(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.
(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, after the 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 :
(3.) 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.