1. This is a reference under Section 66(2) of Indian I.T. Act, 1922, which arose out of the assessment of Shambhu Nath, proprietor of Delhi Printing Works, for the assessment year 1961-62 for which the previous year was the calendar year 1960. The question which has been referred for our decision is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessed was entitled to a deductionof Rs. 20,182 out of the sum of Rs. 40,000 paid by him to Shri Sham Nath in computing the assessed's total income ?'
2. The assessed, Shambhu Nath and his son, Sham Nath, were running and managing the Delhi Printing Works which originally belonged to one Chandu Lal and which was being run from April 1, 1939. In 1952 the assessed and his son purchased the business and started running it as a partnership concern with effect from January 1, 1953. A partnership deed was drawn up on September 12, 1953. The father was entitled to 2/3rds share in the profits and the son l/3rd share. Under the terms of the partnership deed it was not terminable before the expiry of five years from the date of its commencement but under Clause 15 after the expiry of five years either of the partners could retire after serving three months' notice of his intention to the other partner. During the said period of three months the accounts were to be finalised and the retiring partner shall be deemed to have ceased as a partner although some matters might remain unsettled during that period. Under Clause (4) of the partnership deed the cash required for running the business was to be contributed by each partner according to his own share and if any partner advanced more than his share, he was entitled to interest at 6%.
3. In 1958 disputes and differences arose between the assessed and his son. On October 15, 1958, the son served a notice on the father stating that he did not intend to continue as a partner in the business and giving three months' notice for the termination of the partnership. He also gave a number of reasons for his decision. He also laid a claim to several sums of money as due to him on the termination of the partnership. He claimed a sum of Rs. 30,000 together with interest on account of excess drawings made by the father from the firm. He also claimed that the income-tax of the partners had been erroneously paid out of the partnership funds and that in respect of this also he had a claim. He further claimed that a sum of Rs. 35,811-7-6 was due to him as per his account with the firm. He also mentioned another sum of Rs. 3,500 as due to him on account of certain expenses incurred by him on account of the firm.
4. Thereafter, there were certain arbitration proceedings which culminated in an award of the arbitrators dated October 29, i960. This was made a decree of court on October 31, 1960. Under the terms of the award and decree the assessed was to pay a sum of Rs. 1 lakh by Installments as mentioned in the decree to the son whereupon the son was to have no right, title or interest in the business or in its assets. The decretal amount was made a charge on the plant and machinery of the business.
5. In pursuance of the above award the assessed paid a sum of Rs. 40,000 to his son, Sham Nath, during the previous year. Out of this, the assessed adjusted Rs. 15,416 against the capital which stood to the credit of the account of Sham Nath in the books of the business while the balance of Rs. 24,534 was claimed to be a revenue deduction in the computation of the business income of the assessed for the previous year.
6. The ITO disallowed the assessed's claim and this was upheld by the AAC. They seem to have taken the view that the payment made by the assessed was clearly made in order to acquire a capital asset, namely, the interest of Sham Nath in the business.
7. There was a further appeal to the Tribunal. The Tribunal accepted the assessed's claim to a very limited extent. The Tribunal referred to Section 37 of the Indian Partnership Act. It found that for the period of two years ending on December 31, 1960, one-third share of Sham Nath by way of profits in the partnership worked out to Rs. 20,182. It pointed out that Sham Nath, inter alia, had laid claim that all amounts invested by him over and above his share or otherwise due to him including his share of profits up-to-date along with interest should be paid to him. The Tribunal noted that there was no specific adjudication by the arbitrators on this part of the claim of Sham Nath and a consolidated amount of Rs. 1 lakh which had been awarded to him would cover all the aspects of his claim. Taking into account the fact that the claim of Sham Nath was not only for his capital but also for the share of profits due to him, the Tribunal held that it would be fair to hold that the amount awarded by the arbitrators to Sham Nath also included the latter's share of profits for two years from the date of dissolution of the firm. In this view of the matter the Tribunal held that the assessed was entitled to the deduction of Rs. 20,182, being 1/3rd share of profits for the period of two years ending on December 31, 1960.
