P.C. Balakrishna Menon, J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred the following questions at the instance of the Revenue, for decision of this court under Section 256(1) of the Income-tax Act.
' (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the assessment year 1975-76, income by way of royalty received by the assessee from M/s. Jacobs Private Ltd. was assessable under the head ' Business '
(2) Whether, on the facts and in the circumstances of the case, for the assessment year 1975-76, the Tribunal was justified in holding that the status of the assessee would be that of a registered firm and not that of an association of persons
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the assessment year 1975-76, the Commissioner was not correct in cancelling the registration which had been allowed by the Income-tax Officer '
2. The assessee was a registered firm. It was principally engaged in a sole agency business for sale of foreign liquors of McDowell & Co. Ltd. For the assessment year 1975-76, the Income-tax Officer passed an order of assessment accepting the return submitted by the assessee as a registered firm. The Commissioner of Income-tax in suo inotu revision under Section 263 of the Income-tax Act, set aside the order of assessment and directed the Income-tax Officer to make a fresh assessment treating the assessee as an association of persons. The renewal of registration granted to the assessee-firm by the Income-tax Officer for the relevant period was also cancelled. The Commissioner found that the assessee had transferred its agency business in the products of McDowell & Co. Ltd. to a company by name M/s. Jacobs Pvt. Ltd. on September 24, 1970, and the transferee-company had taken over the sole selling agency business. As per the agreement dated September 24, 1970, between them, the assessee was entitled to a royalty at the rate of Re. 1 per case of liquor sold by the transferee-company. According to the Commissioner of Income-tax, afterthe transfer of the sole selling agency, the assessee was not carrying on any business and the income from royalty could not be treated as profits and gains of business. The Commissioner further held that in the absence of any business, there is no question of the continued existence of the partnership and the assessee is not entitled to renewal of registration as a firm under Section 185 of the Income-tax Act. In appeal by the assessee, the Income-tax Appellate Tribunal held that the income by way of royalty at the rate of Re. 1 per case of liquor, received by the assessee from the transferee-company was really its business income in allowing the user of its business asset for the period and the activity in earning income by way of royalty falls within the concept of business of the assessee-firm. It was also found that the firm had been in existence for several years, it had continued to be in existence during the assessment year 1975-76 and hence the Commissioner was not justified in directing cancellation of its registration. The income received by the assessee by way of dividend on the shares of the transferee-company held by it was, however, held to be income falling under the head 'Other sources'. The Tribunal in paragraph 8 of its order noticed that for the prior assessment year 1974-75, the assessee was held entitled to registration as per the order of the Tribunal in ITA No. 478 of 1976-77 for the reason that there was some opening stock that the assessee had disposed of during the relevant accounting period. It was also noticed that the assessee-firm had obtained a re-transfer and resumed the sole agency business in the products of McDowell & Co. Ltd. from 1975-76 onwards. The transfer of the business reserving a royalty to be paid to the assessee was held to be a temporary arrangement with the transferee-company and such arrangement does not disentitle the firm to get renewal of registration. The income derived by way of royalty, according to the Tribunal, can only be classified as profits and gains of business. The Tribunal after considering the agreement between the assessee and the transferee-company entered the following finding at paragraph 12 of its order :
'Under these circumstances, we consider that the royalty which was received by the assessee was really income from allowing the user of a business asset for a particular period, i.e., as long as royalty was paid. The conduct of the assessee was one of earning income by way of royalty at rupee one per case of liquor during the period when the rights of sole selling agency stood transferred to the company and in our view such activity would fall within the concept of 'Business '.'
3. The Tribunal accordingly set aside the order of the Commissioner and directed a reassessment of the assessee as a registered firm treating the income received by way of royalty as income from profits and gains ofbusiness and the income by way of dividend as income from ' Other sources ' during the relevant accounting period.
4. Counsel for the Revenue strongly urges that on transfer of the sole agency business for the sale of the products of McDowell and Company, the asscssee-firm was not carrying on any business, the income derived by way of royalty is not its business income and the firm itself had ceased to exist in the eye of law. According to the learned counsel, in the absence of a business, there cannot be a partnership or a firm. Counsel relies on the decision of a Division Bench of the Madras High Court in K. Viswanathan v. Namakchand Gupta AIR 1955 Mad 536, wherein it is stated at page 540 :
' There can be a partnership only if there is some business to be carried on under it. Where there is no business to be done, there can be no question of partnership. The existence of a business is a ' sine qua non ' of partnership. Section 4 of the Indian Partnership Act (9 of 1932) defines ' partnership ' as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. In Mollwo March & Co. v. Court of Wards 10 Beng LR 312 (PC), the Privy Council observed ' To constitute a partnership, the parties must have agreed to carry on the business and to share profits in some way in common '.'
5. Section 4 of the Partnership Act defines 'partnership', 'partner', ' firm ' and ' firm name '. ' Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'. Persons who have entered into partnership with one another are called individually as partners and collectively as ' a firm ' and the name under which their business is carried on is called the the ' firm name '. There is no dispute that the assessee was carrying on business as a partnership firm until it transferred the sole agency business of the products of McDowell and Company Ltd. to M/s. Jacobs Pvt. Ltd. as per the agreement dated September 24, 1970, produced as annexure E along with the statement of the case submitted to this court by the Tribunal. The relevant portion of the agreement is extracted by the Tribunal in paragraph 6 of its order.
