Sethuraman, J.:— In this reference under s. 256(1) of the I.T Act, 1961, the following question was referred:
“Whether, on the facts and in the circumstances of the case, it has been rightly held that what was received by the assessee on leaving the firm represented capital receipt and not revenue receipt?”
2. There was a firm known as “Dhanalakshmi Pictures” in which the assessee was a partner. This firm was constituted under a partnership deed dated 24th April, 1964, with four partners, including the assessee. On 11th October, 1969, the assessee retired from the firm and the assets and liabilities were liable to be taken over by two of the partners who would carry on the distribution of films thereafter. A dissolution deed was drawn up on 11th October, 1969, in which it was stated that the parties had mutually agreed to dissolve the partnership as and from 11th October, 1969. Clause 6 of the dissolution deed ran as follows:
“The party of the 3rd part hereto (the assessee) shall receive 3rd be paid a sum of Rs. 26,000 (rupees twenty-six thousand only) by the parties Nos. 1 and 2 (the two partners who took over the assets and liabilities) in full and complete settlement of all his claims in the partnership business ???owards his share of capital, accrued profits or losses till 11 th October, 969, his drawings and all other withdrawals till that date.”
3. The manner of discharge of the sum of Rs. 26,000 payable under cl. 6 vas provided for in cl. 7. The ITO noticed that as on 10th October, 1960, the capital account of he assessee in the firm stood at a debit balance of Rs. 53,130′56 and he had been paid a sum of Rs. 26,000 on leaving the firm. The ITO, therefore, ook the view that in essence the assessee had been credited with a sum of is. 79,13056 and that this sum was liable to tax in the assessee's hands as tis income. The assessee filed an appeal to the AAC, who confirmed the assessment.
4. When the matter was taken on appeal to the Tribunal, the Tribunal ???eld that a lump sum payment made to the assessee, a partner, in lieu of lis share of profits and interest in the partnership firm, is not getting any ???um of a revenue nature. It, therefore, held that the sum of Rs. 79,130.56 eceived by the assessee did not have any revenue character. It is this rder of the Tribunal that has given rise to the question extracted ???arlier.
5. From the facts stated above, it would be clear that there are two sums effect which are brought to tax in the assessment under reference. The rst sum is Rs. 53,130.56. It is clear that this sum was a debit balance in ???e books of the firm as against the assessee, a partner. As to how the ebit balance arose is not clear from the statement of the case. However, ???r. Jayaraman, the learned standing counsel for the Commissioner, stated ???at this sum represented the share of losses debited to the partners in le respective years in which the losses arose. The entry in the books of ??? firm would only go to show that the assessee owed to the firm a sum of Rs. 53,130.56. Ordinarily, he should have discharged this debt due to the rm. The question is whether the remission of this amount by the firm in be treated as income in the assessee's hands.
6. It is settled law that a debt forgiven cannot be treated as income, he question as to whether a remission of debt would constitute income as considered in British Mexican Petroleum Co. Ltd. v. Jackson, [1932] 16 C 570 (HL). The assessee in that case entered into a contract with an oil roducing company for the purchase of petroleum over a period of years. He unpaid price of the oil supplied was debited in the accounts. In view the adverse effect of a business slump on the assessee-company, the ???troleum producing company accepted payment of a part of the debt and ???eased the assessee-company from its liability to pay the balance which as due. The House of Lords held that the amount remitted could not be ???cluded as a revenue receipt. Lord Macmillan observed (p. 593):
“I cannot see how the extent to which the debt is forgiven car become a credit item in the trading account for the period within whic??? the concession is made.”
7. This case has been followed by the courts in. India in several case Which can be found collected in footnote No. 3 at page 92 of Kanga ant Palkhivala's The Law and Practice of Income Tax, 7th Edn., Vol. 1.
8. There is a statutory modification to this principle by the enactment ??? s. 41(1) of the Act. But the modification is subject to certain condition which are not satisfied in the present case. That is perhaps the reaso??? why the I.T authorities did not seek to apply s. 41(1) in the present case Applying the general principle that the waiver of a debt cannot constitut income, it is manifest that the assessee cannot be taxed on the sum o Rs. 53,130.56.
9. We shall now discuss the assessability of the sum of Rs. 26,000. Thi??? sum was paid to the assessee in full and complete settlement of all hi??? claims in the partnership business towards his share of capital, accrue??? profits or losses, etc. The I.T authorities have not gone into the questi??? as to how this sum of Rs. 26,000 was arrived at. This sum of Rs. 26,00??? can fall only into one of two categories. Either it is a payment in respec of profits earned by the firm which was due to him or it is returned ??? him as his Share of capital. In either event, it is not taxable. If it ??? only the share of profits credited to his account, then when it is paid ??? him it is not liable to be taxed in his hands. It is common knowledg??? that in the case of a registered firm, the firm is nominally taxed and th??? amount due in respect of the share of a particular partner is apportione??? among the partners in accordance with the share, of each partner in th??? firm and is brought to tax in the hands of the partner. The resultar??? amount of the profit earned by the firm is actually taxed in the hands ??? the partner. If the partner receives his share of the profits, which ha??? already suffered tax, he cannot be taxed again as this will go against th basic principle of taxation, namely, the same amount cannot be taxe twice in the same assessee's hands. If the firm was an unregistere firm, even then, the amount taken by a partner out of his share ??? profits from the firm cannot be taxed in view of the provisions of s. 86(ii of the Act. The return of a partner's capital cannot constitute ??? income. In any event, therefore, the amount of Rs. 26,000 cannot also to brought to tax.
10. The learned standing counsel drew our attention to two decision the first is CIT v. P.R.A.L Muthtt Karuppan Chettiar, [1935] 3 ITR 20 (PC). That case dealt with the question of the assessability of the profit remitted from abroad. At the relevant time the foreign profits were nc taxed in India on the basis of accrual but only on the basis of remittance The assessee contended that the remittance was effected only after the dissolution, that the profits had become capital and that, therefore, the amount cannot be taxed as a remittance of profits. This contention was negatived by the Privy Council. We do not find that this case has any scope of application to the present one, as the only principle decided in that case was that what is received out of profits continue to be profits in the hands of partners notwithstanding dissolution of the firm. In this case, in one view, such profits (if any) having borne tax cannot again be taxed. The second case cited by the learned counsel for the revenue is the one in CIT v. S. Rm. Sathappa Chettiar, [1951] 20 ITR 393 (Mad). In that case, there was a firm brought into existence for erecting and establishing a spinning mill between two persons, of whom the assessee was one. The assessee erected a building and the other partner purchased machinery of the value of Rs. 79,155. The factory was completed but did not start the business for want of supply of electricity. The machinery was used by the assessee, one of the partners, for the purpose of the business of a mill of which he was the managing agent. Disputes arose between the part-ners and they were referred to an arbitrator. There was an award by the arbitrator which provided that the assessee should receive from the mill a sum of Rs. 75,000 in full settlement of his claim for compensation for the use of the machinery by the mill. The question was whether this sum of Rs. 75,000 can be taxed in the hands of the assessee as his income. It was held that it was so liable to tax. That was only because the sum represented a revenue receipt in respect of the user of the machinery, or it was in the nature of the rent payable for the use of the machinery. In either event, it was a revenue receipt. This case also is not of assistance to the problem before us.
11. The result is that the question referred to us is answered in the affir-mative and against the revenue. The assessee will be entitled to his costs. Counsel's fee Rs. 500.