SATISH CHANDRA C.J. - It appears that initially Hafiz Shaukat Hussain carried on business under the name and style of Oriental Art Glories, Moradabad. He dealth with brasswares including their export. On July 14, 1967, he entered into an agreement of partnership with Hasin Ahmad that with effect from July 15, 1967, the business will be carried on in partnership, but under the same name of Oriental Art Glories. Both the partner had equal share in profit and loss. The partnership was stated to be for a period of three years.
On March 31, 1969, the firm was dissolved. Hasin Ahmad went out and the business was taken over by Hafiz Shaukat Hussain. On March 31, 1969, the state of affairs appears to have been that it suffe red a loss of Rs. 8,287.96. Subsequently, they entered into a written agreement indicating the extent of loss and also stating that by this time the likely profits and premium on earned entitlements and release orders granted against export made and the amount of drawback during the period ending May 31, 1969, was not accounted for and that on May 25, 1969, the amount of Rs. 20,222.34 was likely to be due and payable as premium earned entitlements, etc., made during the year. Half of this amount, i.e. Rs. 10,117.17 was agreed to be payable to Hasin Ahmad as the half share of premium on entitlements, etc. This amount has been held in the orders of the authorities below to have been agreed to be paid to Hasin Ahmad by March 31, 1971.
It appears that during the accounting period relevant to the assessment year 1970-71, Hafiz Shaukat Hussain paid this amount to Hasin Ahmad. In his personal assessment, he claimed this amount as a deduction allowance. The ITO repelled this claim. His order was upheld on appeal as well as in further appeal by the Tribunal. The Tribunal in para. 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 the assessee 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 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 license or entitlement of export, etc., or execution of disposal of any documents relating to the partnership business by party No. 1 aforesaid.'
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 overiding title.
At the instance of the assessee, the Tribunal has referred for our opinion the following question of law :
'Whether, on the facts and circumstances of the case, the Tribunal was right in holding the 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 patnership and in holding on this ground that the payment was in the nature of diversion of income after it had been earned ?'
Cls. 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 the 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 form thereafter.'
From cl. 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 and losses accrued to the firm for the period ending dissolution, as also to the payment of the capital due to him.
Cls. 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 cl. 11. Cl. 10 was put in in order to effectuate the purpose of cl. 11 Cl. 10 prevented Hasin Ahmad from interfering with the business of the firm after his retirement from it. Various ways were indicated in cl. 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 cl. 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 cl. 10, while the partnership business was to be conducted by party No. 1. In other words, the prohibition contained in cl. 10 related to the non-interference in continuance of business by party No. 1 after dissolution. There is nothing in cl. 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 cl. 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 cl. 10 was irrelevant. There is nothing in cl. 10 preventing either of the partners from making a claim for their share fo the profits.
The finding fo the Tribunal that this payment was against the provisions of cl. 10 is hence incorrect.
The question as formulated by the Tribunal and referred for our opinion proceeds on the finding that cl. 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 ear ned. In view of the observation made above, the question, as framed, can only be decided in favour of the assessee and against the department.
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 forllowed 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. The Tribunal merely proceeded on the basis of its interpretation of cl. 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.