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Issues:
Interpretation of partnership deed clauses regarding payment to outgoing partner and entitlement to profits from exports. Application of partnership agreement provisions on business transactions. Claim of deductible allowance by a partner. Determination of diversion of income after it has been earned. Accounting system followed by the firm for payment purposes. Analysis: The judgment involves the interpretation of clauses in a partnership deed concerning the payment to an outgoing partner and the entitlement to profits from exports during the partnership period. The court examined clauses 8 to 11 of the partnership deed to determine the rights and obligations of the partners in case of withdrawal from the firm. Clause 9 specified that the outgoing partner would be entitled to profits and losses accrued until dissolution, along with the capital due to him. Clauses 10 and 11 addressed the continuation of the business in the sole proprietorship of the remaining partner upon withdrawal of the other partner. The court emphasized that clause 10 aimed to prevent interference by the outgoing partner in the business operations after withdrawal and did not restrict the right of partners to claim their share of profits from exports during the partnership period. The court disagreed with the Tribunal's finding that a payment made to the outgoing partner was against the provisions of clause 10. It highlighted that clause 10 primarily focused on non-interference in business continuation post-dissolution and did not limit partners from claiming their share of benefits earned during the partnership. The court concluded that the payment was not in violation of the partnership agreement. Regarding the claim of a deductible allowance by a partner for the payment made to the outgoing partner, the court noted that the Income Tax Officer (ITO) had disallowed the claim, which was upheld by the Tribunal. The Tribunal based its decision on the interpretation of clause 10, which the court found to be incorrect. The court ruled in favor of the assessee, stating that the payment was not a diversion of income after it had been earned, as concluded by the Tribunal. Furthermore, the court addressed the accounting system followed by the firm for payment purposes. The assessee argued that although the firm maintained a mercantile system of accounting, it followed the cash system for entitlement purposes, justifying the payment made during the relevant year. However, the Tribunal did not specifically address this argument. The court directed the Tribunal to rehear the appeal to consider the accounting system followed by the firm and make a decision based on the correct interpretation of the partnership agreement. In conclusion, the court answered the question referred to it in the negative, in favor of the assessee and against the department. The judgment highlighted the importance of accurately interpreting partnership agreement clauses, ensuring compliance with the terms agreed upon by the partners, and considering the accounting methods followed by the firm for assessing business transactions and payments to partners.
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