JUDGMENT <NAME>, <NAME>

1. These references raise an interesting question of law relating to the scope of ambit of the charging provision in relation to capital gains tax. The question arises out of the assessments to incme-tax made on the assessees for the assessment year 1963-64. Prior to 18th February, 1961, the assessees and seven other persons carried on business in partnership in the firm name of <ORG>. The business of the firm was the manufacture of Mangalore tiles and this business was being carried on by the firm ever since its inception on 13th January, 1953. There were disputes between the partners of the firm and as a result of these disputes, the assesses retired form the firm with effect from 18th February, 1962, leaving the other seven as continuing partners of the firm. The terms and conditions of retirement were recorded in document dated 18th February, 1962, executed by and between the partners. This document was in the form of minutes of the proceedings of the meeting held on 18th February, 1962, at which the decision was taken by the partners that the assessees should retire from the firm. Since one of the main controversies between the parties turns on the ture interpretation of this document, it would be desirable to set out its material provisions in extenso. These provisions, according to their English translation, read :

" (1) Resolved that out of the partners of our firm, four partners, namely, (1) Shri Mohan Pamabhai, (2) Shri Chandubha Alubha Rana, (3) Shri Bhojubha Seshubha and (4) Shri Hansraj Notibhai are retiring from our partnership with effect from today, i.e., 18-2-1962, after taking their share in the partnership; and since then they are not partners in our firm.

(2) The seven partners, namely (1) Shri Mohan Rudabhai, (2) Shri Amarsi Motibhai, (3) Shri Virji Becharbhai, (4) Shri Parshottam Rudabhai (5) Shri Mohan Kalabhai (6) Shri Mohan Vanabhai and (7) Mrs. <NAME>, have taken over the partnership business as a going concern together with all the assets, goodwill and other rights and claims and demandss and liabilities of our firm and they have today taken over posssession of the entire properties of the firm as a going concern; and the remaining four partners, (1) Shri Mohanbhai Pamabhai; (2) Shir Chandubha Alubha Rana; (3) <NAME>; and (4) <NAME> are retiring form the firm.

(3) The break-up value per share of the partnership assets is determined as follows. The assets and liabilities of the firm as of 18-2-62 are as follows :

Rs.

1,38,020.27 Structure. 32,561.36 Furnace. 58,949.78 Machinery. 17,217.06 Dead stock. 945.81 Cases (<ORG>). 21,252.00 Motor Trucks. 7,663.87 Stores. 8,003.17 Outstanding dues. 1,250.00 Investments. 2,481.43 Goods on hand (ready). 5,338.53 Goods (unready). 53,029.12 Balance. ____________ 3,46,712.40 Less : 7,595.25 Debts ____________ 3,39,117.16 _____________ The above is the value of seventeen shares and, therefore, the value of one share comes to Rs. 19,948.06. This break-up value includes all the amounts due to the partners from the partnership firm. (4) The outgoing partners being entitled to get the amount of the goodwill in addition to the break-up value of the share, the amount of goodwill per share has been fixed at Rs. 8,152.94; and on that basis, out of the outgoing partners, (1) Shri <NAME>, (2) Shri <NAME>, (3) Shri <NAME>, each becomes entitled to an amount of Rs. 56,202.00; and (4) Shri Hansraj Motibhai becomes entitled to an amount of Rs. 28,101. (5) The amount mentioned in condition No. (4) above has been decided to be paid to the outgoing partners in lieu of all their rights, interest and share in the partnership firm and each of them voluntarily gives up his right, title and interest in the partnership firm."

2. On retirement, each assessee received a certain amount in respect of his share in the partnership as contemplated in clauses (3) and (4) and this amount was worked out by taking the proportionate value of his share in the net partnership assets after deduction of liabilities and prior charges. The amount received by each assess included in its break-up an amount representing his proportionate share in the value of the goodwill, since goodwill constituted an asset of the partnership and it was liable to be teken into account in determining the share of each assessee in the partnership at the date of retirement. The Income-tax Officer assessing each of the assessees of the asessment year 1963-64, for which the relevant previous year was Samvat year 2016, took the view that the amount received by each assessee to the extent it included his proportionate share in the value of the goodwill represented capital gain chargeable to tax under section 45 of the Income-tax Act, 1961, and he accordingly brought it to tax in the assessment of each assessee. There is no dispute before us as to what was the amount representing the proportionate share of each assessee in the value of the goodwill which was included in the amount received by him on retirement and it is, therefore, not necessary to refer to the figures in the case of each assessee; it would be sufficient to state that in the case of the assessee in the first reference, namely, Income-tax Reference No. 22 of 1970, this amount was taken to be Rs. 28,598. Each of the assessees preferred an appeal to the Appellate Assistant Commissioner but the appeals were unsuccessful and the assessments were confirmed. This led to the filing of the further appeal to the <ORG> by each of the assessees. Two contentions in the main were advanced on behalf of the assessees in these appeals. The first contention was that the retirement of the assessee from the partnership amounted to dissolutino of the firm within the meaning of section 47 , clause (ii), and, therefore, no transfer of capital asset chargeable to tax under section 45 was involved in the process by which the goodwill of the firm was taken over by the remaining seven partners and the proportionate share in the value of the goodwill was paid to each of the assessees. This contention was negatived by the <ORG> which took the view that the present case was a case of retirement of four partners from the firm and not a case of dissolution which would attract the applicability of section 47 , clause (ii). The second contention, however, found favour with the <ORG> and that contention was that goodwill was a self-created asset which has cost nothing to the firm and its partners in terms of money and a "transfer" of it was, therefore, not within the ambit of the charging provision contained in section 45 and the proportionate share in the value of the goodwill received by each assessee for transfer of his interest in the goodwill was not taxable as capital gains. The <ORG> in this view of the matter directed that in the case of each assessee, no amount received in respect of his proportionate share in the value of goodwill should be assessed to tax. The Commisioner was, obviously, dissatisfied with this decision of the <ORG>, in so far as it went against him and he, therefore, moved the <ORG> and, on his application, the following two questions of law were referred for the opinion of this court in the case of each assessee :

" (1) Whether the Tribunal was right in holding that the goodwill of the firm is a self-acquired asset of the firm ?

(2) Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the amount received by the assessee by way of his share in the goodwill of the firm is not liable to be assessed to tax ?"

3. Each of the assessees submitted at the hearing of the reference application that in addition to the two question proposed by the Commissioner, a third question arising out of the order of the <ORG>, in so far as it decided the first contention against the assessee, should also be referred by the <ORG>. The <ORG> accordingly included the following third question in the reference made in the case of each assessee :

" (3) Whether, on the facts and in the circumstances of the case, the retirement of the assessee as partner from the firm amounted to dissolution of the firm, and, therefore, the capital gain, if any, is chargeable to tax in view of the provisions of section 47(iii) of the Act?"

4. We may point out straightaway that in the view we are taking as regardss questions Nos. (1) and (2), it is not necessary for us to consider the third question and we do not, therefore, propose to answere it.

