COMMISSIONER OF INCOME TAX Vs. KANTILAL SHAH

JUDGEMENT

(1.) IN this reference, we are concerned with Mrs. Vimla Kantilal Shah, an individual, and the assessment year is 1960 -61. For this assessment year, the relevant accounting period in respect of income from Natson Manufacturing Company is the year ended 30th September, 1959, and in respect of the income under the head 'Income from other sources' is the calendar year ended 31st March, 1960. Natson Manufacturing Co. (hereinafter referred to as 'Natsons') is a firm consisting of two partners, A.N. Shah and N. C. shah, which firm was in need of finance and accordingly an agreement dated 7th March, 1958, was entered into between the firm and the assessee. Under the said agreement, a copy whereof is to be found as annexure 'A' to the statement of case, the assessee agreed to advance capital to the said firm for the purpose of its business and development to the extent of rupees one lakh. Clause 3 of the said agreement provided that in consideration of such advance, the firm was to give to the assessee a twenty -five per cent. share from the profits of the firm. The agreement was to be deemed to have commenced from the 1st day of January, 1958, and the share in the profits of the assessee was to be calculated from that date. The period of the agreement provided under clause 6 was five years from 1st January, 1958. By the said clause, it was provided that the accounts should be made up in the first instance up to 30th September, 1958, and thereafter according to the accounting period of the partnership of Natsons, which was the year ending 30th September every year. Clause 7 made provision for what was to be paid to the assessee in case there were no profits of the firm. By the said clause, it was provided that interest would be payable on the sum advanced by her at 6% per annum. It was clarified by a later clause that the agreement was not deemed to constitute a partnership between the two persons constituting Natsons and the assessee or between the firm and the assessee. There was also a provision that if the firm required more capital they were to approach the assessee; the clause, however, did not provide for any obligation on the assessee to advance additional capital beyond the sum of rupees one lakh or indicate the terms of such advance.

(2.) THEREAFTER , differences arose between the said firm and the assessee and by another agreement dated 16th December, 1959, the parties cancelled the earlier arrangement; a copy of the later agreement dated 16th December, 1959, is to be found as annexure 'B' to the statement of case. Clause 1 of the later agreement (annexure 'B') states that the share of profits of the assessee for the firm's year ended 30th September, 1958, comes to Rs. 45,243. Clause 2 indicates that the profit for the next year, i.e., the period ending 30th September, 1959, is being ascertained and is mentioned at about Rs. 45,000. It may be stated that the assessment order for the year 1960 -61 shows that this profit was ultimately ascertained at Rs. 38,801. Clause 3 requires the firm to pay to the assessee all the amounts lying to her credit including the sum of Rs. 45,243 (i.e., the amount advanced as capital and the share of profits for the year ended 30th September, 1958), on the 30th day of December, 1959. Clause 4 provides that on a before 31st December, 1959, the amount ascertained towards the share of profit for the year ended 30th September, 1959, is also to be paid to the assessee. Clause 5 provides that the earlier finance agreement dated 7th March, 1958, is to be treated as cancelled and determined as at the end of 30th September, 1959, on payment being paid as provided in the later agreement; and it further provides that in consideration of the said termination, the firm has to pay to the assessee the sum of Rs. 50,000 by way of compensation for such earlier determination of the said agreement. This amount of Rs. 50,000 is also to be said on 30th December, 1959. By clause 6 the position is reiterated, viz., that on payment of these amounts, viz., Rs. 45,243, and the other amounts standing to the credit of the assessee, the share of profits duly ascertained for the period ended 30th September, 1959, and the sum of Rs. 50,000 being compensation for determination of the finance agreement, the assessee is to release all her right, title and interest in respect of the said agreement dated 7th March, 1958.

(3.) THE matter was carried by the assessee in appeal. A number of grounds were urged before the AAC. It was submitted that notice under s. 148 for revising the assessment was not called for. It was further urged that the ITO had erred in holding that the compensation of Rs. 50,000 received from the firm pertained to loss of profit and not loss of a capital asset. It was also urged that even if this submission be not accepted, the ITO was in error in holding that the income was assessable for the assessment year 1960 -61, and it was submitted on behalf of the assessee that it could not be included in the total income for that year and was relevant only for the assessment year 1961 -62. All the three contentions were rejected by the AAC, who confirmed the order of the ITO.