits of a managing or selling agency, a capital receipt.
5. We are not impressed by this argument of Mr. Kolah. In the present case the assessee was a businessman dealing in articles including parachute silks. His contract with the Tata Aircraft Limited was a contract for the purchase of stock-in-trade for the business, which he was carrying on. It was, therefore, an ordinary contract entered into by him in the course of his business although the magnitude of this contract was a large one. What he received from Messrs. Pokhraj Hirachand when he transferred the benefit of this contract was a receipt in respect of one of the contracts, which he had entered into the ordinary course of his business. In our opinion such a receipt could be regarded as only a trading receipt received by him. We may refer in this connection to the observations of the Supreme Court in the case of Commissioner of Income-tax v. Rai Bahadur Jairam Valji.
6. Their Lordships have observed :
'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 consists of a single act or a series of acts spread over a period.'
7. After having the considered the difference between a payment made as compensation for the termination of an agency and an amount paid as a solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business, their Lordships observed :
'The agency right can be held to be of the nature of a capital asset invested in business. But that cannot be said of a contract entered into in the ordinary course of business and such a contract is part of the business itself, not anything outside it as is the agency, and pay receipt on account of such a contract can only be a trading receipt.'
8. In our opinion the cases which Mr. Kolah has cited relating to the managing agency or selling agency will have no application to the present case and the agreement, which the assessee had entered into with the Tata Aircraft Limited, cannot be considered on the same basis as the contract of a managing agency or the selling agency. As we have pointed out, it is a contract entered into by the assessee in the ordinary course of his business of dealing in parachute silks and the amount which he has received by transferring the benefit of that contract in favour of Pokhraj Hirachand is nothing but a trading receipt.
9. Mr. Kolah has then argued that, on the facts and in the circumstances of this case, the amount which the assessee received from M/s. Pokhraj Hirachand was not merely a receipt in respect of the transfer of the benefit of the contract but also for relinquishing his rights to participate in the profits of the partnership from which he withdrew. According to Mr. Kolah, the sum which a partner receives in consideration of the relinquishment of his right to participate in the profits of the partnership is a sum which he receives in consideration of a capital asset and is not a receipt of income. Mr. Kolah complains that this important aspect of the case has been overlooked by the Tribunal. He points out that it is undisputed that after having made an offer to the Tata Aircraft Limited, the assessee in anticipation of the materialisation of the contract, entered into an agreement with M/s. Nathmal Nihalchand, Pokhraj Hirachand and Hiralal Hargovindas. This agreement, which took place on the 31st of October, 1946, is a partnership agreement between the assessee and the three financiers and brought into existence a partnership of these four persons for the deal which was to be entered with the Tata Aircraft Limited. No doubt, the contract with the Tata Aircraft Limited was entered into in the name of the assessee, but in view of the partnership arrangement of the previous day, it was a transaction entered into by the assessee on behalf of the partnership. Subsequently, on the 13th of November, 1946, the assessee withdrew from the said partnership leaving the deal to be worked out by the other three partners. It is for this withdrawal from the partnership, which incidentally also required him to take steps to transfer the contract which had been entered into in the individual name of the assessee with the Tata Aircraft Ltd. in the name of M/s. Pokhraj Hirachand, that he had agreed to receive a sum of Rs. 3 lakhs. The amount, therefore, was received by a partner for his going out of the partnership and relinquishing his rights to participate in the profits of the said partnership. Since this was the effect of the arrangements that had taken place between the parties first on the 31st of October, 1946, and subsequently, on the 13th of November, 1946, it must be held that the amount received by the assessee was not merely a receipt in respect of a trading transaction in the ordinary course of his business, but in respect of his forgoing his rights to profits in the partnership.
10. In our opinion this argument of Mr. Kolah also fails to impress us. In the first place the argument in the form in which it is presented before us does not appear to have been advanced in the appeal before the Tribunal. Secondly, it is difficult merely from the letter written by the assessee to M/s. Nathmal Nihalchand and Pokhraj Hirachand on the 31st October, 1946, that an agreement such as is required to constitute a partnership in law had been arrived at between the parties. Thirdly, whatever may have been the nature of the arrangement of the 31st October, 1946, the said arrangement was abandoned and a new arrangement arrived at under which the assessee was agreed to be paid a sum of Rs. 3 lakhs for transferring the benefit of the contract which he had entered into in his individual capacity with the Tata Aircraft Limited and for agreeing to have the name of Pokhraj Hirachand substituted for his name as purchasers under the said contract.
11. Mr. Kolah says that all the conditions necessary to constitute a partnership under the law are satisfied by the terms of the said arrangement, contained in the assessee's letter of the 31st October, 1946, which in terms refers to the arrangement as partnership. If the arrangement which the parties have chosen to call a partnership does in law satisfy the requirements of a partnership, it will not be possible to hold it otherwise and say that it was merely a financial arrangement. There is in this arrangement, says Mr. Kolah, an agreement to share the profits. There is also the element of mutual agency between the partners since it is provided that the goods would be sold by mutual consent of the partners and the joint back account would be operated on the joint signatures of the parties. The other terms of the agreement that some of the partners have not been made liable for the loss to be suffered or that they had only to produce a certain amount of capital and not more or that further term that interest was to be paid on the sums advanced by them are not terms from which the agreement could be said to be not one of partnership. It is perfectly open to the parties, says Mr. Kolah, to agree to such terms as they like; what is essential in order that the legal relationship should be a partnership is that there should be an agreement to share the profits and each partner should be the agent of all other partners.