5. So far as the second question is concerned, there were two contentions urged on behalf of the assessees in support of the decision of the <ORG> that the amount representing the proportationate share of each assessee in the value of the goodwill of the firm was not liable to be assessed to tax as capital gain. One contention was that the proportionate share in the value of the goodwill was received by each assessee as part of the amount representing his share in the net partnership assets after deduction of liabilities and prior charges and this last amount having been received by him in satisfaction of his share in the partnership and not by way of consideration for transfer of his interest in the goodwill or other assets of the firm, there was no transfer of capital asset which would attract liability to capital gains tax. This contention was at no time urged before the revenue authorities or even before the <ORG> and it was raised for the first time at the hearing of the references before us, but since it does not involve a new question and represented merely a different aspect of the same question, we allowed the assessee to raise it and it must be said in fairness to the counsel for the revenue that the rightly did not contend that it should not be allowed to be raised. The other contention urged on behalf of the assessees was that having regard to the scheme of the provisions relating to capital gains tax and particularly section 48 , clause (ii), the capital asset contemplated by section 45 is a capital asset, acquisition of which has cost something to the assessee in terms of money, and since goodwill of the firm in the present case admittedly cost nothing to the firm and its partners in terms of money, transfer of his interest in the goodwill by each of the assessees did not attract the charge of capital gains tax. Of these two contentions, the first is, in our opinion, well-founded while the second must be rejected. Our reasons for saying so are as follows :

Turning to the first contention, it is clear from the provisions of the document dated 18th February, 1962, that the assessee retired from the partnership and each of them received a certain amount representing his share in the net partnership assets after deducting debts and liabilities of the partnership. This amount was made up by adding two components : one component represented the proportionate share in the partnership assets other than goodwill after deducting debts and liabilites [vide clause (3)], and the other represented the proportionate share in the goodwill of the firm [vide clause (4)]. The argument of the revenue was that when the assessees retired from the partnership, the interest of each of the assessees in the partnership assets including the goodwill was extinguished and there was accordingly "transfer" of his interest in the goodwill by each of the assessees within the meaning of section 2(47) and the amount representing the proportionate share in the value of the goodwill having been received by each assessee as consideration for transfer of his interest in the goodwill and there being no cost of acquisition of the goodwill to the firm and, consequently, to any partner the whole of such amount is liable to be taxed as capital gain in the hands of each assessee. This argument, plausible though it may seem, is falacious in that it ignores the true nature of the interest of a partner in a partnership and the legal consequences which flow when a partner retires from the firm.

6. The most authoritative statement of the law on this subject, is to be found in the decision of <ORG> in <CITATION> (A. I. R. 1966 S. C. 1300, 1303, 1304). The facts of that case are rather important and we may briefly state them. The members of two joint Hindu families, which we may for the sake of convenience describe as "A" and "B", entered into a partnership for carrying on business of hulling rice, decorticating groundnuts, etc. The capital of the partnership consisted, inter alia, of some lands contributed by the two families and the course of business opf the partnership also, some more lands were acquired by the partnership. The partnership was subsequently dissolved by mutual agreement between the partners and an unregistered document was executed recording the terms and conditions of dissolution which included, inter alia, a stipulation that "A" family had given up their share in the machines, etc., and in the business, and made over the same to the members of "B" family alone completely by way of adjustment. When members of "A" family sought to rely on this document in a subseqent suit for dissoulation and accounts of the partnership, members of "B" family raised a contention that since the partnership assets included immovable properties and the document recorded relinquishment by members of "A" family of their interest in those assets, the document was compulsorily registrable under section 17(1)(c) of the Registration Act and, as it was not registered, it was inadmissible in evidence. To determine the validity of this contention, <ORG> was called upon to consider what is the true nature of the interest of a partner in a partnership and whast happens when the firm is dissolved or a partner retires from the firm. <ORG> analysed the relevant provisions of the Partnership Act and proceeded to state the effect of these sections in the following words :

"From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership property. No doubt, since in the money representing the value of the property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property on anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clause (i), (ii), and (iii) of clause (b) of section 48 ."

7. <ORG> then quoted with approval the folloing statement of the law from <ORG>, 12th edition, at page 375 :

"What is meant by the share of a partner is his proportion of the partnership assets after they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is, and this only, which on the death of a partner passes to his representatives, or to a legatee of his share.... and which on his banckruptcy passes to his trustee."

And, in a later portion of the judgment, summarized the position by stating in clear and specific terms :

"..... his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges."

8. <ORG> held that the partnership assets included immovable properties, the document did not operate as relinquishment of any interest in any of the immovable properties by members of "A" family, but it was merely by way of adjustment of the rights of the partners on dissolution by giving to each his share in the net partnership assets after deduction of liabilities and prior charges and it was, therefore, not compulsorily registrable under section 17(1)(c) of the Registration Act.

9. The same question again arose before <ORG> in a different context in <CITATION> ( 68 I. T. R. 240, 243  2 S. C. R. 173 (S. C.)). The two partners, each owning a cinema theatre, formed a partnership to carry on business in partnership as exhibitors of cinematograph films, and they brought their respective theatres into the books of the partnership as its assets. The business was carried on for some time but, thereafter, the partnership was dissolved and, on dissolution, it was agreed that the theatres should be returned to their original owners and in the books of account of the partnership, the theatres were shown as taken over at the original price less the depreciation allowed during the subsistence of the partnership. The revenue contended on these facts that the assets must in law be deemed to be sold by the partnership to the individual partners in consideration of their respective shares and the difference between the price realised and the written down value should be included in the total income of the partnership under the second proviso to section 10(2)(vii) . This contention was negatived by <ORG> and <NAME>, speaking on behalf of <ORG>, pointed out that on dissolution of a firm the only right of a partner is "to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights" and this distribution of surplus "is for the purpose of adjustment of the rights of the partners in the assets of the partnership : it does not amount to transfer of assets." The learned judge proceeded to observe :

"........ adjudment of the rights of the partners in a dissolved firm is not a transfer, nor it is for a price...... A partner may, it is true, in an action for dissolution insist that the assets of the partnership be realised by sale of its assets, but where in satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale, property is allotted, the property so allotted to him cannot be deemed in law to be sold to him."

10. The observations, though made in the context of a dissolution of partnership, are equally applicable where a partner retires from the partnership, the last passage quotes by us above from the decision of <ORG> in <NAME> case (A. I. R. 1966 S. C. 1300).

11. Both these decisions of <ORG> were followed by a Full Bench of this court in <CITATION> ( 80 I. T. R. 291, 297 (Guj) [F. B.]). That was a case under the Bombay Stamp Act, 1958, and the question was as to what is the nature of the transaction when a partner retires from the partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accouns on the footing of a notional sale of the partnership assets and given to him : does it fall within the category of "conveyance on sale" so as to be liable to stamp duty under article 25 , clause (b) of Schedule I of the Act ? The Full Bench held that such a transaction does not involve any element of sale of interest of a partner in the partnership assets. Speaking on behalf of <ORG>, I pointed out, after referring to the decisions in <NAME>'s case (A. I. R. 1966 S. C. 1300) and <ORG> Case ( 68 I. T. R. 240;  2 S. C. R. 173 (S. C.)) that where a partner retires from a partnership :

"What is given to him by way of his share in the partnership, whether it be cash or some property of the partnership, is received by him as his share in the net partnership assets, after deducting liabilities and prior charges on settlement of accounts and there is no transfer of any interest inproperty from him to the continuing partners nor is it for a price. It is merely an adjustment of the rights between the retiring partners and the continuing partners in the assets of the partnership; the share of the retiring partner in the partnership is made over to him."

