ORDER
1. These are cross appeals taken by the assessee and the revenue again ( the order of the Commissioner (Appeals), dated 11-12-2001, pertaining to the assessmeot year 1998-99.
2. At the time of hearing before us, Shri, K.R. Prasad, Advocate and Ms. Archana Choudhary, DR appeared on behalf of the assessee and the revenue respectively. The arguments have been heard and taken into consideration while disposing the present proceedings.
3. The present appeals can be summarized in the following manner. The assessee is an individual who was the employee of M/s. Electronics and Controls, a proprietary concern of one Shri Ramachandra Iyer. The said Shri Ramachandra Iyer died on 7-4-1997. Upon his death, a partnership was formed on 16-4-1997 by the legal heirs of the deceased being the partners. Such partnership took over the business of the proprietary concern as a going concern with effect from 7-4-1997. At that point of time a power of attorney was executed by the partners of the reconstituted firm styled as M/s. Electronics & Controls by way of which the assessee individual was appointed as an attorney on behalf of the firm. In terms of the said Power of Attorney, the assessee was given the powers, to run the day-to-day production, purchase and marketing policies based on the policy decision taken by the firm. A copy of the said Power of Attorney has been placed in the paper book filed before us. Clause 6 of the said Power of Attorney states that the said Attorney shall be the full-time working manager responsible for all day-to-day activities of the firm except insofar as for the purposes of financial borrowings and policy decisions. The assessee contended that in terms of the said Power of Attorney it was clear that there was no employer-employee relationship between the partnership firm and the assessee individual and if at all there was a relationship, it was of a principal-agent relationship. It appears that subsequently certain differences arose between the assessee and the heirs of Shri Ramachandra Iyer, i.e., the partners of the firm. The two wanted to severe relationship with the assessee and his wife in relation to the various group concerns of the legal heirs of Shri Ramachandra Iyer. A settlement agreement was reached between Mrs. Sundari Ramachandra, one of the partners of M/s. Electronics & Controls and the assessee. Copy of the said agreement has been placed in the paper book before us. The relevant clauses of the same are being reproduced hereinafter:
” 1. The said General Manager and Powerof Attorney holder will tender his resignation and confirms having returned the Power of Attorney and the same will be treated as his resignation. The resignation is accepted by the partner forthwith and consequently the Power of Attorney shall stand revoked.
2. The matter raised and agitated by the workers and others would be addressed jointly by the partner and Mr. B.L. Subbaraya and for this purpose Mr. B.L. Subbaraya agree to communicate and address all concerned to the effect that there are no issues or difference of opinion among the partner and Mr. B.L, Subbaraya and request them to restore normalcy and “communicate that there is no necessity for them to feel agitated on matters concerning the partner and Mr. B.L. Subbaraya.
3. Both the parties agree further that (a) A settlement of Rs. 100 lakhs Rupees one hundred lakhs only will be paid to Mr B.L Subbaraya in full and final settle ment of all dealings and transactions concering business matter and his employment hitherto in Electroneics and controls Supra Sulax Corporation, ECPL and other business settlement concerning both the parties.
6. As regards, Sulax Corporation, Mr. B.L. Subbaraya undertakes to obtain resignation of the partner Mrs. Srilakshmi Subbaraya forthwith and Mrs. Sundari Ramachandran will be at liberty to induct any further partners in the business of Sulax Corporation in any manner of her choice. It is the mutual desire of the parties hereto that Sulax Corporation will be managed by Mrs. Sundari Ramachandran in any manner of her choice and the liabilities of the business will not be borne and met by Mrs. Srilakshmi Subbaraya on any account whatsoever consequent upon the submission of the resignation by Mrs. Srilakshmi Subbaraya from the business of Sulax Corporation as a partner.
7. As regards settlement of the partner in Sulax Corporation as provided for in Clause 6 above, Mr. B.L. Subbaraya agrees that any settlement as may be made in this respect arising out of resignation of Mrs. Srilakshmi Subbaraya and payable to Mrs. Srilakshmi Subbaraya will constitute and be a part of the settlement of the compensation of Rs. 100 lakhs as described in Clause 3 of this agreement and shall constitute as final settlement from the firm on this account.”