8. It is from this order of the Tribunal that the Commissioner has sought for and obtained a reference of the question which has been set out earlier.
9. On behalf of the applicant, Commissioner of Income-tax, it is submitted that the payment made by the assessed to his son represented a payment in lieu of the acquisition by the assessed of the right, title and interest of Sham Nath in the business and that it was rightly disallowed by the ITO and the AAC. On the other hand, Mr. Anoop Sharma, appearing on behalf of the assessed, submitted that it was a case where Shambhu Nath had been able to derive his profits from the business by utilising the capital and assets invested therein by Sham Nath. He submitted that to the extent of the share of profits which Sham Nath was entitled to receive from the business as a partner earlier, even after the dissolution of thefirm, there was a diversion of income by overriding title and that Shambhu. Nath was in law entitled only to 2/3rds of the profits from the business. Since he had appropriated the entire amount and since he had been called upon to give the share of profits of Sham Nath during the year of account, it would be an allowable deduction.
10. After hearing the learned counsel and considering the facts of the case, we are of the opinion that the conclusion of the Tribunal does not call for any interference. As mentioned earlier, Shambhu Nath and Sham Nath were partners of a firm till 15th October, 1958. On that date Sham Nath gave a notice of termination of the partnership and under Clause (15) of the partnership deed, the partnership came to an end on 14th January, 1959. This was a case in which there were only two partners in the firm and hence in the reference made by the Tribunal as well as by counsel for the assessed before us, Section 37 of the Indian Partnership Act has no application to the facts of this case.
11. The result of the above position is that the partnership came to an end on January 14, 1959. Thereafter, the retiring partner was entited to a settlement of account and to take away his assets as well as his monies from the firm. But there was a delay in this process. Shambhu Nath claimed to be the owner of the firm while Sham Nath laid claim to certain assets of the firm as well as to certain amounts due to him during the conduct of the business. These disputes were referred to arbitration and the arbitrators awarded a sum of Rs. 1 lakh to Sham Nath. The arbitrators, however, did not give any reasons for that decision or explain on what basis the sum of Rs. 1 lakh was arrived at by them. As already stated. Sham Nath claimed several amounts from the firm and, in the absence of any other material, it would be appropriate to infer that the amount awarded to Sham Nath included, inter alia, some compensation to him by way of interest as well as payment for the use of the assets (which belonged to the partnership in which he had also had an interest) for carrying on the business thereafter. In these circumstances, we think, the Tribunal's conclusion that a part of the amount paid to Sham Nath under the award and decree of the court should be treated as a business deduction allowable in the hands of the firm is correct and should be upheld. It would not be correct to describe this as a share of profits due to Sham Nath as the partnership had ceased on January 14, 1959, and Sham Nath was no longer entitled to a one-third share as before. We think, however, that the deduction can be upheld on the larger ground urged by Mr. Anoop Sharma, namely, that this was the amount paid by the assessed who carried on the business thereafter utilising the assets of the firm even after the dissolution of the firm and made profits by the use thereof. The compensation which the business had to pay to Sham Nath for the use of his assets aswell as by way of interest on amounts invested by him in the firm would be a deductible outgoing in the hands of Shambhu Nath. We are, thereforee, of opinion that the conclusion of the Tribunal should be upheld in the facts and circumstances of the present case though not exactly mentioned by the Tribunal.
12. The assessed, an old man, appeared in person and pleaded that on account of his present straitened financial circumstances, he was not able to engage a counsel. At our request, Mr. Anoop Sharma appeared as amices curiae and put forward the case on behalf of the assessed. We wish to record our appreciation of the assistance rendered by Mr. Anoop Sharma in this case.
13. For the above reasons, we answer the question referred to us in the affirmative and against the applicant. There will be no order as to costs in this reference.