12. These decisions clearly establish that the interest of a partner in the partnership is not interest in any specific item of the partnership property, but as pointed out by <ORG> and <ORG> of this court, it is a right to obtain his share of profits from the time to time during the subsistence of the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and labilities of the partnership. When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges in determined on taking accounts on the footing of national sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideraton for transfer of his interst in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners : vide also the recent decision of <ORG> in <CITATION> ( 79 I. T. R. 594;  3 S. C. R. 406 (S. C.)). It is true that section 2(47) defines "transfer" in relation to a capital asset and this definition given an artificially extended meaning to the term "transfer" by including within its scope and ambit two kinds of transactions which would not ordinarily constitute "transfer" in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But, even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership. If relinquishment or extinguishment of intersest in partnership assets were involved in the retiremet of a partner, the decision in <NAME>'s case (A. I. R. 1966 S. C. 1300) could not have been what it was. Section 17(1)(c) of the Registration Act requires compulsory registration of a document where it acknowledge receipt or payment of any consideration not only on account of creation, declaration, assignment or limitation but also on account of extinction of any right, title or interest in immovable property and the document i <NAME>'s case (A. I. R. 1966 S. C. 1300) could have, therefore, clearly and indubitably required compulsory registration, if there was any relinquishment or extinguishment of interest of members of "A" family in the immovable properties forming part of the partnership assets. But <ORG> held that the transaction merely reperested adjustment of the rights of the partners on dissolution and did not invole relinquishment or extinguishment of the interest of member of "A" family in the partnerhship assets which included immovable properties and the document was, therefore, not compulsorily registrable. It is impossible to contend, in view of this decision of <ORG>, that when a partner retires from the partnership, there is relinquishment or existinguishment of his interest in the partnership assets. We must, therefore, hold it to be clear beyond doubt that, even if goodwill be assumed to be capital asset within the charging provision enacted in section 45 , there was, in the present case, transfer of interest of any assessee in the goodwill within the meaning of section 2(47) when the assessee retired from the firm. Each assessee, undoubtedly, received certain amount on retirement, but this amount represented his share in the net partnership assets after deduction of liabilities and prior charges and it was received in satisfaction of his share in the partnership; each of them realised his share in the partnership when the amount coming to his share was paid over to him. If there was no transfer of interest of any of the assessees in the goodwill within the meaning of section 2(47) , the conclusion must inevitably follow that no part of the amount received by any assessee in respect of his share in the value of the goodwill could be regarded as capital gain chargeable to tax, for under the charging provision enacted in section 45 , profit or gain in chargeable to tax as capital gains only if it is profit or gain arising from the "transfer" of a capital asset.

13. But, even if we are wrong in taking this view and the correct view is that when a partner retires from the partnership his interest in the partnership assets is extinguished and there was, therefore, in the present case, "transfer" of interest of each of the assessee in the goodwill when the assessees retired from the firm, the amount received by each assessee in respect of his share in the value of the goodwill must still be held to be outside the pale of chargeability to capital gains tax. It is not every transfer of a capital asset which attracts the charge of capital gains tax. Section 45 which is the charging section, undoubtedly, provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head "capital gains". But, section 48 shows that the transfer that is contemplated by section 45 is a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Section 48 provides the mode of computation of capital gains by enacting that the income chargeable to tax as capital asset" the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. The amounts specified in clauses (i) and (ii) are to be deducted from the "consideration received or accruing as a result of the transfer of the capital assets" for the purpose of determining the profits or gains chargeable to tax. It is, therefore, clear that the transfer of a capital asset, in order to attract the capital gains tax, must be a transfer as a result of which consideration is received by the assessee or accrues to the assessee. If there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable and it would not be possible to compute profits or gains arising afrom the tranfer of the capital asset. The transaction in order to attract the charge of tax as capital gains must, therefore, clearly be such that consideration is received by the assessee or accrues to the assessee as a result of the transfer of the capital asset. Where tranfer consists in existinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a transfer exigible to capital gains tax. This view is clearly supported by a recent deision given by a Division Bench of this court in <CITATION> ( 82 I. T. R. 194 (Guj.)). Now, as we have already pointed out above, when a partner reties from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is paid to his, what he receives is his share in the partnership which is worked out and realised and it does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets. Moreover, it is not possible to say, in such a case, that any amount in received by the retiring partner as his share in any particular asset of the firm so that it may be said that a particular part of the amount was received as consideration for the extinguishment of the interest of the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets; he has also to bear his of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities tha the is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the partnership assets and it is only on the surplus that the retiring partner is entilted to claim a share. It is, therefore, not possible to predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular partnership asset. We are, therefore, of the view that when the assessees retired from the firm, there was no transfer of interest of any of the assessees in the goodwill of the firm and no part of the amount received by any of the assessees was assessable to capital gains tax under section 45 .

14. This decision as regards the first contention renders it unnecessary for us to examine the validity of the second contention but since the second contention has been fully argued before us and it raises a question of some importance, we think it desirable to express our opinion upon it. The determination of this contention rests on the construction of a few relevant provisions of the Act. Section 45 which is the general charging section levies the charge of capital gains tax on "any profits or gains arising from the transfer of a capital asset". The expression "capital asset" occurring in this section is defined in section 2(14) to mean :

"2. In this Act, unless the context otherwise, requires, -...

(14)... property of any kind held by an assessee, whether or not connection with his business or profession, but does not include -

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him;

(iii) agricultural land in India;...."

15. The definition brings within the meaning of "capital asset" property of any kind held by an assessee, except that specifically excluded from the definition. The words "property of any kind" are words fo widest amplitude; they excluse any limitation which may be sought to be introduced for the purpose of restricting the applicability of the definition. The adverbial clause "whether or not connected with his business or profession" also exphasizes the width and amplitude of the definition. Every kind of property held by an assessee, whatever be its nature or character, is within the connotation of the expression "capital asset" provided of course it does not fall within any of the excepted categories specified in clauses (i) to (iv). Now, it can hardly be disputed that goodwill of a business is "property" recognised by law.

16. <ORG> pointed out in <NAME> v. Union of India ([1970] 40 Comp. Cas. 325; [1970] 3 S. C. R. 530; A. I. R. 1970 S. C. 564, 611), commonly known as the Bank Nationalisation case ([1970] 40 Comp. Cas. 325; [1970] 3 S. C. R. 530; A. I. R. 1970 S. C. 564, 611) :

"Goodwill of a business is an intangible asset : it is the whole advantage of the reputation and connection formed with the customers together with the circumstances making the connection durable. It i that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features : <NAME> v. <NAME> ([1896 A. C. 7 (H. L.)). Goodwill of an undertaking therefore is the value of the attraction to customers arising from the name, and reputation for skill, integrity, efficient business management, or effcient service."

17. <ORG> held that goodwill of a business is property and it cannot be acquired except on payment of compensation under article 31(2) of the Constitution. It is, therefore, clear that goodwill is a kind of property held by the owner of the business and it is a capital asset within the meaning of section 2(14) .

18. It would, therefore, seem that if there is transfer of goodwill any any profits or gains arise to the assessee from such tranfer, they would be assessable to capital gains tax under section 45 . But, what is the meaning of the word "transfer" ? The definition of "transfer" is to be found in section 2(47) . We have already referred to that definition earlier and we need not, therefore, reproduce it here. It is sufficient to state that it is a definition which includes within its scope of ambit not onl transactions which would constitute transfer according to the accepted connotation of that word, but also transactions which would not ordinarily be regarded as transfer according to its ordinary natural sence. The definition given an extended statutory meaning to the word "tranfer" and includes within it relinquishment of a capital asset or the extingishment of any rights therein. Now, if contrary to the view taken by us, it were held when the assessees retired from the firm, there was a transfer of interest of each of the assessees in the goodwill within the meaning o section 2(47) and the amount representing the value of the share of each assessee in the goodwill was paid to him in consideration of such transfer, the present case would clearly fall within the plain terms of section 45 . The whole of the amount received by each assessee in respect of his share in the value of the goodwill would represent his profit or gain arising from the transfer of his interest in the goodwill, since admittedly it did not cost anything to the assessees in terms of money to acquire the goodwill. The question then is : Is there anything in the scheme of taxation relating to capital gains tax or in any other provision of the Act which takes such a transaction outside the scope of ambit of section 45 ?

