V. RAMASWAMI J.


At the instance of the Revenue, the following 10 questions have been referred

"(1) Whether, on the fact, and in the circumstances of the case, the Tribunal was right in holding that the compensation received by the assessee for relinquishing his rights, etc., in the partnership firms cannot be taxed as revenue receipt in his hands ?


(2) Whether, on the facts and in the circumstances of the case, it has been rightly held by the Tribunal that the disposal of the undertaking cannot be treated as amounting to a business in itself and that the surplus realised therefrom by the assessee cannot be taxed as business income in the hands of the assessee ?


(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in and had valid material to allocate the compensation received by the assessee towards share in the assets of the firm, goodwill of the firm and compensation for the restrictive covenant for five years and its quantification is reasonable on the facts found in the case ?


(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no 'transfer' involved even under the provision of the Income-tax Act, 1961, when a partner retires from a partnership and that, therefore, the assessee cannot be assessed to capital gains tax on the surplus realised ?


(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the compensation received by the assessee cannot be taxed as income or capital gains in the hands of the assessee ?


(6) Whether, on the facts and in the circumstances of the case, the entire amount paid by the assessee as compensation to Shri G. D. Naidu and Shri G. D. Gopal and others could not be disallowed as capital expenditure and that an amount referable to the restrictive covenant agreed to by the parties should be allowed as a deduction in the hands of the assessee under section 37 of the Income-tax Act ?(7) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the compensation paid by the assessee-firm to Shri G. D. Naidu and Shri G. D. Gopal should not be considered as the sale price paid by the assessee-firm to acquire the entire business to the exclusion of these partners and that it could not be disallowed as such ?


(8) Whether, on the facts and in the circumstances of the case, the Tribunal was right in quantifying the components of the compensation paid into three parts and its determination of the compensation relatable to the restrictive covenant is based on valid materials and is a reasonable view to take on the facts of the case ?


(9) Whether, on the facts and in the circumstances of the case, the compensation paid but relatable to the restrictive covenant did not bring any enduring advantage to the assessee-firm and the Tribunal's finding in this regard is sustainable in view of and on the materials on record ?


(10) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty under section 271(1)(c) cannot be sustained in the assessee's case ?" *


One G. D. Naidu (since deceased) was a prominent industrialist of South India. He started the following five transport services on April 1, 1957, which operated in areas in and around Coimbatore as indicated in the name and style of the said services


(i) Alandurai Service


(ii) Gobi Service


(iii) Erode Service


(iv) Palghat Service


(v) Dharmapuram Service


These services were run as partnerships. G. D. Naidu was a partner in all these firms from the inception. His son, G. D. Gopal, was also taken as a partner in all the above concerns with effect from April 1, 1960. These firms were registered for purposes of income-tax from the assessment year 1958-59 onwards. Certain changes occurred in the constitution of these firms during the financial year 1963-64 which is the previous year for the assessment year 1964-65 for all the firms. Though the details of the changes in all the firms are not readily available, it is not disputed that the changes that had taken place in each of these services took on a similar pattern. Therefore, it is sufficient to illustrate the position with reference to Alandurai Service. Till March 31, 1963, the Alandurai Service was firm consisting of 12 partners including G. D. Naidu and his son, GopalOn 1-4-1963: Shri G. D. Naidu, Shri G. D. Gopal and Shri


C. R. Balasubramaniam retired from the firm and Shri Chinnaswami Gounder, Abdul Wahab Rowther and P. S. Mohideen Abdul Khadar were

admitted as partners of the firm-- Next on On 25-5-1963: eight more partners, who had been in the firm from its commencement, retired and five new partners (Mohd. Abdul Khadar, Abubakar, Ramaswamy

Gounder, Gani and Sarvadeen) were admitted as

partners. This was followed up by another change


On 14-12-1963: when one more partner, who had been in the firm

from its commencement, retired. Finally, immediately on the close of the previous year On 1-4-1964: Abdul Wahab Rowther, Mohideen Abdul Khadhar Md. Abdul Khadar and Abu Baker retired giving place to Subhanna Gounder, Muthuswami, Ahmed Khadhar and Abdul Azeez --resulting in the firm being constituted by eight persons, S. Chinnaswami, Subhanna Gounder Ramaswami Gounder, Muthuswami, Gani, Sarvadeen

Abdul Azeez and Ahmed Khadar. The changes in the other firms were similar It may thus be seen that during the financial year 1963-64, all the old partners of the firm retired in stages, so that by April 1, 1964, the firm composed entirely of a new group of partners. The firms were not dissolved at any stage. It is also the admitted case that the firms were registered for income-tax purposes for the assessment year 1964-65 also and continued to function


