1. The assessee is a limited liability company. Before the year 1947 the assessee used to carry on its business of a 'rolling mill' in the territory which now forms part of Pakistan. The assessee was a member of the Steel Rolling Mills Associations of India and was a receiving a quota of coal and steel form the Government of India. After the partition of India, the registered office of the assessee was shifted to Bombay. In Bombay the assessee had no factory of its own where it could take advantage of the quotas of steel and coal. The assessee, therefore, entered into an agreement of partnership with one K. R. Irani who had put up a factory in Bombay styled as New Era Iron & Steel Works, but who had himself no quota of steel and coal. Under the terms of the agreement the partnership was to continue so long as the quota system relating to steel was continued in the Dominion of India or till the expiry of the lease factory premises which ever was the later date. By clause 12 of the partnership agreement it was provided that the assessee, in consideration of taking K. R. Irani as partner in the partnership, was to receive a sum of Rs. 50 per ton all steel received by the partnership from the assessee. By clause 13 its was provided that all the quota of steel and coal that the assessee may receive from the Iron & Steel Controller, the Government of India, under the quota system that may be in force from time to time for steel re-rolling mills of the assessee at Bombay shall be utilized solely for the purposes of the business of the partnership. This partnership agreement was recorded on September 29, 1948. The terms of the partnership agreement was modified on September 9, 1954, by another agreement, and certain additional convenants were added thereto. By clause 5A it was provided that the benefit of all the factory land for which rent was being paid by the partnership shall belong wholly to the partnership even though the lease stool in the name of K. R. Irani : and by clause 5B it was provided that the benfit of the licence for supply of electricity which stood in the name of New Era Iron & Steel Works shall wholly belong to the partnership. A modification was also made about the profit to be paid to the assessee for the steel supplied by it from its quota to the partnership. By this modifications the profit was designated 'royalty' and under sub-clause (a) of clause 11 it was agreed that the royalty fixed at Rs. 50 per ton under clause 12 of the partnership agreement, dated September 29, 1948, was to be reduced as form October 1, 1953 to Rs. 25 per ton on all rellable materials received up to June 30, 1954, except 'semis and perfect billets' on which royalty was to be charged at the rate of Rs. 10 per ton. By sub-clause (b) it was provided that the cess charges payable to the Steel Re-rolling Mills Associations of India would be paid by the partnership till the partnership subsisted. By sub-clause (c), which is material, it was provided :
'Mr. K. R. Irani hereby agrees to pay a lump sum of Rs. 60,000 as goodwill in consideration of waiving the royalty from the partnership account on the quota of re-rollable scrap materials received after June 30, 1954.' be debited to the capital account of Mr. K. R. Irani in the books of the account of the partnership bearing interest at 6% per annum from July 1, 1954.
2. By sub-clause (d) it was agreed that the amount of Rs. 60,000 be debited to the capital account of Mr. K. R. Irani in the books of account of the partnership, bearing interest at 6% per annum from 1 st July, 1954. The Income-tax Officer brought the amount of Rs. 60,000 to tax in the hands of the assessee. The Appellate Assistant Commissioner was of the view that the by the modification made in the deed of partnership by the agreement, dated September 9, 1954, there was no change in the other terms and conditions, that the assessee's business of re-rolling continued in the same manner as it was done originally,and that the only difference made by the modification of the deed of partnership was that the whereas previously the assessee was getting 'royalty' at a fixed rate on the quantity of steel received, the assessee since June 30, 1954, received in the same in lump. The Income-tax Appellate Tribunal criticised this 'approach of the Appellate Assistant commissioner', but ultimately dismissed the appeal. They observed that the under the original agreement of partnership the amount of Rs. 50 per ton paid was the profit which the assessee 'was to make for rendering a particular service to the partnership' and 'there was no question of payment of the royalty as such.' Then they observed :
'The partnership never became entitled to get the goods from the Controller. It was the assessee-company who procured the a goods and sold them to the partnership at the agreed profit.... Under the new arrangement, one of the partners of the partnership has been shown to have paid Rs. 60,000 to the assessee-company and the company has agreed to sell in future to the partnership certain goods at its cost price.'