19. The asessessees relied strongly on section 48 in support of their contention that since goodwill did not cost anything to the assessees in terms of money, it was not a capital asset, transfer of which fell within the mischief of the charging provision enacted in section 45 . The revenue urged that section 48 clearly postulates that there must be cost of acquisition of the capital asset and, therefore, if there is any capital asset which does not cost anything to the assessee in terms of money to acquire it, it would be outside the scheme of the taxing provisions. Now, we have already referred to section 48 and pointed out that it provides the mode of computation of capital gains. It seeks to arrive at the real profit earned by the assessee from the transfer of the capital asset. It takes the gross receipt of the assessee, namely, the full value of the consideration received or accruing as a result of the transfer of the capital asset, and provides for deduction of certain amounts out of it with a view to arriving at the real profit. One amount is the expenditure incurred wholly and exclusively in connection with the transfer of the capital asset : vid clause (i). There can be no doubt that if any expenditure is incurred wholly and exclusively in connection with the transfer of the capital asset, it must be deducted from the gross receipt in order to ascertain the net profit of the assessee. Obviously, if no such expenditure is incurred, there can be no question of deducting it from the full value of the consideration. Another amount which is to be deducted from the full value of the consideration is "the cost of acquisition of the capital asset" : vide clause (ii). Where the capital asset has cost money to the assessee to acquire it, it must necessarily be deducted from the full value of the consideration in the order to ascertain the net profit earned by the assessee. The object of the charging provision is to tax "profits or gains" and this expression means real or net profits or gains and in order to arrive at real or net profits or gains, the cost which has been incurred by the assessee in acquiring the capital asset mut be deducted from the full value of the consideration received by him. Now, one question may arise here fro consideration : what is the meaning of the words "acquistion of the capital asset" in this context ? Do they mean only acquisition of the capital asset from a third party or do they also include capital asset created by the assessee ? These words seemed to suggest, according to the assessee, that the capital asset must exist as such at the date when it is acquired and that would be possible only when it is acquired from a third party. Where the capital asset is created by the assessee, as for example where a painting is produced by a painter or a statute chistled by a sculptor or a building constructed by an owner, it would not be possible to say that the painting is acquired by he painter or the states is acquired by the sculptor or the binding is acquired by the owner. This agrument, plusible though acquistion and creation. But, we do not think there is any such antithesis between these two concepts. The word "acquisition" is the noun from the verb "acquired" and the meaning of the word "acquisition". Black's Law Distionary gives the following meaning ofthe word "acquire" : "To gain by any means, ususally by one's own exertions; to get as one's own; to obtain by search, endeavour, practice, or purchase; receive or gain in whatever manner ; come to have." The word "acquire", accordingly to its plain natural meaning, is a word of very wide import. It is not confined to obtaining of a thing from the third party. When an assessee gains a thing by his own exertions or comes to own it or have it by any recognised mode which would doubtless include the mode of creation, he can be said to have acquired the thing. There are various modes of acquisition by which a thing may be acquired by an assessee and creation is one of them. When an assessee creates a painting, sculpture or a building, the gains it, he comes to have it or to own it. He acquires the painting sculpture or building by creating it. When a capital asset is created by a assessee, it becomes his property, he come to own it and, therefore, he acquires it the moment it is created. Creation or production of a capital asset is not foreign to the consequ of acquisition and even where a capital asset is a self-created asset of the assessee, it would be covered by clause (ii) of section 48 and if any cost has been incurred by the assessee in created or producting it, it would represent the cost of acquisition of such capital asset and would be deductible from the value of the consideration received by the assessee as a result of transfer of such capital asset, for the purpose of computation of real profit assessable to capital gains tax.

20. But, what would be the position if no cost in terms of money bas been incurred by the assessee in acquiring the capital asset, as in the present case, where admittedly creation of the goodwill did not cost anything to the firm and its partners in terms of money ? The argument of the assessee was that where the acquisition of the capital asset has cost nothing to the assessee in terms of money, the capital asset must be held to be outside the net of taxation cast by the taxing provision. Section 48 , clause (ii), clearly shows, said the assessee, that the transfer of a capital asset would attract the capital gains tax under section 45 only if the capital asset has actually cost of the assessee something in terms of money. If the capital asset did not cost anything to the assessee in terms of money in its acquisition, capital gain resulting from its tranfer would not be exigible to tax. This contention was sought to be supported by reference to two decisions, one a decision of <ORG> in <CITATION> ( 71 I. T. R. 433 (Mad.)), and the other, a decision of <ORG> in Commissioner of Income-tax v <NAME> and Co. ( 76 I. T. R. 5 66 (Cal.)). We do not think this contention is well founded. It is based on a misapplication of the provision enacted in section 48 , clause (ii). What is provided for in section 48 , clause (ii), is deduction of the cost of acquirisition of the capital asset and this deduction is for the purpose of arriving at the real profit of the assessee. If the capital asset has not nothing to the assessee in terms of money and accordingly there was no cost of acquisition of the capital asset to the assessee, there would obviously be nothing to deduct under section 48 , clause (ii), and the full value of the consideration received as a result of the transfer of the capital asset would be the real profit or gain of the assessee. It is difficult to see how a provision for deduction of the cost of acquisition of the capital asset can be construed to limit the scope of ambit of the charging provision enacted in section 45 . If the provision for deduction applies in a given case, it must be given effect to, but if it does not apply, there would be nothing to deduct. It would indeed be strange logic to hold that the width and amplitude of the chargeing provision enacted in section 45 must be narrowed and restricted because there may be cases where the provision for deduction of the cost of acusition of the capital asset is not applicable. The proper way of reading sections 45 and 48 would be that section 45 applies in case of every tranfer of a capital asset where there is consideration received or accruing as a result of the transfer of the capital asset and so far as the computation of the real profit arising to the assessee from such tranfer is concerned, it has to be made under section 48 by deducting from the full value of the consideration, inter alia, the cost of acquisition of the capital asset, where the capital asset has cost something to the assessee in terms of money. If the argument urged on behalf of the assessee in regard to the cost of acquisition of the capital asset were correct, it would also apply equally in regard to expenditure incurred wholly and exclusively in connection with the transfer and logically it should follow that where no expenditure is incurred wholly and exclusively in connection with the transfer, it would be held to be outside the scope and ambit of section 45 . But such an argment would be manifestly unsustainable and if that be so, it must equally be unsustainable in regard to the cost of acquisition of the capital asset. The second part of clause (ii) of section 48 provides that the cost of any improvement of the capital asset should also be deducted from the full value of the consideration. That would also apply where any such cost is incurred by the assessee. If there is no such cost incurred by the assessee, there can be no question of deduction and the provision clearly cannot apply.