In the course of the assessment proceedings for the assessment year 1964-65, each one of the firms claimed deduction in the computation of its business income in respect of an amount of compensation paid to G. D. Naidu and G. D. Gopal. Again, to illustrate the position by reference to the case of Alandurai Service, the firm wrote to the Income-tax Officer on June 25, 1966, as under

"A sum of Rs. 2, 25, 340 was paid in the assessment year 1963-64 to Shri G. D. Naidu and Shri G. D. Gopal to shut off competition from them in regard to the bus service. As this is an item of revenue expenditure, the payment may be allowed, the loss computed and allocated for set off in the hands of the partners who form the registered firm. The returns already made for the aforesaid years may be considered subject to this claim, inasmuch as assessment for these two years are still pending. If so advised, revised returns will be made for these years." *


In response to a query by the Income-tax Officer, It was explained by the assessee on September 5, 1966, as under

"That the amount settled was Rs. 3, 25, 000. Deducting liabilities of the service undertaken to be paid by Shri G. D. Naidu amounting to Rs. 99, 659, 93, the balance of Rs. 2, 25, 340.07 represents compensation paid to M/s. G. D. Naidu and G. D. Gopal, viz., Rs. 1, 25, 000 to Shri G. D. Naidu and Rs. 1, 00, 340.07 to Shri G. D. Gopal, The sum of Rs. 3, 25, 000 was paid in cash on April 2, 1963." *


The agreement between the parties, on the basis of which the abovementioned amounts were paid, was said to have been embodied in a letter written by G. D. Naidu and G. D. Gopal in each of the cases. In the case of Alandurai Service, he wrote on April 1, 1963, on the letter-head of the firm a letter addressed to T. S. Mohammed Gani, a new partner in Alandurai Service, Coimbatore. The letter runs as follows


"The terms agreed to in yesterday's discussions, I confirm here as follows


Yourself and your friends will buy the shares of Alandurai Service, as many as available including my shares. Then, I agree not to enter into business competition in the routes of this service for five years if you pay Rs. 1, 25, 000 cash down within December 1, 1963Though agreed to this agreement in principle, on account of some small dispute, final settlement has not yet been made. Coimbatore, Yours faithfully, 1-4-1963. (Sd.) G. D. Naidu." *


At the left hand bottom of the letter appears the following endorsement


"I agree to the above terms


(Sd.) T. S. M. Gani."


There is a similar letter by G. D. Gopal with the figures "Rs. 1, 00, 000 in the place of" Rs. 1, 25, 000

"in the second paragraph


To complete the narrative, it may be mentioned that the payments were made to the erstwhile partners of their share amounts by crediting the share capital account of the firm and debiting the various partners. Thus the credits of the former partners to their capital account were squared up with reference to the dates April 1, 1963, May 29, 1963, and December 14, 1963, respectively. The sum of Rs. 2, 25, 340.07 said to be due to G. D. Naidu and G. D. Gopal was exhibited in the firm's balance-sheet for the year ending March 31, 1964, as part of property and assets with the following narration" *


Compensation-Rs. 2, 25, 340.07


The position is similar with no material differences in other cases. However, the details of the compensation paid to G. D. Naidu and G. D. Gopal in the various cases may be set out and they are as under : ------------------------------------------------------------------------------------------------------------------------------------------- Name of concern Total Credit Compensation


amount balances ------------------------------------------------ of old G.D. Naidu G.D. Gopal


partners ------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. Rs. Alandurai Service 3, 25, 000 99, 660 1, 25, 000 1, 00, 340 Palghat Service 8, 00, 000 2, 80, 126 2, 70, 000 2, 49, 974 Erode Service 9, 05, 000 3, 02, 663 3, 50, 000 2, 52, 337 Gobi Service 7, 99, 000 2, 34, 920 3, 00, 000 2, 64, 080 Dharmapuram Service 13, 00, 000 3, 11, 153 5, 50, 000 4, 38, 747 ---------------------------------------------------------------------------------------------------------------------------------------------41, 29, 000 12, 28, 522 15, 95, 000 13, 05, 478 ---------------------------------------------------------------------------------------------------------------------------------------------


Thus, G. D. Naidu and G. D. Gopal got Rs. 15, 95, 000 and Rs. 13, 05, 478, respectively, by way of compensation


