JUDGMENT
V. Ramaswami, J.
1. The following three questions have been referred at the instance of the assesses under section 256(1) of the Income-tax Act, 1961 :
“1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 90,500 received by the assessee was taxable as revenue receipt for the assessment year 1973-74 or was a capital receipt in its entirety?
2. Whether, in the alternative, the sum of Rs. 90,500 could be regarded as partially representing the profit derived from the business of the partnership until the date of the compromise and partially to the extent of the balance as relatable to the compensation and, if so, whether the compensation amount could be fixed at Rs. 30,500 and the balance at Rs. 60,000 as a matter of fact ?”
3. Even if it is held that the sum of Rs. 60,000 or any other portion out of the amount of Rs. 90,500 is regarded as arising on revenue account, whether it is proper to regard this entire amount as accruing or arising within one year, the previous year relevant to the assessment year 1973-74, or could be regarded as accruing in any of the preceding previous years so as to be assessable not in its entirely for the assessment year 1973-74 but during the assessment year 1973-74 and one or more of the preceding assessment years ?”
2. The assessee is an individual. He had entered into a partnership on October 18, 1961, with K. Thillai and others. The business of the partnership was carried on under the name and style of Nilgiri Mining Corporation. The firm entered into certain contracts with a cement company for supply of bauxite mined in about ten acres of land belonging to the partner, Thillai. Disputes seem to have arisen very soon after the partnership was entered into. The said Thillai who was owning the bauxite mine seems to have entered into a private contract with the cement company for the supply of bauxite and purported to dissolve the partnership firm with effect from January 17, 1964. The assessee questioned the dissolution as also the entering into the contract personally directly with the cement company and filed O. S. No. 40 of 1964 out of which the appeal, A. S. No. 220 of 1968, on the file of the District Court, Coimbatore, arose, praying for an injunction, restraining Thillai and the other partners from interfering with his functioning as a partner and also for an injunction directing the cement company not to deal with Thillai individually. The suit appears to have been decreed and the appeal filed against it by Thillai was dismissed. A second appeal was preferred to this court. Pending these proceedings, Thillai died and his legal representatives came on record. When the appeal was pending in this court, the parties entered into a compromise on November 2, 1972, and the compromise decree reads as follows :
“a. K. Eapen Jacob agrees that the firm Nilgiris Mining Corporation Ltd. was only a partnership at will, and that the deed of dissolution dated January 17, 1964, executed by late Mr. Thillai, the first appellant in the above second appeal and three other partners. A. Chami, P. V. Chaminar and K. S. Mani, is valid, effective and binding on him.
b. That the firm has no sole selling agency rights as claimed in the suit, O. S. No. 40 of 1964, on the file of the Court of the Subordinate Judge, Ootacamund.
c. That consequently the aside suit, O. S. No. 40 of 1964, shall stand dismissed and the decree passed thereon on April 23, 1968, and confirmed by the District Judge, Coimbatore, on January 17, 1969, In A. S. No. 220 of 1968, on its file shall stand vacated.
d. That the legal representatives of the deceased-first appellant, K. Thillai, shall be free to carry on the mining and other allied business without any let or hindrance from the aforesaid K. Eapen Jacob and his men, servants and agents without any let or hindrance.
e. That the appellants Nos. 2 to 9 shall be entitled to all the monies in deposit in the State Bank of India, Coonoor, deposited by the deceased, K. Thillai, in pursuance of the order of this Hon’ble in CMP No. 2011 of 1969.
f. That we, the legal representatives of K. Thillai, should pay the aforesaid K. Eapen Jacob a sum of Rs. 90,500 (Rupees ninety thousand and five hundred only) in full quit of all his claims as a partner of Nilgiris Mining Corporation and the alleged sole selling agency claimed for it. Mr. K. Eapen, the 1st respondent, is entitled to receive the said sum of Rs. 90,500 in lieu of his abandonment of his contractual right and as compensation for loss of office and goodwill.
g. K. Eapen Jacob shall withdrawn as not pressed O. S. No. 679 of 1969 filed by him in the Court of the District Munsif, Coimbatore, on or before November 30, 1972, and in case he fails to do so, the appellants Nos. 2 to 9 are at liberty to have the same dismissed.”
3. For the assessment year 1973-74, the assessee filed his return on August 16, 1973, admitting a business loss of Rs. 7,004. In this return, he claimed a sum of Rs. 90,500 as receipt and not taxable as income. However, the Income-tax Officer took the view that it is a revenue receipt assessable to income-tax on the ground that :
“this represents profits which the assessee would have made had the partnership continued. The entire sum of Rs. 90,500 has been received towards loss of earnings.”