6. Counsel for the Revenue relies on Clauses (1) and (2) of annexure E agreement in support of his proposition that the assessee can no longer be treated as a firm for the reason that it has ceased to carry on the sole agency business in the products of McDowell and Company Ltd. Clauses (I) and (2) of annexure E agreement are extracted below :
' (1) The Vendors shall sell and the Company shall purchase as a going concern assets and rights and undertake to discharge liabilities bothassets and liabilities described in schedule and also the right to carry on business as sole selling agents of McDowells, Shertallai, with the right to carry on the said business in continuation of the vendors' business with all rights mentioned in the schedule to this agreement and all debts and actionable claims due to the vendors along with all securities relating to the same and with all benefits attached to the securities for such debts in connection with the said business and all rights and benefits arising from all contracts to which the vendors may be entitled in connection with the said business.
(2) In consideration of assigning the rights to carry on business of sole selling agency of ' McDowells ', the vendors will be entitled to a royalty of rupee one per case for every case sold by the company.'
7. The Revenue concedes that the assessee was a registered firm until the date of the agreement, annexure E, and it had been granted registration up to and inclusive of the assessment year 1974-75. It is no doubt true as held by the Madras High Court in Viswanathan's case AIR 1955 Mad 536, that without any business, there cannot be a partnership. The Revenue has no case that the partnership had no business when it was started and continued until 1974-75. It had also resumed the sole selling agency business in 1976-77. For the relevant accounting period, however, the assessee was getting only a royalty at the rate of Re. 1 per case of liquor sold by the transferee-company. It had no other income except the royalty and dividend on the shares of the transferee-company held by it.
8. For the reasons to follow we are inclined to take the view that the income received by way of royalty cannot be reckoned as profits or gains of business of the assessee. The Tribunal has already held that the dividend received can only be treated as income from ' Other sources '. It should, therefore, be held that during the relevant accounting period, the assessee had no business income.
9. We are not, however, prepared to accept the contention raised by counsel for the Revenue based on the decision of the Madras High Court in Viswanathan's case AIR 1955 Mad 536, that the firm has ceased to exist during the relevant accounting period. The mere fact that for any particular period, a firm had no business income does not mean that the firm itself had ceased to exist. The firm was very much in existence prior to the accounting period and it continued to exist after the accounting period also. In such circumstances, it is not possible to hold that during the interregnum, the firm had ceased to exist for the reason thas it had no business or business income during that period.
10. As per Section 39 of the Partnership Act, 'the dissolution of a partnership between all the partners of a firm is called the ' dissolution of thefirm '.' Dissolution can be by agreement of all partners or by decree of court. It can also be a compulsory dissolution on the happening of events mentioned in Section 41 or of the contingencies mentioned in Section 42 of the Partnership Act. A partnership firm can cease to exist only on its dissolution in any of the modes contemplated by the Partnership Act. The mere fact that for any particular period of time, the firm was not carrying on any business nor was earning any business income does not entail its dissolution, nor is it one of the modes of dissolution contemplated by the Partnership Act. A temporary cessation of business activity does not result in the annihilation of the firm itself, as contended for by counsel for the Revenue, nor does the decision of the Madras High Court in Viswanathan's case AIR 1955 Mad 536, support any such proposition. We, therefore, overrule the contention that the firm had ceased to exist during the relevant accounting period. The income derived by way of royalty at the rate of Re. 1 for every case of liquor sold cannot, however, be treated as the profits or gains of business of the assessee-firm.
11. In New Savan Sugar and Guv Refining Co. Ltd. v. CIT : 74ITR7(SC) , the Supreme Court considering the question whether the income by way of royalty received by a company on lease of its factory and machinery can be assessed as profits and gains of business within the meaning of Section 10 of the Indian Income-tax Act, 1922, stated at page 14 ;
' The primary condition for the application of Section 10 of the Act is that the tax is payable by an assessee under the head ' Profits and gains of business ' in respect of business carried on by him. When an assessee does not carry on business at all, Section 10 cannot be applicable and the income that lie receives cannot bear the character of profits of business. As we have already shown, there is no direct nexus between the income of the assessee and the production of the factory. The royalty payable to the assessee was not paid under Clause 7 of the indenture of lease for the production in the factory. The production was only a measure of the royalty to be paid and, in any event, the measure of payment had nothing to do with the character of the payment as a receipt from business or from other sources. It follows that, in the circumstances of this case, the income of the assessee cannot be characterised as income from the activity of the assessee carrying on any business. The High Court was, therefore, right in holding that the income of the assessee was liable to be assessed under Section 12 and not under Section 10 of the Act.'
12. It was accordingly held that the income by way of royalty can be classified as ' income from other sources '. We are, therefore, clearly of the view that the income received by the assessee by way of royalty in the present case is not profits and gains of business within the meaning ofSection 28 of the Income-tax Act; it is only income from ' Other sources ' falling under Section 56 of the Act.
13. For the aforesaid reasons, we answer question No. (1) in the negative, i.e., in favour of the Revenue and against the assessee. We answer questions Nos. (2) and (3) in the affirmative, i.e., in favour of the assessee and against the Revenue.
14. A copy of this judgment under the seal of the court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.