21. We cannot, therefore, assent to the argument of the assessee that the chargeing provision enacted in section 45 is confined only to those cases where the capital asset has cost something to the assessee in terms of money in acquiring it. Even a capital asset which has cost nothing to the assessee in acquiring it would be within the ambit and coverage of the charging provision, provided the conditions for the applicability of the charging provision are satisfied. We have been taken through the other sections of the Act relating to the capital gains tax but we do not find anything in those sections which compel us to give a narrow and constricted meaning to the charging provivision enacted in section 45 by excluding self-created capital assets or capital assets which have cost nothing to the assessee in terms of money in acquiring them. It is true that a different view has been taken by <ORG> in <NAME> case ( 71 I. T. R 433 (Mad.)) in regard to section 12B of the old Income-tax Act , 1922, corresponding to section 45 of the new Act and it has been held that section 12B of the old Act does not apply to transfer of capital assets which did not cost anytihg to the assessee in terms of money in their creation or acquisition, but with the respect to the learned judges who decided that use we find ourseleves unable to accept the reasoning on which it proceeds. The resoning is the same as that advanced before us with only this difference that whereas reliance is placed in the case before us on section 48 , clause (ii), of the new Act, in the case before <ORG> reliance was placed on the corresponding provision in section 12B (2), clause (ii), of the old Act which was in almost identical terms. This reasoning is in our opinion defective and does not carry conviction. We have already stated out reasons for saying so.

22. <ORG> has also taken the view of <NAME> Co.'s case ([1970] 76 I. T. R. 566, 574 (Cal.)) that profit or gain arising from tranfer of goodwill of a business is not chargeable to tax under section 12B of the old Act, firstly, because the provisions of section 12B "do not make it clear..... expressly or by necessary implication that goodwill was at all a contemplated subject of taxable capital 12B does not levy the charge of capital gains tax on self-created assets like goodwill which cost nothing to the assessee in terms of money in their creation or acquisition. But, neither of these two arguments commends itself to us and we find ourselves unable to accept them. So far as the first argument is concerned, we do not find anything in any provision of the Act which militates against the taxability of profit or gain arising from the transfer of goodwill. The question is not whether ther is anything in the provisions of the Act which expressly or by necessary implication shows that goodwill was contemplated to be a subject of taxable capital gain. That is, in our opinion, with the greatest respect to <ORG> of <ORG> which decided <NAME> Co.'s case ( 76 I. T. R. 566, 574 (Cal.)), a wrong approach. Goodwill being property is capital asset and if it is tranferred and there is in the result profit or gain, it would clearly taxable under that section, unless we find anything in some other provision of the Act which expressly or by necessary implication shows that goodwill was not intended to be a subject of taxable capital gain. The inquiry must be not whether goodwill is intended to be a subject of taxable capital gain but whether it is intended to be exclusded from the charge even though it falls within the plain terms of section 45 . The second argument is the same which found favour with <ORG> and for reasons which we have already given, we are unable to accept it. The decision of <ORG> does not, therefore, appeal to us and we cannot accept it as laying down the correct law. We may also in passing refer to a recent decision of <ORG> in <CITATION> ( 81 I. T. R. 500 (Delhi)) where the same view has been taken by <ORG> in regard to taxability of profit or gain arising on tranfer of goodwill of a business. But, this decision merely quotes the relvant passage from the judgment of <ORG> in <NAME> case ( 71 I. T. R. 433 (Mad.)) and follows it without giving any independent reasoning of its own and it does not, thefore, carry the matter any further.

23. We are, therefore, of the view that though goodwill of a business is a capital asset and profit or gain arising from transfer of goodwill, where there is consideration received or accrued as a result of the transfer is chargebale to capital gains tax under section 45 , there was in the present case no transfer of interest of any of the assessee in the goodwill when the assessee retired from the firm and, in any event, even if there was transfer of such interest, there was no consideration received or accrued as a result of transfer of such interest and no part of the amount received by any of the assessee was, therefore, assessable to capital gains tax under section 45 .

24. We, therefore, answer the questions referred to us in each of the four references as under :

Question No. (1) in the affirmative.

Question No. (2) in the affirmative.

Question No. (3) does not arise.

25. The Commissioner will pay the costs of each reference to the assessee.


PETITIONER: COMMISSIONER OF INCOME TAX, <NAME> Vs. RESPONDENT: MESSRS. BEST & CO. DATE OF JUDGMENT: 02/11/1965 BENCH: <NAME>, K. BENCH: <NAME>, K. SHAH, J.C. SIKRI, S.M. CITATION: 1966 AIR 1325 1966 SCR (2) 430 CITATOR INFO : R 1971 SC1590 (9) RF 1980 SC 793 (4,8) R 1986 SC1821 (32) D 1992 SC 959 (17) ACT: Income-tax Act , s. 10- -Assessee a multi-agency concern-One of the agencies terminated with a restrictive covenant not to carry on business--compensation, whether capital or revenue receipt. HEADNOTE: The respondent was a multi-agency concern. The principal of one of the agencies terminated that agency and paid the respondent certain amounts. When the amounts were sought to be assessed to Income-tax, the respondent objected on the ground that the amounts represented only compensation received for termination of the agency business and as consideration for the restrictive covenant not to do business in the same line for a prescribed period. The Income-tax Officer, the Appellate Assistant Commissioner. and <ORG> held against the respondent, but <ORG> on a reference, held that by the termination of the agency, the respondent lost an earning asset and that the compensation paid for the destruction of such an asset was a capital receipt not liable to tax. In appeal to this Court, HELD : While the income-tax authorities have to gather the relevant material to establish that the compensation given for the loss of the agency was a taxable income, an adverse inference could be drawn against the assessee if he had not produced evidence which was in his exclusive knowledge and keeping. The 'respondent gave up one of its innumerable agencies in different lines without any protest presumably because it was in the normal course of its business, and continued to do business without any mishap. it did not place any material before the <ORG> to establish the relative importance of the said agency in the frame work of the earning apparatus of its business. The loss of - the agency would therefore only be -a normal trading loss, and the amount of compensation attributable to it would be a revenue receipt assessable under S. 10 of the Income-tax Act, 1922. [486 H; 487 A, C; 488 B-C] The restrictive covenant was one of the terms of the agreement relating to consideration, and therefore the compensation paid was not only in lieu of the giving up of the agency but also for the respondent accepting a restrictive covenant for a specific period. Since the covenant was an independent obligation which came into operation only after the agency was terminated and was wholly unconnected with it, that part of the compensation attributable to the restrictive covenant was a capital receipt not assessable, to tax. [491 B, C, H; 492 <CITATION> - tax, Calcutta,  8 S.C.R. 121 and <CITATION>  3 S.C.R. 692, followed. The apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant by the assessing authority. The compensation was severable and any difficulty in apportionment cannot be a 481 ground for rejecting the claim by the revenue and the assessee for apportionment. [492 B-D] <NAME> (H. M. Inspector of Taxes) v. <NAME>, (1942) 25 T.C. 136 <NAME> v. <NAME> (H. M. Inspector of Taxes) (1946) 28 T.C. 41 and <CITATION> , (1954) 28 I.T.R. 435, referred to. JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 682 and 683 of 1964.

Appeals from the judgment and order dated July 24, 1961 of <ORG> in Case Referred No. 29 of 1957. <NAME>, <NAME>, <NAME> and <NAME>, for the appellant.

<NAME>, <NAME>, <NAME> and <NAME>, for the respondent.