12. Now, in the first place, an agreement of partnership will require an agreement between all the partners. The agreement, therefore, has to be agreed to by each one of the partners. What we find in the letter, which the assessee has written on the 31st of October, 1946, is that he agreed to purchase the goods in partnership on the terms and conditions as contained in his letter. It does not show whether these terms were agreed to by the others in the proposed partnership, so that a partnership could in fact be said to have come into existence as stated in this letter. What can at best be said in favour of Mr. Kolah is that a partnership arrangement had been proposed by the assessee. Reading the terms of the proposed arrangement it seems to us that the terms were proposed by the assessee to the financiers because he was short of funds for entering into the contract with the Tata Aircraft Limited and was prepared to offer very favourable terms to the financiers, agreeing to take upon himself an onerous burden. The terms proposed in this arrangement are undoubtedly very favourable and advantageous to the other three persons than to the assessee for the sole reason that they were producing the sum of Rs. 10 lakhs necessary to be kept as a deposit with the Tata Aircraft Ltd. for the proposed deal with them. The arrangement as contained in this letter does appear to us more like an arrangement arrived at between a person in need of money and his financiers. It appears, however, that although the assessee in his letter of the 31st of October, 1946, has styled it as a partnership, the letter of the financiers of the 13th of November, 1946, to the assessee does not refer to it as a partnership but merely an arrangement. The said letter slab does not speak of the contract which the assessee had entered into with the Tata Aircraft Limited as a contract entered into by him on behalf of the partnership but refers to it as a transaction of the assessees. It also speaks of the deposit, which had been made in connection with that transaction as a deposit of the assessee made with the money which had been paid by the financiers to him. As we have already pointed out, there is nothing to show that the proposed agreement of 31st of October, 1946, had been in the same terms agreed to by the other three partners and a partnership had, in fact, come into existence. Secondly, assuming that a partnership arrangement had been arrived at between the assessee and the three financiers on the 31st of October, 1946, it appears that the said arrangement had been agreed to be cancelled between them and some other different arrangement was agreed to be brought about. This is clear from the letter of 13th November, 1946, and the action taken subsequent thereto by the parties. By this letter of 13th November, 1946, the three financiers stated that they had cancelled the arrangement of 31st October, 1946, because the assessee has agreed to transfer the benefits of the agreement entered into by him with the Tata Aircraft Ltd. In pursuance of this fresh arrangement, the assessee on the 13th of November, 1946, wrote to the Tata Aircraft Ltd. to substitute the name of M/s. Pokhraj Hirachand for his name in the contract of purchase of the parachutes and Messrs. Pokhraj Hirachand endorsed the said letter signifying their consent to the said transfer. Messrs. Tata Aircraft Ltd. agreed to the substitution and accordingly the contract for the purchase of the parachute was transferred by the assessee to Messrs. Pokhraj Hirachand. It is undisputed that the assessee agreed to receive Rs. 3 lakhs from Messrs. Pokhraj Hirachand. In the partnership deed, which was executed between the six persons on the 22nd of November, 1946, it was stated in the preamble that Messrs. Milkhiram Bros., who had made the contract to purchase the parachutes from Messrs. Tata Aircraft Ltd. on the 1st November, 1946, in their own name, i.e., Messrs. Milkhiram Bros., had transferred the same subsequently in the name of Messrs. Pokhraj Hirachand of Champa Galli, Bombay, on payment of Rs. 3 lakhs by Messrs. Pokhraj Hirachand to Messrs. Milkhiram Bros. It will be noticed that there is no reference in this preamble to the partnership between the assessee and the three financiers of the 31st of October, 1946. In our opinion, on the facts and circumstances that are disclosed on the record before us, on the 13th November, 1946, the position between the parties was that any previous arrangement between them whether by way of partnership or otherwise was to be treated as cancelled. The contract with Messrs. Tata Aircraft Ltd. was treated as a contract entered into by the assessee with the Tata Aircraft Ltd. and the benefit of the same was transferred by the assessee in favour of Messrs. Pokhraj Hirachand for a consideration of Rs. 3 lakhs. In the view that we take of the matter, therefore, the sum of Rs. 1,87,000, which has been found by the Tribunal as having been received by the assessee was a sum received by the assessee for transferring the benefit of a contract entered into by him in the ordinary course of his business. The said sum had nothing to do with his relinquishment for forgoing the right to participate in the profits of any partnership.
13. In our view, therefore, the Tribunal was right in taking the view that the sum of Rs. 1,87,000 was an income of the assessee liable to income-tax.
14. The result, therefore, is that our answer to the question, which has been referred to us in the present reference, must be in the affirmative. The assessee will pay the costs of the department.
15. Reference answered in the affirmative.