Further, in terms of the said agreement extended to the partnership firm of the group M/s. Sulax Corporation, in which ‘Smt. Srilakshmi Subbaraya’, wife of the assessee was a partner. In terms of the retirement deed dated 27-10-1997, the wife of the assessee, Smt. Srilakshmi Subbaraya retired. In terms of Clause 2 of the retirement deed, a sum of Rs. 20 lakhs was agreed to be paid to her in lieu of her share of profits up to the date of retirement. This amount was payable to her in addition to the amount standing to her credit as on 31-3-1997. The relevant clause i.e., Clause 2 of the retirement agreement is being reproduced hereinafter to facilitate appreciation of the matter
“The final account of the partnership have been drawn as of 31-3-1997. As at the said date a sum of Rs, 11,00,000 stands to the credit of the Retiring Party. As the Retiring Party is retiring in the middle of the year, the Retiring Party has agreed to accept a lump sum amount of Rs. 20,00,000 in lieu of her share of profits up to the date of retirement. Thus, in addition to the amount standing to her credit as at 31-3-1997, after adjustment of the drawings made up to the date of retirement, the said sum of Rs. 20,00,000 shall be paid to the Retiring Party by the Continuing Parties in full settlement of all her right, title and interest in all assets of the partnership of M/s. Sultax Corporation. Out of the above sum, a sum of Rs. 12,00,000 (Rupees Twelve Lakhs only) has been paid along with this Retirement Deed and the balance of Rs. 8,00,000 (Rupees Eight Lakhs only) shall be paid by the continuing parties within 60 days of this agreement in full and final settlement of the dues to the retiring partner. The retiring partner acknowledges the receipt of the part settlement of Rs. 12,00,000 (Rupees Twelve Lakhs only) and gives her consent to receive the balance payment within 60 days of the agreement hereto.”
4. Against the aforesaid facts the assessing officer proceed to finalize the assessment. Firstly, it was noticed by the assessing officer that in terms of the settlement of the assessee was to receive a sum of Rs. 100 lakhs. The assessee had already withdrawn a sum of Rs. 23 lakhs from the firm M/s. Electronics & Controls. According to the assessee, out of the total sum of Rs. 100 lakhs receivable Rs. 20 lakhs was agreed to be received towards the retirement of his wife from the group partnership firm and that the balance of Rs. 80 lakhs was only receivable by the assessee. In terms of the same, the assessee contended that the balance of Rs. 80 lakhs was to be understood as forming capital receipt and was not liable for taxation. According to the assessee, since he had given up all sources of income, and such other rights thereby there was an extinction of income earning apparatus itself and thus treated the sum of Rs. 80 lakhs as capital receipt. The assessing officer on the other hand, took the view that the entire sum of Rs. 100 lakhs was to be treated as accruing to the assessee alone and no portion of the same could be treated as relating to Smt. Srilakshmi Subbaraya, the assessee’s wife who had retired from the group partnership firm. Noticing that since a sum of.Rs. 23 lakhs has already been withdrawn by the assessee which constituted the sum of Rs. 100 lakhs, the same was liable to tax. According to the assessing officer, the amount of Rs. 23 lakhs was to be treated as an amount in lieu of salary being the sums being withdrawn by the assessee out of which Rs. 2,50,000 was given as deduction under Section 10(10), holding it as gratuity and the balance of Rs. 20,50,000 was brought to tax. The balance sum of Rs. 77,00,000 (Le., Rs. 100 lakhs minus Rs. 23 lakhs) was brought to tax as assessable under Section 17(3) of the Income Tax Act. Noticing that there was a litigation with regard to the settlement agreement, the assessing officer concluded that there was a claim for recovery of certain sums from the firm and the matter was subjudiced and pending before the Court. In this view of the matter, although he proceeded to assess the sum of Rs. 77 lakhs in the hands of the assessee, but made the assessment on a protective basis.
5. Aggrieved by the aforesaid stand of the assessing officer, the matter was carried in appeal before the Commissioner (Appeals).Tbe Commissioner (Appeals) firstly held that Rs. 20 lakhs receivable by Smt. Srilakshmi Subbaraya, the wife of the assessee on retirement from the group partnership firm was not a part of Rs. 100 lakhs in terms of the settlement entered into with the assessee. Secondly, with regard to the sum of Rs. 77 lakhs, the Commissioner (Appeals) held that the same was in dispute and therefore, by placing reliance on the decision of the Apex Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd (1986) 161 ITR 5241 (SC) it held the same was not taxable during the year under consideration. Insofar as the remaining amount of Rs. 23 lakhs was concerned, the same was held to be taxable as profit in lieu of salary under Section 17(3) and, thereby sustained the action of the Assessing Officer on this count. Presently the assessee as well hs the revenue are in appeal before us.
6. The assessee is in appeal against the stand of the Commissioner (Appeals) in sustaining the addition to the extent of Rs. 23 lakhs and also against the decision of the Commissioner (Appeals) in holding that sum of Rs. 20 lakhs payable to Smt. Srilakshmi Subbaraya was not a part of the amount of settlement agreed between the assessee and Smt. Sundari Ramacbandran. The revenue, on the other hand, is in appeal against the decision of the Commissioner (Appeals) with regard to the relief allowed to the extent of Rs. 77,00,000.
