TMI Blog1988 (12) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... , deleted and the assessee got relief. On second appeal by the Department, the Tribunal upheld the decision of the Appellate Assistant Commissioner holding that the assessee-firm is distinct and separate entity vis-a-vis the firm on whose behalf the amount of Rs. 1,37,518 has been collected and, accordingly, on these facts, it cannot be said that the said amount can be treated as the income of the assessee-firm as it existed during the accounting period relevant to the assessment year under appeal. On these facts, the following question of law has been referred to this court at the instance of the Commissioner under section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 1,37,518 should not be included in the assessee's income for the relevant previous year ?" At the hearing, Mr. Moitra, learned advocate for the Commissioner, has contended that the assessee-firm received the amount in question and thereafter, distributed the same to the erstwhile partner. Accordingly, it must be treated as the income of the assessee-firm. He has also submitted that the assessee-fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retiring partners as and when collected would not form part of the receipts of the firm but shall be held by the continuing partners in trust for the retiring partners until payment was made in full to them. In the context of those facts, it is necessary to set out the relevant clause of the deed of retirement dated March 14, 1970 which, inter alia, provides as follows : "Bimalanda Mitra, Nemai Chand Kundu and Sunilendra Chandra Basu (hereinafter referred to as the "retiring partners") have retired from the partnership business of Messrs. G. Basu and Co. and Messrs. Tarmaster and Co. from close of business on the 8th October, 1969. The firms of Messrs. G. Basu and Co. and Messrs. Tarmaster and Co. will be carried on by Arun Kumar Basu and Anil Kumar (hereinafter referred to as the "continuing partners"). Arun Kumar Basu shall pay the following sums to the retiring partners in full satisfaction of all their claims for their rights, share of outstanding fees, goodwill, assets and other dues : Rs. Bimalanda Mitra 62,842 Nemai Chand Kundu 44,656 Sunilendra Chandra Basu 42,437 Total-1,49,935 The above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It cannot constitute the income of the assessee-firm. The question is not one of artificial stipulation in the deed of retirement with regard to the receipt of the outstanding fees, as contended by the Income-tax Officer. The question is whether there was any legal obligation on the part of the assessee-firm to the retiring partners. Under the agreement, when there has been division of assets and income of the firm earlier constituted, the assessee-firm cannot carry on the profession without fulfilling its obligation. The agreement is binding on the parties. It is not a case of distribution or diversion of income after the income is received by the assessee. It is a case where the amount does not reach the hands of the assessee as its income. Every receipt is not income. It will depend on the nature and character of the receipt. It is true that no assessee can, by agreement, change the nature and character of the receipt. If the receipt is impressed with the character of income, whether it is distributed before or after the receipt is of no consequence. Similarly, where there is an obligation to pay and it has to be diverted by overriding title, it cannot be treated as income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. The Income-tax Officer reopened the assessment on the ground that the income arising from the receipt of rebate on excise duty and duty drawback and interest on deposits of such rebate and drawback had escaped assessment for the said year. The matter went to the Tribunal and the Tribunal held that there was a diversion of benefit in respect of the said rebate and drawback even from the inception and there was an overriding title in favour of the foreign buyers. A contention was raised on behalf of the Revenue before this court that there was no diversion of the amount of excise rebate and drawback at source nor was there any overriding title of the foreign buyers in respect of the amounts and the assessee alone was entitled to the said amounts. Repelling the said contention, the Division Bench held as follows (at page 881) : "On a consideration of the facts as found, the provisions of the relevant agreements between the assessee and its foreign buyers, the respective submissions, of the parties and the decisions cited, it appears to us that, under the agreements it was made clear that the assessee would be entitled to receive the excise duty rebate and customs duty drawback on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract, they continued to be partners and the profits should be apportioned between them as they were entitled to receive the profits in the "previous year". It may be stated that the partnership deed executed by the new firm did not mention anything about the old partners continuing with regard to the 336 bales. During the whole of the relevant accounting year, the firm consisted of three partners only and the application of the firm for registration showed that the profits were shared only between three partners. The Tribunal held that the mere fact that some moneys were paid to the old partners by the new firm as a result of certain arbitration could not affect the taxation of the firm ; as soon as the income was earned, tax was attracted and the Bench disallowed the claim of the applicants (appellants). There, Viswanatha Sastri J., speaking for the court, observed as follows (at page 368) : "The two old partners had each a three annas share in the old firm. They had certain valuable rights in respect of the forward contracts for the purchase of piece-goods as the market was rising owing to war conditions. Their rights in respect of these contracts were isolated and res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusive right to the goods which formed the stock-in-trade and is, therefore, a revenue expenditure laid out solely and exclusively for the business of the new firm." Reliance has also been placed on the decision of IRC V. Hogarth [1940] 23 TC 491 (C Sess). In that case, "in 1934, one of the partners of the firm of which the respondent was a member became seriously ill and was unable to attend to the business. In the absence of a provision for retirement in the partnership deed, an agreement was concluded in January, 1937, under which the partner retired as at 31st December, 1936, and 'in full settlement of his whole share ... in the capital, assets and profits of the business' he was to be paid, inter alia, 'a sum equal to one-fourteenth part of the net 'profits of the business for the three years ending 31st December, 1937,1938 and 1939, under deduction of income-tax. The retiring partner died on 12th February, 1937. Certain payments were made to his representatives under the agreement, including an item, paid in May, 1938, of. 2,389 pounds representing, after deduction of income-tax, 1/14th of the net profits of the business for the year to 31st December 1937. The responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether he is subject to be called on so to retire. Under the agreement of co-partnery, if those who call on him to retire are right, he loses as at the date of retiring all interest in the profits of the firm. If, on the other hand, he is right in maintaining his position as partner of the firm, he continues with an indefinite right over an unmeasured term of future years to enjoy year by year his share in the profits of the firm. It is an immediate determination of his right to profits on the one hand and continuance without definite term of his share of profits on the other. What is in issue is his right to an income and a claim against capital. The partners could have settled the matter by arbitration. They preferred to settle it by compromise, and the agreement of 14th January, 1937, is an agreement to compromise any conflicting claims. In form it provides, inter alia, for three instalments of a share of the profits calculated on the share which would have been enjoyed by Mr. Henderson as a continuing partner. On the interpretation that your Lordship has arrived at-and at which I also arrive-these instalments were to be paid year by year. This seems to me much more like ..... X X X X Extracts X X X X X X X X Extracts X X X X
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