Madras High Court
A.K. Sharfuddin, Tiruchirapalli vs Commissioner Of Income-Tax, Madras on 23 February, 1960
Equivalent citations: AIR1960MAD508, [1960]39ITR333(MAD), AIR 1960 MADRAS 508
JUDGMENT Rajagopalan, J.
(1) In form and virtually in substance the Rs. 31,000 paid to the assessee by his partner Abbas was compensation for the relinquishment of the rights of a partner which the assessee had. The deed of partnership specially provided that the purchase and sale of scrap metal was the only item of business that the partnership was to undertake. Though the deed of partnership provided that it was only the assessee that was to contribute the capital, it was common ground that the capital was borrowed capital. The entire liability to discharge that loan was taken over by the surviving partner Abbas under the terms of the deed of dissolution. To go back to the point mentioned earlier, the only item of business that the partnership was formed to transact was the purchase and sale of scrap iron. The purchase was effected, but the sale could not be effected, because of a temporary embargo placed upon sales by the Government of India.
Abbas took the risk of effecting a sale and making a profit out of the scrap already purchased by the partnership, and what he paid was compensation to the assessee for relinquishing all his rights in the partnership. The case, in our opinion, falls within the scope of the rule of this court laid down in Rangaswami Naidu v. Commissioner of Income-tax, Madras . That Rangaswami Naidu's case dealt with a managing agency makes no real difference in the application of the principle; as in that case, it is against the congeries of rights, that the assessee enjoyed under the deed of partnership that he was paid a compensation, and that was compensation for a capital asset.
In cannot be said that the contract the assessee entered into with Abbas was in a line with the normal trading contracts the assessee entered into. His line of business was hardware. Once again, we have to point out that the partnership deed provided only for this one item of business, and that item of business the assessee had to give up, and for giving it up he was paid compensation. Therefore, it was not a trading receipt, and the compensation was really for loss of a capital asset.
(2) We answer the question in the negative and in favour of the assessee. As the assessee has succeeded he will be entitled to the costs of this reference. Counsel's fee Rs. 250/-.
FD/V.S.B. (3) Answer for assessee.