The Judgment of the Court was delivered by <NAME>, <ORG>, Madras, the respon- dent herein, hereinafter called <ORG>, is a private limited company carrying -on business in innumerable lines. It is doing the business of importers, exporters, agents and subagents of various shipping, insurance, and manufacturing companies, in the course of which it acquired numerous agencies from manufacturers both in India and outside for sale in India of textiles, dairy products, engineering equipments, soaps., paints, toilet goods, etc. One of such agencies was from <ORG>, Glasgow, hereinafter called the "Principal", for distribution and marketing in certain territories in South India of its ammunition, blasting explosives and accessories. The said agency came into existence in 1900. The terms of the agency were not reduced to writing. The rates of commission were paid on terms agreed upon from time to time. The agency was terminable at will; but, because of their mutual confidence, it continued without break till the year 1947 when the Principal decided to transfer all its agencies in India and Ceylon to <ORG>. By its letter dated March 11, 1947, the Principal gave notice to <ORG> terminating its agency from April 1, 1948. After some correspondence, the agency was terminated on March 31, 1948, and the Principal paid certain amounts in three instalments calculated on the basis of the income earned by the <ORG>, which took over the business from that date. Pursuant to that agreement, <ORG>

Sup.CI/66-18 cipal paid on September 30, 1949, a sum of Rs. 34,100 as commission on sales during the year ended March 31, 1949, on September 30, 1950, a commission of Rs. 66,790 on sales during the year ended March 31, 1950, and on September' 30, '1951, a commission of Rs. 3,35,371 on sales during the year, ended March 31, 1951. During the assessment year 1950-51, the first amount was brought to tax and the assessment had become final and nothing turns upon it in these appeals. But in respect of the other two assessment years, namely, 1951-52 and 1952-53, <ORG> objected to the inclusion of the said amounts in its taxable income on the ground that the said amounts represented only compensation received for termination of the agency business and also as consideration for the restrictive covenant not to do business in the same line for a prescribed period. The Income-tax Officer, in the first instance, and, on appeals, the Appellate Assistant Commissioner held that the termination of the said agency did not alter the structure of the respondent's business and that they represented only remuneration paid voluntarily by the Principal to the agent in appreciation of its past services. On further appeals by <ORG>, <ORG> held that, as the three annual instalments were based on future sales in the same territory as before, they were of the same nature as the normal commission receipts of the respondent. On that ground, both the appeals were dismissed. At the instance of the assessee, the following question was referred by the <ORG> to <ORG> at Madras for its opinion under s. 66(1) of the Indian Income- tax Act, 1922, hereinafter called the Act "Whether the aforesaid sum of Rs. 66,790 and Rs. 3 ' 35,371 are assessable under Section 10 for the assessment years 1951-52- and 1952-53."

<ORG> of the said <ORG>, having regard to the circumstances of the case, came to the conclusion that by the termination of the agency the assessee lost an earning asset and the compensation paid for the destruction of such an asset was a capital receipt and, therefore, not liable to tax. The <ORG>, on obtaining the necessary certificate from the <ORG>, has preferred the present two appeals to this Court..

Mr. <NAME>, learned counsel for <ORG>, contended that the assessee had innumerable agencies, that it was a normal incident in the course of its business to give up agencies and acquire new ones, that the termination of the agency in question was a normal occurrence in the course of its business, that it had no impact on the earning assets or the structure of the business, that the alleged restrictive covenant was only an act of grace on the part of the agent in view of the long standing relationship between the parties and that it did not enter into the calculation of the, compensation paid to the assessee. In short, his argument was that the said compensation only represented the taxable income of the assessee should the <ORG> hold that the compensation was in part capital and in part revenue income, the argument proceeded, the said compensation would have to be apportioned reasonably between the said parts. Mr. <NAME>, learned counsel for the assessee, advanced the argument that on a true construction of the agreement disclosed by the correspondence it should be held that the amount received by the assessee was wholly as a consideration for. the restrictive covenant and, therefore, was of a capital nature. Alternatively he contended that even if the amount was wholly paid as compensation for the loss of the agency, it was a capital receipt, as the assessee lost a substantial source of income in relation to the totality of its business. On the assumption that the payment partook of a composite character, the learned counsel would say that an appointment should be made in proportion of the value to the assessee of the loss incurred under both the heads, namely, the loss of the agency and the restrictive covenant not to do business for a specified period in the same field.

These appeals raise the familiar question, namely, whether a particular income arising from the termination of one of the agencies of a multi-agency concern is a capital receipt or a revenue receipt. The decisions on this question are legion. Eminent judges in India as well as in England expressed their inability to lay down a precise principle of universal application but were able to evolve some workable rules of guidance. The difficulty is inherent in the problem itself. This <ORG> in a recent decision has surveyed the entire field and, therefore, no useful purpose will be served to cover the ground over again. That case is <CITATION> (1). There, this <ORG>, speaking through <ORG>, expressed its conclusion thus:

"'Where, on a consideration of the circumstances, payment is made to compensate a person for cancel-

(1) [1964] 8 S.C.R. 93 lation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue: where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."

But the difficulty still remains in the application of the said principle to the facts of each case. <CITATION> of income-tax, Calcutta(1) this Court applied the said rules to the facts of that case, which, by and large, are similar to, the facts in the present case. It would, therefore, be useful to notice briefly the facts of that case. There, the appellant company carried an business in diverse lines : acting as managing agents, shipping agents, purchasing agents, and secretaries, the company also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an unwritten agreement which was terminable at will the appellant acted as sole agents and distributors of explosives manufactured by <ORG> That agency was terminated and by way of compensation <ORG> paid for the first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the appellant's agency computed at the rates at which the appellant had formerly been paid and in addition in the third year full commission for the sales effected in that year at the same rates. <ORG> had intended to take a formal undertaking from the appellant to refrain from selling or accepting any agency for explosives or other competitive commodities, but no such agreement in writing was taken or insisted upon. The question was whether the amounts received by the appellant for those three years were of the nature of capital or revenue. This Court held that the amounts paid were of the nature of income and, therefore, assessable to tax. The reason given for that conclusion was that, having regard to the vast array of business done (1)  8 S.C.R. 121 by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The material facts of that case are on all fours with the present case. Indeed, the Principal in both the cases was the same and the agency terminated was also a similar one. The compensation given was worked out on the same lines. The only difference is that in that case it was not found that the restrictive covenant entered into the bargain.

This <ORG> again reiterated the same principle in Commis- sioner of Income-tax, Madras v. <ORG>). But, on the facts of that case, it came to the conclusion that the compensation paid for the loss of agency was. a capital asset. There, <NAME>, J., speaking for the <ORG>, said "In <ORG> case(1) this <ORG> pointed out that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but the rule is subject to an exception that payment received even for termination of an agency agreement, where the agency is one of many which the assessee holds, and the termination of the agency does not impair the profit making structure of the assessee, but is within the framework of the business, it being a necessary incident of the business that existing agencies may be ter- minated, and fresh agencies may be taken, is revenue and not capital, <ORG>'s case(8) falls within the excepti on to the ordinary rule, and circumstances which brought the case of the respondent within the exception must be clearly established." As we have observed earlier, in view of the judgments of this <ORG>, no further citation is called for. Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends upon the circumstances of each case. Before coming to a conclusion one way or the other, many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints ? If it was a business of taking agencies, how many agencies it had, what was their nature and variety ? How were they acquired, how one or some of them were lost and what was the total income they were (1) [1965] 3 S.C.R. 692 (2) [1964] 8 S.C.R. 93 (3) [1938] 21 T.C. 608 C.I./66-19 yielding ? If one of them was given up what was the average income of the agency lost ? What was its proportion in relation to the total income of the company ? What was the impact of giving it up on the structure of the entire business ? Did it amount to a loss of enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? or was it a loss due to an ordinary incident in the course of the business ? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to a loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter, it would be a capital receipt. But these questions can only be answered satisfactorily if the relevant material is available to the income-tax authorities. The evidence, of witnesses in charge of the business, the relevant accounts and balance sheets of the assessee before and after the loss, other evidence disclosing the previous history of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinized by the <ORG>. At this stage the question of burden of proof raised at the <ORG> may be noted. <CITATION> .(1), this <ORG> observed :

it must in the first instance be observed that it is for the revenue to establish that a particular receipt is income liable to tax................ ".

