Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: A. K. SHARFUDDIN VS Respondent: COMMISSIONER OF INCOME-TAX, MADRASHonorable Justice RAJAGOPALANP. Sharfuddin,C. S. Rama Rao Sahib
1960 P T D 1022
1960 P T D 1022
[Madras (India)]
Before Rajagopalan and Ramachandra Iyer, JJ
A. K. SHARFUDDIN
Versus
COMMISSIONER OF INCOME‑TAX, MADRAS
Referred Case No. 38 of 1955, decided on 23rd February, 1960.
Income or capital----
----‑Partnership‑Compensation for relinquish ment of partnership rights‑Whether income or capital.
Compensation received by one partner of a. partnership from another partner for relinquishing all his rights in the partnership is compensation for loss of a capital asset and is not a trading receipt.
Rangaswami Naidu v. Commissioner of Income‑tax (1957) 31 I T R 711 applied.
STATEMENT OF CASE
By this application, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law which are said to arise out of the Tribunal's order in I. T. A. No. 7049 of 1953‑54. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case, agreed to both the parties, and refer it to the High Court of Judicature at Madras under section 66 (1) of the Indian Income‑tax Act.
2. The assessee who does business in hardware, entered into a partnership with one A. M. Mohammed Abbas for importing scrap iron worth about Rs. 2 lakhs and selling the same in this country under an agreement, dated 13th April, 1950, a copy of which is annexure `A' and forms part of the case. The assessee himself went to Malaya on behalf of the firm and purchased scrap iron. After the goods were so acquired, the Government of India did not grant permission to the firm to sell this stock. On 31st December, 1950, the partnership was dissolved and a deed, dated 5th January, 1951, was entered into in evidence thereof, a copy of which is annexure "B" and forms part of the case. One of the recitals in this deed says:
" . . .the retiring partner hereby assigns and releases unto the said continuing partner all his share, right, title or interest in the said business and the property, assets, credits, effects and goodwill thereof."
In pursuance of this clause, Rs. 31,000 was forthwith paid by Mohamed Abbas to the assessee, the retiring partner, in full settlement of all his claims in respect of the partnership business on 5th January, 1951, the date of execution of the aforesaid deed (annexure) within the year ended 12th April, 1951, the "previous year" for assessment year 1951‑52. The business was thereafter to be carried on by Mohamed Abbas in his individual capacity.
3. The Income‑tax Officer assessed the aforesaid sum of Rs. 31,000 for the aforesaid assessment year 1951‑52 as his share of revenue profits from the business in question, giving his reasons therefore as follows:
"It is, therefore, clear that what has been paid to the assessee is only the assessee's share of profits from the partnership. The assessee is himself a hardware merchant and therefore any receipt from a partnership doing similar business in scrap iron cannot be said to be either casual or non‑recurring. The scrap iron business in akin to the hardware business and it cannot be said therefore that the scrap iron is a new venture or a new type of business absolutely unconnected with the assessee's business. As the partnership existed only for a small period no portion of the payment of Rs. 31,000 could be attributed to goodwill or capital asset. The entire sum of Rs. 31,000 will, therefore, be treated as the assessee's share of revenue profits assessable in his hands under business."
4. The Appellate Assistant Commissioner on appeal wrote as follows:
"I find that since the firm did not get a permit for selling the stock which had been brought from Malaya no sale was effected till the date of the dissolution of that firm. The appellant's share of the profit will be a share in the profit if the accounts were closed on 31st December, 1950. Since the stock was remaining unsold on that date there could not have been any profit till then. The payment of Rs. 31,000 by Abbas was only to enable him to get the ownership of all the stock that had been purchased jointly by him with the appellant. It was not any share of profit that was given to the appellant. This cannot be included in his asses sable income."
5. The Department appealed against this deletion made by the Appellate Assistant Commissioner and contended that as Mohamed Abbas had taken all the rights, liabilities, title and interest of the business and had released the assessee by making a payment of Rs. 31,000 in full settlement of his share, the sum received constituted a share of the assessee's profits in the partnership. It was also contended that the Appellate Assistant Commissioner erred in considering the payment as having been made by Mohamed Abbas for acquiring the ownership of the stock and also that the real nature of the payment must be arrived at by a reference to the attendant factors and circumstances which led to the receipt. The counsel for the assessee contended that the payment represented good will and that it was not profit and supported the Appellate Assistant Commissioner's order.
6. For reasons given in their order, a copy of which is annexure `C' and forms part of the case, the Tribunal held reversing the Appellate Assistant Commissioner's order that the sum of Rs. 31,000 represented profits that accrued to the assessee from the transaction by which he sold his share of the stock‑in‑trade and other assets of the joint venture to his co‑venturer and that it was assessable in his hands in the normal manner.
7. On these facts, the assessee has raised a number of questions, but we think it is enough if the following question is referred:
"Whether there were materials for the Tribunal to hold that the aforesaid sum of Rs. 31,000 or any part thereof was profit that accrued to the assessee assessable under the Income‑tax Act."
P. Sharfuddin for the Assessee.
C. S. Rama Rao Sahib and S. Ranganathan for the Commissioner.
JUDGMENT
RAJAGOPALAN, J.‑In form and virtually in substance the Rs. 31,000 paid to the assessee by his partner Abbas was compensation for the relinquishment of the rights of a partner which the assessee had. The deed of partnership specifically provided that the purchase and sale of scrap metal was the only item of business that the partnership was to undertake. Though the deed of partnership provided that it was only the assessee that was to contribute the capital, it was common ground that the capital was borrowed capital. The entire liability to discharge that loan was taken over by the surviving partner Abbas under the terms of the deed of dissolution. To go back to the point mentioned earlier, the only item of business that the partnership was formed to transact was the purchase and sale of scrap iron. The purchase was effected, but the sale could not be effected, because of a temporary embargo placed upon sales by the Government of India, Abbas, took the risk of effecting a sale and making a profit out of the scrap already purchased by the partner ship, .and what he paid was compensation to the assessee for relinquishing all his rights in the partnership. The case, in our opinion, falls within the scope of the rule of this Court Laid down in Rangaswami Naidu v. Commissioner of Income‑tax ((1957) 31 I T R 711). That Rangaswami Naidu's case dealt with a managing agency makes no real difference in the application of the prin ciple, as in that case, it is against the congeries of rights that the assessee enjoyed under the deed of partnership that he was paid a compensation., and that was compensation for a capital asset. It cannot be said that the contract the assessee entered into with Abbas was in a line with the normal trading contracts the assessee entered into. His line of business was hardware. Once again, we have to point out that the partnership deed provided only for this one item of business, and that item of business the assessee had to give up, and for giving it up he was paid compensation. Therefore, it was not a trading receipt, and the compensation was really for loss of a capital asset.
We answer the question in the negative and in favour of the assessee. As the assessee has succeeded he will be entitled to the costs of this reference. Counsel's fee Rs. 250.
Question answered in the negative.