TMI Blog1983 (2) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of Binny's amalgamations. The assessee was entitled to fees as counsel for work done to this company up to January 23, 1970. It was, however, agreed that the assessee was entitled to receive the fee from Binny Limited only of an amount equivalent to one-fourth of the firm's bill on this account. These two points of agreement are set out in cls. 3 and 4 of the Heads of Agreement. Having regard to the important part they have played in the controversy between the parties, we set out the text of these clauses : " 3. The continuing partners agree that in respect of Binny's amalgamation bill for work done up to 23-1-1970 Mr. Reddi shall be entitled to receive from Binny Limited fee as counsel equivalent to 1/4th of the firm's bill on that account. 4. All work except as provided for herein with Mr. Reddi as regards taxation, company law and relative matters may be taken by him subject to clients' wishes and the continuing partners shall not be entitled to any fee in respect of such work. " Pursuant to these terms, the assessee subsequently received from Binny Limited 1/4th of the fee bill of the firm up to January 23, 1970. As for the fees in respect of other work to which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho is a member of the bar, which means that his source of income is the legal profession. Under the scheme of the income-tax statute, businesses as well as professions are dealt with under one single head of charge, entitled " Profits and gains of business or profession ". Both a business and a profession are governed by the same provisions in the tax code relating to computation of taxable income, grant of allowances, and deductions and the like. There are, however, obvious differences between the way in which income is earned in business on the one hand, and the income is earned in the professions, on the other. In business, there is almost always a capital base for income to emerge. A businessman invests or risks, or sinks, his capital either on a project or on a capital equipment. By exploiting the project or the equipment, the businessman derives business income as so much of a return on the capital. The proportion of the fixed capital to other outlays may vary from business to business, but in almost every case a businessman risks his capital in business, exploits the capital in a commercial way, and gets his return as income periodically. The Privy Council's metaphor in CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh we have observed that professional partnerships need little or no capital to start with as compared to trading or industrial partnerships, the partnership law and practice always marked a clear distinction between the contribution of capital by the partners and the contribution of their labour. Further, where a business is being carried on by a partnership especially in industrial concerns, there is a distinction between fixed capital and circulating capital, between capital assets and trading assets, and so on. This distinction is maintained right through the career of the partnership. Even during the dissolution of firm the distinction is clearly drawn. In this respect, the partnership dissolution basically differs from the dissolution of an incorporated company. Lord Atkin, giving the judgment of the Privy Council in CIT v. P.R.A.L. Muthukaruppan Chettiar[1935] 3 ITR 208, held that the principles applicable to the winding up of a company and the distribution of its assets on liquidation were not applicable to a dissolution of a partnership. The Noble Lord observed thus (p. 210): "On the dissolution of a partnership an outgoing partner has the right to receive not as in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not make any difference to the revenue character of that payment in his hands. In our judgment, the Tribunal's decision is based on misconception of the law. Quite apart from any reference to the principles laid down in Muthu Karuppan Chettiyar's case [1935] 3 ITR 208 (PC), the Tribunal's conclusion is unsupportable even on factual consideration. The assessee, as we earlier pointed out, joined the law firm in the year 1967. Under the partnership deed, which is on record, he was entitled to a share in the net profits of the firm equivalent to 13% thereof. What does this mean in the context of the constituents and personnel of this law firm ? The record shows that there were as many as 12 partners, all of them practising lawyers and each being given his aliquot share in the firm's profits just as the assessee, out of consideration for his expertise, was entrusted with income-tax and company law work, other partners who have their own specialization must have been entrusted with such work as they could do best. Despite the distribution of legal work in this fashion as between the different partners, the scheme of the partnership is that professional receipts from cases handled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not apply to the case on hand. According to the assessee he gave up his share of the assets of the law firm and, hence, it was in consideration therefor, that he was given the right to receive the fees for services which he had rendered to the firm's clientele earlier. There is nothing in the Heads of Agreement to suggest, either express or implied, to support the assessee's contention. Clause I of the Heads of Agreement merely reiterates that after the expulsion of the assessee from the firm, the remaining partners would be entitled to continue the partnership unabated. This clause is nothing but a reiteration of the terms of the main partnership deeds. Even accepting the assessee's contention that the right to receive the fees for work done up to January 23, 1970, was given to him in consideration of his giving up his other demands on the firm, that would not really alter the nature of the receipt. It is impossible to view the present situation as in any way different from the retirement of a partner from a firm and a consequential accounting between the retired partner and the remaining partners. In such a situation, the character of the receipt obtained by the outgoing partner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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