We may point out, as some argument was advanced on the ques- tion of burden of proof, that this Court did not lay down that the burden to establish that an income was taxable was on the <ORG> was immutable in the sense that it never shifted to the assessee. The expression "in the first instance" clearly indicates that it did not say so. When sufficient evidence, either direct or circumstantial, in respect of its contention was disclosed by the <ORG>, adverse inference could be drawn against the assessee if he failed to put before the <ORG> material which was in his exclusive possession. The process is described in the law of evidence as shifting of the onus in the course of a proceeding from one party to the other. There is no reason why the said doctrine is not applicable to income-tax proceedings. While the Income-tax authorities have to gather the relevant material to establish that the compensation given for the loss of agency was (1) [1965] 3 S.C.R. 692 a taxable income, adverse inference could be drawn against the assessee if he had suppressed documents and evidence, which were exclusively within his knowledge and keeping. With this background let us scrutinize the evidence in the present case. As we have stated earlier, the assessee is a well established and long standing company in South India. It has taken innumerable agencies in different lines. One of such agencies was the agency it had taken from <ORG>, Glasgow. Though the said agency had been with the assessee for over 47 years, it was an agency terminable at will. The assessee did not place any material before the <ORG> to establish the relative importance of the said agency in the framework of the earning apparatus of its business; it did not adduce any evidence to prove that the said agency was a pivot of its structure and that it had closed any branch or part of the establishment in consequence of the said loss. It could have placed material before the <ORG> to show that the average income from the said agency compared with the total income from all the agencies was so large that by this loss the entire business was dislocated. But it did not do so. The only evidence on which <ORG> relied and on which the learned counsel for the assessee laid emphasis was the fact that the income returned by the assessee for the year 1952-53 was very nearly the same as that it received by way of compensation from the Principal during the accounting year corresponding to the said assessment year. On that basis <ORG> held that the income from the source which had been taken away from the assessee by reason of the termination of the agency would be very nearly half of its total income and, therefore, it lost an enduring asset. This reasoning does not appeal to us. Firstly, the compensation paid for the third year did not represent only the commission on the sales effected in respect of that agency during that year, but it represented not only the commission on the said sales but also in addition two-fifths of that commission; secondly, the figures for the earlier two years show that during (he year ending March 31, 1949, if the whole commission had, been paid, the figures would have been Rs. 85,250 for the first year and Rs. 1,66,975 for the second year. The second year's figures was about one-fourth of the total income and the first year's would be one-eighth of it. There is another fallacy in this line of reasoning. The sales effected during the said three years were the sales effected by the agency. It is not possible to predicate that the assessee would have effected the same sales during that period if it had continued the agency. The real facts could have been brought out if only the average total commission earned by the assessee for a reasonable period of time before the transfer was disclosed. In the absence of such material it is not possible to arrive at any conclusion one way or the other, on the line of enquiry pursued by <ORG>. What remains, therefore, is only the fact that the assessee had innumerable agencies in different lines and that it only gave up one of them and continued to do business without any apparent mishap. The correspondence between the parties shows that the assessee gave up the agency without any protest presumably because such termina- tion of agencies was part of the normal course of its business. We, therefore, hold on the facts of the present case that the loss of the said agency by the assessee was only a normal trading loss and that the income it received was a revenue receipt.

Mr. <NAME> next contention is that on a fair reading of the correspondence that passed between the parties it should be held that the compensation given to the assessee was only in lieu of a restrictive covenant and, therefore, it was a capital receipt.

To appreciate this contention it is necessary to read the relevant correspondence. On March 11, 1947, the Principal wrote a letter to the assessee. As the argument mainly turned upon the contents of this letter, it is necessary to extract it in full. It reads :

IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LIMITED Explosives Branch, Nobel House, 25, Bothwell Street, Glasgow C-2.

<NAME> March 1947.

Our Ref. : Export sales Section GIL/NR.

Messrs. <NAME> and Company Limited, P.O. Box 63, Madras, India.

Dear Sirs, Agency arrangements.

We refer to the interview which Mr. <NAME> had with your Mr. <NAME> in May 1945, when it was intimated that as a matter of long term policy, our agencies in India and Ceylon would ultimately be taken over by <ORG> Limited. It was indicated at that time that a period of two to three years might elapse before any steps were taken as regards this transfer. We now have to advise you that the matter has been receiving further consideration, and <ORG> Limited desire to take over the various agencies as from the first April 1948.

It is with regret, therefore, that we have to intimate our intention of transferring your agency, as from the above date, to <ORG> Limited, and would take this opportunity of expressing to you our sincere appreciation of the valuable services you have rendered to us over a period of many years.

As a result of the transfer of your agency to <ORG>, we propose that compensation should be paid to you on the following basis :- (1) For the first three post-transfer years, we shall pay you two-fifths of the commission accruing on annual sales in the territory of your <ORG> taken over by, <ORG>, such commission to be computed at the commission rates formerly paid to you. (2)In the third post-transfer year we shall pay you, in addition, a sum equivalent to the full commission on sales for that year effected by <ORG> in your territory, calculated at the same rates.

(3) Payment will be made to you after the end of each year as soon as the amount is ascertained.

For the purposes of calculating the commission due to you, the post-transfer years will be deemed to run as from the date of the transfer of your agency to <ORG>. We trust that you will find these proposals acceptable.

As a condition of our paying compensation on the basis outlined above, we would request you to be good enough to give us a formal undertaking to refrain from 4 90 selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement now being terminated.

In this connection, we are asking our legal department to prepare a formal agreement which we will submit to you for your signature as soon as possible.

Yours faithfully, for <ORG>. Mr. <NAME> contended that for the past valuable services the Principal expressed only sincere appreciation and for the termination of the agency and thus putting an end to the assessee's future benefits it proposed to give the assessee compensation measured by the sales effected by the new agent. But his main argument is that whatever terminology was used, commission or compensation, the amount agreed to be paid was wholly as compensation for the assessee agreeing to refrain from selling or accepting any agency for selling explosives. That conclusion was sought to be arrived at on the ground that the said restrictive covenant was a condition for the payment of compensation. We find it difficult to accept this construction of the document. The scope of this document cannot be appreciated ignoring the circumstances under which it came into existence. As we have stated earlier, the agency, which is the subject-matter of this agreement, was only one of many other agencies the assessee had.

We cannot agree with the learned counsel that the compensa- tion was given wholly for the restrictive covenant. Indeed, the compensation was given expressly for giving up the agency. In the last paragraph of the letter a request was made to the assessee to agree to a restrictive covenant as a condition for paying compensation. The letter dated April 8, 1947, written by the Principal to <ORG> makes the position clear. Therein it was stated "With regard to the point you raise concerning the period during which you would undertake not to take any competitive agency, we would like you to understand that it was never our intention that you should be tied down on this Point for all time. We had felt that the, limiting period should be one of five years and we are pleased to note, from your letter that this appa-

rently is in accordance with your own ideas. It is suggested that the five years should date from the termination of the agency, namely, 1st April, 1948."

