Satish Chandra, C.J. - (1.) IT appears that initially Hafiz Shaukat Hussain carried on business under the name and style of Oriental Art Glories, Moradabad. He dealt with brasswares including their export. On 14th July, 1967, he entered into an agreement of partnership with Hasin Ahmad that with effect from 15th July, 1967, the business will be carried on in partnership, but under the same name of Oriental Art Glories. Both the partners had equal share in the profit and loss. The partnership was stated to be for a period of three years.
(2.) ON 31st March, 1969, the firm was dissolved. Hasin Ahmad went out and the business was taken over by Hafiz Shaukat Hussain. ON 31st March, 1969, the state of affairs appears to have been that it suffered a loss of Rs. 8,287.92. Each of the partners undertook to share the loss, i.e., of Rs. 4,143.96. Subsequently, they entered into a written agreement indicating the extent of the loss and also stating that by this time the likely profits and premium on earned entitlements and release orders granted against exports made and the amount of drawback during the period ending 31st May, 1969, was not accounted for and that on 25th May, 1969, the amount of Rs. 20,222.34 was likely to be due and payable as premium on earned entitlements, etc., made during the year. Half of this amount, i.e., Rs. 10,117.17, was agreed to be payable to Hasin Ahmad as the half share of premium on entitlements, etc. This amount has been held in the orders of the authorities below to have been agreed to be paid to Hasin Ahmad by 31st March. 1971. It appears that during the accounting period relevant to the assess ment year 1970-71, Hafiz Shaukat Hussain paid this amount to Hasin Ahmad. In his personal assessment, he claimed this amount as a deduct ible allowance. The ITO repelled this claim. His order was upheld on appeal as well as in further appeal by the Tribunal. The Tribunal in para. 4 of its order observed: "In our view there is substance in the stand taken by the learned authorised representative of the department as we have seen that the assessee has paid this amount against the stipulation in Clause 10 of the partnership deed where it has been agreed upon 'that if party No. 2 with-draws from the partnership at any time during the three years, all bank accounts shall continue to operate and he shall have no right to stop any payments to the bankers or other parties or to stop mail in the post office or the receipt of any benefits of licence or entitlement of export, etc., or execution of disposal of any documents relating to the partnership business by party No. 1 aforesaid'." Opposite party No. 2 was Hasin Ahmad. They consequently repelled the submission made on behalf of the assessee that this payment represented business expenditure or diversion of income by an overriding title.
(3.) AT the instance of the assessee, the Tribunal has referred for our opinion the following question of law : "Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Clause 10 of the partnership deed prevented the outgoing partner from claiming any share in the benefits earned on account of exports for the period of partnership and in holding on this ground that the payment was in the nature of diversion of income after it had been earned ?" Clauses 8 to 11 of the partnership deed are material and relevant for answering the question referred to us. They are as follows : "(8) That it is mutually agreed that at present the duration of the partnership is fixed for three years. (9) That if party No. 1 withdraws from the firm within the said three years, he shall be liable to pay to party No. 2 Rs. 2,500 as fixed damages and if party No. 2 withdraws from the firm within the said three years, he shall only be entitled for the profits and losses accrued to the firm for the period ending dissolution of the firm and the capital due to him and in that case party No. 2 shall not be entitled to the said fixed damages of Rs. 2,500. (10) That if party No. 2 withdraws from the partnership at any time during the three years all bank accounts shall continue to operate and he shall have no right to stop any payments to the bankers or other parties or to stop mail in the post office or the receipt of any benefits of licence or entitlement of exports, etc., or execution or disposal of any documents relating to the partnership business by party No. 1 aforesaid. (11) That on dissolution of firm the business shall be continued in sole proprietorship of party No. 1 and party No. 2 shall have no concern with the goodwill of the firm thereafter." ;