4. On appeal, the Appellate Assistant Commissioner accepted the contention of the assessee that the amount received by him was for relinquishing all his rights in the partnership and that no part of its related to his business income and that, therefore, the inclusion of the sum of Rs. 90,500 as revenue income cannot be sustained. In that view, the appeal was allowed. The Revenue Assistant Commissioner was right in his view that any income received by surrender of the source of income would be capital in nature, was not willing to accept that the entire amount of Rs. 90,500 was relatable to the loss of the infrastructure of the assessee’s business. The Tribunal was further of the view that a portion of its was relatable to the profits derived from the business of the partnership until the date of compromise and in that view proceeded to separate a sum of Rs. 60,000 out of the sum of Rs. 90,500 as referable to the share of profits accrued from the business of the partnership until the date of compromise and the balance of Rs. 30,500 only related to the surrender of the partnership rights.
5. We are unable to see how the Tribunal had come to the conclusion that the amount of Rs. 90,500 agreed to be paid to the assessee under the compromise included any portion of the profits derived from the business of the partnership until the date of compromise or that could be quantified at Rs. 60,000. As already stated, the dispute in the civil court was whether the partnership is to be continued for a period of thirty years or whether it is a partnership at will. The further dispute was whether the defendants, namely, the other partners, are entitled to enter into a contract directly with the cement company without the partnership directly dealing with the same. Though the assessee had succeeded, the other partners were questioning the find of the District Judge in appeal before this court contending that the partnership was at will and it was dissolved on January 17, 1964, and the plaintiff assessee had no right or interest in the business on or after January 17, 1964. When the parties compromised the matter accepting that the partnership was at will and compromised the matter accepting that the partnership was at will and that the deed of dissolution dated January 17, 1964, was valid, it could only mean that the parties have decided to settle their disputes with reference to the date do dissolution as January 17, 1964, and there would be no case for taking into account any profit from 1964 to 1972 when the compromise was entered into. Even on that basis, the other defendants agreed to give the assessee the sum of Rs. 90,500 and as stated in the compromise, it was “in full quit of all his claims as a partner of Nilgiris Mining Corruption and the alleged sole selling agency claimed for it”, and “in lieu of his abandonment of his contractual right and as compensation for loss of office and goodwill”. There could, therefore, bone no doubt that what was given under the compromise as held by the Appellate Assistant Commissioner was for surrendering the assessee’s source of income, namely, the share in the partnership. The assessed entered into the partnership with a view to bringing into existence a source expected to yield a regular annual return year after year and when that source was surrendered by him, the compensation received in lieu of such surrender would manifestly be a receipt on capital account. The ratio of the decision in CIT v. Uttama Reddy (M.) [1984] 148 ITR 580 (Mad) relied on by learned counsel for the Revenue, far from supporting the Revenue, supports the case of the assessee. Though the decision in that case mostly rested on facts, the observation of the learned judges was as follows (headnote) :
“The idea that whatever is paid to a partner on a dissolution is only capital receipt, overlooks the fundamental position of partnership law and practice that a partner is entitled to his are of the profits and also to his share of the capital and when he gets out of the partnership, he is entitled to demand his share in each and if they are paid to him, they partake of the same character as that from out of which the amount in each case is paid.”
6. No serious objection could be taken to this statement of the law. However, we find that there is nothing on facts to show that there were any accumulated profits which were included in determining the compensation at Rs. 90,500. As already stated, under the compromise, the parties agreed that there was a dissolution on January 17, 1964. Therefore, if there had been any accumulation of profits, it should be profits that accrued from the date of partnership, namely October 18, 1961, till January 17, 1964. On that absolutely there is no evidence to show that there was any profit or accumulated profit and that the parties had not withdrawn that profit, if there was any. Learned counsel for the Revenue wanted to rely on a passage in the judgment of the learned District Judge in A. S. No. 220 of 1968 which was relied on by the Tribunal. But we are of the view that is not evidence which can be relied on. The judgment of the learned District Judge has been set aside as specifically mentioned in the compromise and none of the findings made therein by the learned judge could also be relied on. In fact, we find that the passage relied on is also very vague. Except to say that the in the beginning they were making large profits, there was nothing on record to show that any profit was made and it was not divided and was allowed to be accumulated. In the circumstances, therefore, we are unable to agree with the Tribunal that there was any basis for its conclusion that a portion of the profit derived from the business of the partnership until the date of the compromise was also included in the sum of Rs. 90,500 or that was a sum of Rs. 60,000.
7. We accordingly answer the latter part of the first question in the affirmative and in favour of the assessee and hold that the entirety was capital receipt. In the light of this answer, it is unnecessary for us to answer the other portion of the first question or the second and the third question. The assessee will be entitled to his costs. Counsel’s fee Rs. 500.