The letter written by the assessee to the Principal is not on the file. But it is clear from this letter that the restrictive covenant was one of the terms of the agreement relating to consideration. It was a part of the consideration that passed from the assessee for receiving the compensation. We cannot also agree with Mr. <NAME>, who went to the other extreme and contended that the restrictive covenant was only an act of grace on the part of the Agent and that it did not enter into the bargain. We, therefore, hold that the compensation agreed to be paid was not only in lieu of the giving up of the agency but also for the assessee accepting a restrictive covenant for a specific period.

The next question is whether that part of the compensation attributable to the restrictive covenant is a capital receipt or a revenue receipt.

<ORG> in <NAME> (H.M. Inspector of Taxes) v. Robson(1), had to consider, whether compensation paid for a restrictive covenant was a capital receipt or a revenue receipt. Under a service agreement the respondent therein covenanted in consideration of the payment to him of &-7,000 on the execution of the agreement, that if the agreement were determined by notice given by him or by his breach of its Provisions he would not compete directly or indirectly with the company within a radius of fifty miles of its place of business untill the five years had expired. <ORG> held that the said amount was a payment for giving up a right wholly unconnected with his office and operative only after he ceased to hold that office and, therefore, it was not taxable under Schedule E of the Income-tax Acts. This Court in <ORG> v. Commis- sioner of Income-tax, Calcutta(1) accepted the said principle and held that the compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated or for loss of goodwill was prima facie of the nature of a capital receipt.

In the present case, the covenant was an independent obliga- tion undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly un-

(1) [1942] 25 T.C. 33.

(2) [1964] 8 S.C.R. 121 4 9 2 connected with the assessee's agency terminated. We, therefore, hold that that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax.

The next question is whether the compensation paid is sever- able. If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the <ORG> or of the assessee. Such an apportionment was sanctioned by courts in Wales (H.M. Inspector of, Taxes v. Tilley(1), <NAME> v. <NAME> (H.M. Inspector of Taxes (2 ) , and <CITATION> (1). In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive cove- nant. The manner of such apportionment has perforce to be left to the assessing authorities.

The answer to the question referred to the, <ORG> is that only such part of the sums of Rs. 66,790 and Rs. 3,35,371 as is attributable to the loss of the agency is assessable under S. 10 of the Act for the assessment years 1951-52 and 1952-53. We accordingly modify the answer given by the <ORG> in that regard.

In the result, the appeals are partly allowed. As both the parties failed in part and succeeded in part, they will bear their respective costs here and in <ORG>. Appeals allowed in part.

(1) [1942] 25 T.C. 136 (3) [1955] 28 I.T.R. 435 (2) [1946] 28T.C. 41


CASE NO.: Appeal (civil) 3274-75 of 2003 PETITIONER: Govt. of A.P. and <ORG>. RESPONDENT: <NAME> and <ORG>. DATE OF JUDGMENT: 10/08/2005 BENCH: ARIJIT PASAYAT & H.K. SEMA JUDGMENT:

J U D G M E N T [With C.A. Nos.3076/2003, 3080/2003, 3088/2003, 3090/2003, 3093/2003, 3094/2003, 3096/2003, 3101/2003, 3280-3294/2003, 3323-3341/2003 and 3614/2005).

ARIJIT PASAYAT, J.

In these appeals challenge is to the judgment of <ORG> of <ORG> setting aside the orders/awards made under the Land Acquisition Act , 1894 (in short the 'Act') and directing Land Acquisition Officer to pass fresh awards keeping in view the observations made in the judgment.

A brief reference to the factual aspects would suffice.

In 1956 Nagarjuna Sagar Project (Acquisition of Lands) Act, 1956 (in short the 'Nagarjuna Act') was enacted. Under the said Act Sections 11 and 23 of the Act were amended. In 1979 writ petition was filed by one <NAME> and others questioning constitutional validity of Nagarjuna Act. <ORG> of <ORG> by its judgment dated 31.8.1979 in writ petition No.2110/79 ( <CITATION> . (AIR 1980 A.P. 165) held that the amendment to Section 23(1) (first clause) of the Act as made by the Nagarjuna Act is violative of second proviso to Article 31-A of the Constitution of India, 1950 (in short the 'Constitution') only so far it relates to acquisition of land within the ceiling limit and is under personal cultivation. The correctness of the judgment was questioned before this Court. Several other writ petitions were also decided following <NAME>'s case (supra). All the Civil Appeals against those judgments were taken up by a Constitution Bench in Civil Appeal Nos.1220-42/82 and connected matters. This Court did not go into the constitutional issues in view of the fact that respondents were small land owners having less than one acre of land. Possession has been taken in the lands involved in those appeals on different dates between 1980 and 1984. Being of the impression that the notifications had lapsed, fresh notifications were issued under Sections 4 and 6 in 1991. Land Acquisition Officer after due inquiry determined the market value in accordance with the Nagarjuna Act and the awards were made in 1992. In February 1997 and thereafter writ petitions were filed questioning validity of the actions taken and prayed for direction to determine the market value on the date of notification in 1991 under Section 4(1) of the Act without resorting to Nagarjuna Act. The Division Bench held that subsequent notifications were really unnecessary in view of the decision of this Court in <CITATION> . (1996 (6) SCC 424). It was held that when possession of the land has been taken pursuant to Section 17 of the Act, the provisions of Section 11-A do not have any application. Therefore, subsequent notifications were held to be of no consequence. After being held so, <ORG> remitted the matter to the Land Acquisition Officer by quashing the awards and directed passing of fresh orders.

Learned counsel for the appellant-State and its functionaries submitted that <ORG> did not consider the specific plea raised regarding delayed presentation of writ petition after long passage of time. Further the writ- petitioner had not effectively availed the remedies available under the Act and could not have indirectly asked for interference with the awards made long prior to the filing of the writ petitions. It was further submitted that the undisputed position is that references were pending in terms of Section 18 of the Act when writ petitions were filed. That being so, <ORG> should not have entertained the writ petitions.

In response, learned counsel for the respondents submitted that this <ORG>'s order in the earlier matters dated 8th July, 1996 to which reference has been made earlier, did not in essence find fault with the reasoning of <ORG> in the earlier decision. Further, the Land Acquisition Officer had passed the awards in some cases after the impugned judgments of <ORG> were passed and at this length of time this <ORG> should not interfere.

We shall first deal with the plea relating to the maintainability of the writ petition filed after long passage of time. In a catena of decisions this Court has held that <ORG> should not entertain writ petitions when there is delayed challenge to notification under Section 4(1) and declaration under Section 6 of the Act. ( <CITATION> (1975 (4) SCC 285), <CITATION> . (1996 (1) SCC 250) and <CITATION> . (1996 (11) SCC 501).

<ORG> was moved in these matters by writ petitions long after Section 4(1) Notification and Section 6 declarations were made. On that ground alone the writ petitions should not have been entertained. Additionally, the respondents clearly accepted that references in terms of Section 18 were pending. <ORG> has not even indicated any reason as to why the writ petitions were being entertained when the references in terms of Section 18 were pending. On that score also <ORG> judgment becomes unsustainable.

We, therefore, set aside the judgment of <ORG>. The references which were pending and have been closed in view of the impugned judgment of <ORG> shall be revived. In some of these cases also the fresh awards have been passed. They are set aside and the original reference stands revived. Only references which were pending on the date of <ORG> judgment i.e. 14.3.1997 shall stand revived. Other claims and adjudications, if any, pursuant to <ORG>'s impugned order in these cases shall have no effect.

The appeals are accordingly allowed with no order as to costs.