Law:

Section:

Section 56, read with section 28 of the Income-tax Act, 1961 - Income from other sources - Chargeable as - Assessment year 1975-76 - Assessee firm was engaged in sale agency business for sale of foreign liquors - In September 1970, assessee transferred its agency business to other concern for some years - In those years assessee was receiving royalty from that concern - Assessee resumed its agency business from 1975-76 onwards - Whether merely because assessee firm did not carry on business for temporary period, it could not be said that firm ceased to exist - Held, yes - Whether, however, income derived from royalty during interregnum was not assessable as business income but as income from other sources - Held, yes FACTS The assessee-firm was principally engaged in a sole agency business for sale of foreign liquors for the relevant assessment year the ITO passed an order of assessment accepting the return submitted by the assessee as a registered firm. The Commissioner while exercising powers under section 263 found that the assessee had transferred its agency business to a company on 24-9-1970, and the transferee-company had taken over the sole selling agency business. As per the agreement 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, 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 was no question of the continued existence of the partnership and the assessee was not entitled to renewal of registration as a firm under section 185. The Commissioner therefore cancelled the renewal of registration granted to the firm and directed the ITO to make fresh assessment treating the assessee as an association of persons. On further appeal, the Tribunal held that the income by way of royalty received by the assessee from the transferee-company was really its business income in allowing the user of its business asset. It also noticed that the assessee-firm had…

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