Satish Chandra, C.J.
1. It appears that initially Hafiz Shaukat Hussain carried on business under the name and style of Oriental Art Glories, Moradabad. He dealt with brasswares including their export. On 14th July, 1967, he entered into an agreement of partnership with Hasin Ahmad that with effect from 15th July, 1967, the business will be carried on in partnership, but under the same name of Oriental Art Glories. Both the partners had equal share in the profit and loss. The partnership was stated to be for a period of three years.
2. On 31st March, 1969, the firm was dissolved. Hasin Ahmad went outand the business was taken over by Hafiz Shaukat Hussain. On 31stMarch, 1969, the state of affairs appears to have been that it suffered aloss of Rs. 8,287.92. Each of the partners undertook to share the loss, i.e.,of Rs. 4,143.96. Subsequently, they entered into a written agreementindicating the extent of the loss and also stating that by this time thelikely profits and premium on earned entitlements and release ordersgranted against exports made and the amount of drawback during theperiod ending 31st May, 1969, was not accounted for and that on 25thMay, 1969, the amount of Rs. 20,222.34 was likely to be due and payable aspremium on earned entitlements, etc., made during the year. Half of thisamount, i.e., Rs. 10,117.17, was agreed to be payable to Hasin Ahmad asthe half share of premium on entitlements, etc. This amount has beenheld in the orders of the authorities below to have been agreed to be paidto Hasin Ahmad by 31st March. 1971.
3. It appears that during the accounting period relevant to the assessment year 1970-71, Hafiz Shaukat Hussain paid this amount to HasinAhmad. In his personal assessment, he claimed this amount as a deductible allowance. The ITO repelled this claim. His order was upheld onappeal as well as in further appeal by the Tribunal. The Tribunal inpara. 4 of its order observed:
'In our view there is substance in the stand taken by the learned authorised representative of the department as we have seen that theassessee has paid this amount against the stipulation in Clause 10 of the partnership deed where it has been agreed upon 'that if party No. 2 with-draws from the partnership at any time during the three years, all bank accounts shall continue to operate and he shall have no right to stop any payments to the bankers or other parties or to stop mail in the post office or the receipt of any benefits of licence or entitlement of export, etc., or execution of disposal of any documents relating to the partnership business by party No. 1 aforesaid'.'
4. Opposite party No. 2 was Hasin Ahmad. They consequently repelled the submission made on behalf of the assessee that this payment represented business expenditure or diversion of income by an overriding title.
5. At the instance of the assessee, the Tribunal has referred for ouropinion the following question of law :
'Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Clause 10 of the partnership deed prevented the outgoing partner from claiming any share in the benefits earned on account of exports for the period of partnership and in holding on this ground that the payment was in the nature of diversion of income after it had been earned ?'
6. Clauses 8 to 11 of the partnership deed are material and relevant for answering the question referred to us. They are as follows :
'(8) That it is mutually agreed that at present the duration of the partnership is fixed for three years.
(9) That if party No. 1 withdraws from the firm within the said three years, he shall be liable to pay to party No. 2 Rs. 2,500 as fixed damages and if party No. 2 withdraws from the firm within the said three years, he shall only be entitled for the profits and losses accrued to the firm for the period ending dissolution of the firm and the capital due to him and in that case party No. 2 shall not be entitled to the said fixed damages of Rs. 2,500.
(10) That if party No. 2 withdraws from the partnership at any time during the three years all bank accounts shall continue to operate and he shall have no right to stop any payments to the bankers or other parties or to stop mail in the post office or the receipt of any benefits of licence or entitlement of exports, etc., or execution or disposal of any documents relating to the partnership business by party No. 1 aforesaid.
(11) That on dissolution of firm the business shall be continued in sole proprietorship of party No. 1 and party No. 2 shall have no concern with the goodwill of the firm thereafter.'
7. From Clause 9 it is clear that if Hasin Ahmad were to withdraw from the firm within a period of three years, he was entitled to the profits andlosses accrued to the firm for the period ending dissolution, as also to the payment of the capital due to him.
8. Clauses 10 and 11 were inserted to cover the situation that if Hasin Ahmad withdraws from the partnership during the period of three years, the business shall be continued in sole proprietorship of party No. 1. This eventuality was specifically provided in Clause 11. Clause 10 was put in in order to effectuate the purpose of Clause 11. Clause 10 prevented Hasin Ahmad from interfering with the business of the firm after his retirement from it. Various ways were indicated in Clause 10, namely, that he was to have no right to stop payments to the bankers or other parties or to stop mail in the post office or the receipt of any benefits of licence or entitlement of exports, etc. The last part of Clause 10 relating to 'the partnership business by party No. 1 aforesaid' expressly makes it clear that party No. 2 will have no right to do the things mentioned in the earlier part of Clause 10, while the partnership business was to be conducted by party No. 1. In other words, the prohibition contained in Clause 10 related to the non-interference in continuance of business by party No. 1 after dissolution. There is nothing in Clause 10 which relates to or curtails the rights of the parties to claim share in the benefits earned on account of export for the period of partnership, which matter was covered by Clause 9 wherein it was provided that party No. 2 will be entitled for the profits and losses accrued for the period ending dissolution. For this purpose Clause 10 was irrelevant. There is nothing in Clause 10 preventing either of the partners from making a claim for their share of the profits.
9. The finding of the Tribunal that this payment was against the provisions of Clause 10 is hence incorrect.
10. The question as formulated by the Tribunal and referred for our opinion proceeds on the finding that Clause 10 prevented the partners from claiming any share in the benefits earned on account of export for the period of partnership and on the basis of this finding the conclusion was that it was diversion of income after it had been earned. In view of the observation made above, the question, as framed, can only be decided in favour of the assessee and against the department.
11. This, however, does not conclude the matter. The learned counsel appearing for the assessee had argued before the Tribunal that though the firm was maintaining mercantile system of accounting, yet for entitlement purposes it had followed the cash system and on that basis the assessee paid the amount that was received by him during-the year under consideration. This argument has not been dealt with specifically by the Tribunal. There is no finding whether the general system of accounting was mercantile or the assessee had in fact followed the cash system for the entitlement purposes and what was the fate of this argument. TheTribunal merely proceeded on the basis of its interpretation of Clause 10 which, as observed above, was not correct. In the circumstances, the Tribunal will have to rehear the appeal in order to decide the point in controversy. We, therefore, answer the question referred to us in the negative, in favour of the assessee and against the department.