3. In paragraph 4 of their order they observed that in substance by the modified agreement the assessee had agreed to supply the goods at cost price in future to the partnership against receipt of the amount of Rs. 60,000 from K. R. Irani. This, in the view of the Tribunal, was a payment made in lump for the 'services' to be rendered from year to year to the partnership by the assessee and was accordingly a revenue receipt. The Tribunal has, at the instance of the assessee, referred the following question :
'Whether the sum of Rs. 60,000 received by the assessee-company from K. R. Irani is a revenue receipt and liable to income-tax ?'
4. We are unable to agreed with the Tribunal that there was under the original or the modified agreement any service to be rendered by the assessee to the partnership. Under the terms of the agreement of the partnership as originally formed, the assessee was entitled to receive for every ton of a steel supplied to the partnership by the assessee Rs. 50 and the assessee agreed to supply all the coal and steel received by it from the Iron & Steel Controller, and to utilise it for the business of the partnership and not for any other purpose : and even under the amended partnership agreement the assessee agreed to supply to the partnership all the steel received under the quota and instead of receiving profit at the rate of Rs. 50 per ton as originally stipulated the assessee received a lump sum of Rs. 60,000 from K. R. Irani. Mr. Kolah for the assessee strenuously contends that by sub-clause (c) of clause II of the amendment to the original partnership agreement the quota right have been transferred to K. R. Irani for a consideration of Rs. 60,000 and the assessee having received consideration for the transferring the very source of the profit, that consideration must be regarded as a capital receipt and not a revenue receipt. In support of his contention, Mr. Kolah relies upon the fact that in sub-clause (c) there is a reference to 'goodwill' and that the right transferred by that clause is not shown to be restricted to any period. We are, however, unable to agree with the contention of Mr. Kolah that there was any attempt made under the amended agreement to transfer the quota right. We have already referred to clauses 5A and 5B which were added to the original agreement by the agreement of modification. There was an express provision made that the lease hold interest and the licence for supply of electricity were to be treated as partnership property even though they stool in the name of K. R. Irani and the New Era Iron & Steel Works respectively. It is evident that when there was an intention to transfer the assets which belonged to the individual partners to the partnership, an express provision was made in that behalf. In sub-clause (c) there is no convenant that the quota was to be treated as belonging to the partnership. Again there is nothing in the relevant clauses which purports to convey the 'quota arights' of the assessee to the partnership. It is merely stipulated that for a lump sum consideration of Rs. 60,000 the assessee agreed that all the re-rollable scrap material received after June 30, 1955, will be supplied to the partnership; but even clause 13 of the original agreement the assessee had agreed to supply all the quota of steel and coal to be received under the quota to the partnership and not to utilise it for any other purpose. The true effect of the alteration made by sub-clause 12 of the original agreement the profit was to before received by the assessee at the rate of Rs. 50 per ton of steel supplied, under the amended agreement the assessee received a capitalised payment of Rs. 60,000 in lieu of that profit. The capitalisation of the profit under an agreement will not, in our judgment, affect the real nature of the receipt.
5. There is, in our judgment, no substance in the submission made by the Mr. Kolah that because the amount of Rs. 60,000 is refereed to in the amended agreement as paid as 'goodwill in consideration of waiving the royalty' it was intended to make it a part of the goodwill of the partnership : nor is there any substance in the submission that by the agreement the right to the quota of steel transferred was unrestricted. Evidently the modification made by the agreement, dated September 9, 1954, was to the original agreement dated September 29, 1948, and it was to be incorporated therein : and under the original agreement the rights and obligations were to enure so long as the lease or the quota system continued whichever was the later date.
6. In our view, the answer to the question referred to us will be :
'The sum of Rs. 60,000 received by the assessee-company from K. R. Irani is a revenue receipt and liable to the appropriate tax'
7. The assessee to path the costs of the Commissioner of Income-tax.
8. Question answered accordingly.