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TMI Blog1986 (11) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... artner, that right could be exercised by the eldest surviving child and in the absence of exercising that right, the firm had to pay to the children of the deceased every year an amount equal to 15% of the firm's net income for a period of 15 years from the date of death of the partner. Late Sri Bharat Aiyar died in 1954 without introducing any new partner and his eldest child also did not nominate any new partner. It appears that none of his children was qualified as a chartered accountant. According to the covenant in the deed, 15% of the net profits of the firm had to be shared by the children of late Sri Bharat Aiyar. The assessee under the same arrangement received different amounts in earlier years and those amounts were not taxed. However, the amount received in this year was Rs. 7,042 and it was held by the Income-tax Officer who completed the assessment that it was income in the hands of the assessee as it flowed from the contract and was to be received from year to year. A copy of the order of the Income-tax Officer has been marked annexure " A " to the statement of the case. When the assessee went up in appeal before the Appellate Assistant Commissioner, he found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of late Sri Bharat Aiyar has also been made an annexure to the statement of the case forming part thereof and marked annexure " E ". The sheet-anchor of the decision of the Tribunal in the instant case is, therefore, the decision of the Cochin Bench of the Tribunal in which detailed reasons have been given (annexure D). We, therefore, think it meet and proper to proceed to examine the correctness or otherwise of the decision of the Cochin Bench of the Tribunal (annexure D). Since the facts are identical, we need not detain ourselves over the facts involved in annexure D. We, therefore, proceed upon the merits of the matter decided straightaway by the Cochin Bench. Incidentally, it may be mentioned here that Mrs. Sankari Rama Aiyar was the appellant before the Tribunal (Cochin Bench). Relying on the different clauses of the partnership agreement and the covenants incorporated therein, the Tribunal in that case discussed the matter and stated that relying on the different clauses and agreements of the partnership deed, learned counsel in that case has strenuously argued that the payment of 15% of the profits of the firm was only in lieu of postponement of the exercise of the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person, it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made." In the same judgment, the Supreme Court observed at page 232 as follows : " The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period." Counsel for the assessee had also drawn the attention of the Cochin Bench of the Tribunal to a decision in IRC v. Pyman [1937] 21 TC 129 (KB). In that case, one of the partners in the firm died in June, 1933 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted legal theory that an interest of the partner in a firm extends not only to a share in the profits of the firm or assets of the firm including goodwill and that a claim to an interest in the capital of the firm is capital and that compensation received with respect to such payment is also capital in nature. It was, therefore, held that manifestly the compensation received by the legal heirs of the deceased partner of partnership from another partner in lump sum or in instalments for relinquishing for loss of capital asset was not a trading receipt. In this connection another decision in the case of S. Kuppuswami v. CIT [1954] 25 ITR 349 (Mad) was also relied upon. In this background, we have to test the law and the principles discussed in the aforementioned cases. We propose to begin with the case of S. Kuppuswami [1954] 25 ITR 349 first. In that case, a registered accountant was employed by another registered accountant for some time and then he became a working partner of a branch. Subsequently, an agreement was entered into between the assessee and S which stated, inter alia, that the branch became the sole concern of the assessee and that the goodwill was to be valued at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in's case [1960] 39 ITR 333 (Mad) in which the compensation was received by one of the partners of the partnership itself whereas in the instant case the receipt was not by way of compensation in the hands of one of the partners but the heirs of the deceased partners who had neither invested any capital nor had any say or matter in the management or affairs of the partnership firm, nor were they concerned at all with regard to the profits of the partnership firm. This thus leads us to the decision of the Supreme Court in the case of P. H. Divecha v. CIT [1963] 48 ITR 222 (SC), which has already been discussed partly by the Cochin Bench of the Tribunal but in order to highlight the facts and the principles laid down by the Supreme Court, we prefer to give some relevant detailed facts involved and the principles laid down by the Supreme Court itself. A firm, which was conducting business in electrical goods including electric lamps, entered into an agreement in 1938 with Philips Electrical Co. under which the firm was given exclusive rights to purchase and sell electric lamps manufactured by Philips in certain areas. By a letter which formed an annexure to the agreement, the firm w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm that would have arisen if the agreement had not been terminated, it could not be said that it replaced those profits. Although the amount was large, there was nothing to show that it was an adequate measure of the Profits that were expected to be made during the three years in which the amount was to be paid. Principle No. 3.-That the payment could not be regarded as payment for any services rendered even though it was described as remuneration in addition to the ordinary profits of trading. The payment was made out of regard for the qualities of the three partners who had built up a vast network of sales organisation of which the company would obtain the benefit when it entered on the business of selling for itself. Principle No. 4.-That as it was not related to any business done or to loss of profits and it was not recompense for services, Past or future, the payment did not bear the character of income taxable under the Indian Income-tax Act, 1922. Other principles were also laid down with which we are not concerned. The two principles which are very relevant to be taken note of are that although payment was described as remuneration, it was held on the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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