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TMI Blog1978 (1) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee could have made had the partnership continued. It is on the above basis that the sum of Rs. 90,500 was included in the assessment. 2. On appeal, in a very well considered order, the AAC dealt with the facts of the case and came to the conclusion that the compromise-agreement of 2nd Nov., 1972 resulted in the assessee having to surrender his source of income. The compensation amount received, therefore, was a receipt on capital account. The assessee's appeal thus was allowed by him. It is against this order of the AAC that the present appeal is laid before us on behalf of the Department. 3. The learned counsel for the Department has taken us at length through the history of the case resulting in a compromise-decree. The receipt of the sum of Rs. 90,500 was clearly on account of the accumulated profits which the assessee should have received. The learned counsel has taken us through the financial and income position of the Vendor from the asst. yr. 1965-66 onwards as returned by Thillai for Income-tax purposes and pointed out that what the assessee got was clearly profit which he was deprived of until a compromise was accorded by the decision of the Court. There wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners of the firm also, it would appear, colluded with Thillai in this, the net result being the Nilgiri Mining Corporation went out of business as sole selling agent for bauxite from Thillai's lands. The assessee filed suit No.40 of 1964 in the Sub-Court, Nilgiris on behalf of himself and the firm against the other co-partners and the cement company praying for an injunction to restrain the cement company from purchasing bauxite ore from Thillai until the dissolution of the firm after it has run an agreed period of 30 years fixed in the partnership. The said suit was decided on 24th March,1968 in the assessee's favour. On appeal, the District Judge, Coimbatore substantially upheld the assessee's points except for appointment of Receivers which had been directed by the lower Court. Thillai took the matter to the High Court but during the pendency of the suit he died. His legal representatives after his death felt the futility of continuing the litigation endlessly and entered into a compromise with the assessee. This being accepted on the following terms the matter was brought to a close on 2nd Nov., 1972: "a. K. Eapen Jacob agrees that the firm Nilgiri Mining Corporation was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here after the company stopped payment of the commission. The litigation which followed this ended in a compromise and a decree of Court under which the assessee was paid certain amounts for the years 1951,1952 and 1953 as a commission and a further amount of Rs. 70,000 by way of compensation for the termination of the agreement as from 1st Jan., 1954. The assessee was not a business-man and was not engaged in the business of discovering any mineral ore in the business of bringing about agreements between parties. The Supreme Court on the above facts held that the assessee acquired an income-yielding asset as a result of his activities but the compromise-decree destroyed that asset for which a sum of Rs.70,000 was paid as compensation. The payment was neither in respect of services rendered by him in the past nor towards accumulated commission due to him. The Supreme Court held that the sum of Rs. 70,000 being the price paid for surrendering a valuable right was a capital asset or capital receipt. At page 810 of the report it is stated: "It is now well-settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities and that mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ordinary course of business, to be altered or terminated on terms and any payment received in settlement of the rights as a result of the termination of the contract really represents the profits which the assessee would have made had the contract been performed. "As observed by this Court in Jairam Valji's case (1959 35 ITR 148) when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period and in this respect, it differs from an agency agreement." Their Lordships held, in short, that there was no stoppage of business or receipt of compensation but only the alteration of the trading activity. The argument of the counsel that the fact that the managing agency right given up under the agreement was a capital asset and the assessee also parted with goodwill of the company, also a capital asset, thus claiming the amounts received to be compensation and capital receipt, was not accepted. The question in dispute was posed by their Lordships thus: there is no dispute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment of the Dt. Judge in suit No.229 of 1965 dt. 17th Jan.,1969 there is a clear finding to the effect that the partnership has not incurred a loss but, on the other hand, resulted in huge profits. In para 41 of the judgment it is stated: "Within a few months, the firm had realised a sum of about Rs. 1,75,000 and odd. Each of the 5 partners has derived in about 5 months' time, that is, the time from which bauxite supplies began to the 5th respondent a sum of Rs. 15,000 and odd. As far as D.W.1 is concerned he has derived a larger amount as he has been paid separately for every ton of bauxite raised from the suit land. D.W.1 must have realised that he had struck a veritable gold mine. He must have naturally wanted to cut off P.W.1 so that he could appropriate all the profits to himself." The above is extracted to indicate that irrespective of the returns filed by Thillai and his sons the partnership continuing certainly had income. If the assessee were to continue to be a partner in the firm he would certainly have been entitled to his share of profits of the partnership. Though therefore the compromise-agreement refers to the goodwill, rights in the partnership etc. as matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the District Judge and the returns filed by Thillai and his sons, in our view it would be proper to put the profit figure at Rs. 60,000 and the compensation at Rs. 30,500. In view of the decision in Gangadhar Baijnath's (1) case the sum of Rs. 30,500 would be a capital receipt and not taxable. The balance of Rs. 60,000 would however be taxable. 9. It would not however be proper to subject the entire amount of Rs. 60,000 as the income of the assessee for the asst. yr. 1973-74. Though the ITO has not pointed out the exact nature of income he was bringing to tax, the argument of the learned Departmental Counsel before us cannot leave any room for doubt that the profits, if any, really belonged to the period the assessee last received his share from the firm to the date of the compromise. The firm was brought into existence under a proper deed of partnership. The judgments have decided that the assessee continued to be a partner in the partnership at will till the date of the compromise. The income, therefore, by way of profit from the partnership should have accrued to the assessee from year to year during the above period even though the assessee received the sum by way of lump ..... X X X X Extracts X X X X X X X X Extracts X X X X
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