7. Rival parties have been heard at length. After having heard the parties, we proceed to dispose of the issue in the following manner. Insofar as the facts are concerned, the same lie in a narrow compass and are not in dispute. The assessee entered into a seitlement agreement with Mrs. Sundari Ramachandran, one of the partners of M/s. Electronics and Controls, a firm on whose behalf the assessee was acting as a Attorney. The settlement agreement postulated that the assessee being the General Manager and the Power of Attorney holder was to severe with his connection with the firm and other group concerns. Also, the wife of the assessee being a partner in another related concern of M/s. Sulax Corporation was also to withdraw from the firm by way of resignation. The relevant clauses of the ‘ settlement have been reproduced by us in the earlier part of the order and are not being reproduced herein for the sake of brevity. Clause 3 provides that a sum of Rs. 100 lakh & was payable to the assessee in full and final settlement and in return there of the assessee was to severe his relationship in Electronicg and Controls, supra Sulax Corporation, ECPL and other businesses. Thus, the settlement extended not only to the assessee’s relationship with M/s. Electronics and Controls, a firm in which the assessee was a Power of Attorney but also to. other group concerns. In terms of Clause 6 of the settlement, referente is also made to the affairs of M/s. Sulax Corporation in which the wife of the assessee Smt. Srilakshmi Subbaraya was a partner. In terms of the said clause, the said Smt. Srilakshmi Subbaraya was to resign from the partnership of M/s. Sulax Corporation. Further, in terms of Clause 7 it was provided that in lieu of the resignation of Smt. Srilakshmi Subbaraya from the partnership of Sulax Corporation, the amount payable shall constitute and be a part of the settlement of the compensation of Rs. 10 lakhs described in Clause 3. Thus, in view of the aforesaid, it cannot be deduced that the sum of Rs. 20 lakhs to be paid to Smt. Srilakshmi Subbaraya at the time of retirement from the firm M/s. Sulax Corporation and was not a part of compensation settled in terms of the settlement deed dated 9-8-1997 between the assessee and Mrs. Sundari Ramachandran. On this count, we are not in agreement with the conclusion of the lower authorities to the effect that the sum of Rs. 20 lakhs payable to Smt. Srilakshmi Subbaraya was not a part of the settlement agreement dated 9-8-1997. Thus, it is only the taxability of a sum of Rs. 80 lakhs that is to be considered in the hands of the assessee before us.
8. The fact which is undisputed is that the entire settlement is still a subject-matter of dispute being subjudice and there is no finality attained even during the year under consideration. This is clear from the following facts. Subsequent to the deed of settlement between the assessee and Smt. Sundari Ramachandran on 9-8-1997 the disputes arose on its implementation. The assessee filed a company petition against M/s. Electronics and Controls Power Systems Pvt. Ltd., under Section 433 of the Companies Act, 1956 seeking winding up for its failure to pay the dues to the assessee. Incidentally, subsequent to the deed of settlement dated 9-8-1997, the business of the partnership firm M/s. Electronics & Controls was taken over by a private limited company M/s. Electronics & Electronics Power Systems Pvt. Ltd. The said winding up petition came to be dismissed by the Hon’ble High Court of Karnataka on 2-3-2000 on the plea that there was no sum dues from the company inasmuch as the settlement was between the assessee and the individual Smt. Sundari Ramachandran. Subsequently the assessee instituted a suit or recovery of the amount in terms of the settlement before the civil court at Bangalore in O.S. No. 5898/2000, a copy of which is placed in the paper book filed before us. We also find from the paper book that the defendant Smt. Sundari Ramachandran has denied the existence and execution of the said settlement agreement dated 9-8-1997 as been concocted/ fabricated. Therefore, undisputedly the entire settlement agreement dated 9-8-1997 is in jeopardy. Of course, the assessee has withdrawn a sum of Rs. 23 lakhs from the firm M/s. Electronics and Controls. Therefore, having regard to the binding nature of judgment of the Hon’ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra), to the proposition that where an amount was in dispute, it could not be treated as income, we do no find any infirmity in the conclusion of the Commissioner (Appeals) that a sum of Rs. 77,00,000 cannot be brought to tax during the year under consideration as the matter had not attained finality. However, the Commissioner (Appeals) went wrong in not applying the same principle to the amount of Rs. 23 lakhs received by the assessee. Even this amount of Rs. 23 lakhs is disputed and the right of the assessee in the said amount is inchoate and therefore, the same also cannot be brought to tax during the year under consideration.
9. In view of the aforesaid discussion, we have not considered the other grounds raised by the assessee.
10. In the result, the appeal of the assessee is treated as allowed and that of the revenue is hereby dismissed.