Before the Income-tax Officer, it was claimed that these amounts should be allowed as revenue expenditure in the hands of the firm for the assessment year 1964-65. In the hands of the recipients G. D. Naidu and G. D. Gopal, the two assessees though had first returned for the assessment year 1964-65 one-half of their respective amounts as capital gains, the other half being claimed as payable to the workers, at a later stage they claimed exemption in respect of the entire amount. The Income-tax Officer held that these amounts must have been paid only to seek entry into the partnership, to acquire the business along with the route permits which is a capital asset, and that, therefore, it was a payment not to carry on business but for a commencement of a business. According to the Incometax Officer, the entire outlay was for initiation of a business and to acquire tangible assets and that, therefore, the amount could not be allowed as revenue expenditure. The Income-tax Officer also held that the amount could not be allowed as a revenue expenditure on the ground that it was paid to buy off competition in the view that no question of warding off competition could arise as the firm had a monopoly route and it was not easy to put on more buses in that route. The payment for the continuation of the business in the same name free of competition only amounted to payment for enhancement of goodwill and resulted in an enduring advantage. Therefore, it was capital expenditure and not revenue. The Income-tax Officer also observed that the payment was not for business considerations and, therefore, it could not be allowed as deduction, under section 37 of the Income-tax Act, in the hands of the firm. In the case of the recipients, the Income-tax Officer found that, the entire amount was receivable and was received by the two assessees and, that, therefore, there was no evidence to substantiate the alleged entitlement of the labourers to any part of the compensation amounts. The Income-tax Officer then referred to the great part played by G. D. Naidu in building up the structure of all these companies and in rendering them prosperous by his financial abilities, personal skill and industrial acumen amidst great difficulties and came to the conclusion that the compensation received should be treated as revenue in character. The firm and the individual assessees took the matter on appeals to the Appellate Assistant CommissionerThe Appellate Assistant Commissioner came to the conclusion that the payments have been made with three objects in view


(a) to get the retirement of Naidu and Gopal from the firm, that is to say, to get a transfer of their rights in the firm in favour of the new firm and its partners ;


(b) to get the retirement of the other partners of the firm, thus enabling the new partners to get the full rights over the profits of the firm from April 1, 1963; and


(c) to get Gopal and Naidu to agree not to enter into competition with the firm for a period of five years


He held that the part of the compensation attributable to (a) and (b) would be capital in nature and that the part attributable to (c) would be revenue in nature. In the absence of data as to how the compensation amount was determined, he treated the payment as attributable equally to the three objects and allowed one-third (and disallowed two-thirds) of the amounts claimed in the hands of each of the firms. On the same analysis, he held, in the hands of the recipients, Naidu and Gopal, that


(i) one-third of the amounts received attributable to object (a) above, would be taxable as capital gains;


(ii) one-third attributable to (b) would amount to income from business; and


(iii) one-third relatable to the restrictive covenant would be a capital receipt not assessable to tax


He thus sustained the assessment of the two sums of Rs. 4, 35, 159 in the case of G. D. Gopal and two sums of Rs. 5, 31, 667 in the bands of Shri G. D. Naidu


As against the orders of the Appellate Assistant Commissioner, the assessees as well as the Department went in appeal to the Tribunal, for the assessment year 1964-65. The Tribunal came to the following conclusions in the case of the firms


"(i) on the facts found in this case, the compensation paid should be held to be for the following three components(a) for the share in the assets


(b) for the share of the goodwill


(c) for the restrictive covenant, in terms of section 36(2) of the Partnership Act


(ii) The payments in respect of items (a) and (b) referred to above would not be deductible in the hands of the firm because these are only payments to retiring partners by a firm and hence on capital account. But to the extent the contribution is attributable to item (c), the compensation paid is a deductible expense in computing the income of the firm as the firm has not acquired any asset or advantage of enduring nature by securing this covenant


(iii) The value of these three components of the compensation amount can be evaluated as follows


(a) The assets of the firms are not worth much and the payment to the retiring partners to the extent of the amounts in the capital accounts would cover the share of assets in the firm


(b) The value of the goodwill in the case of Alandurai Service can be estimated at Rs. 75, 000 being the two years' purchase price of the average annual profit for a period of past six years. On the same basis, the goodwill attributable to the other firms should be computed


(c) The balance would represent the compensation paid for the restrictive covenant and it should be allowed as a deduction in each of the five cases


The Tribunal held that the payments made by the firms are allowable as deductions only in part. The Tribunal had given figures for Alandurai Service. The Tribunal directed that on the same basis, the goodwill attributable to the other firms should be computed. Only the figures so computed would be disallowable. The balance of the payments would qualify for deduction as revenue disbursement


The conclusions of the Tribunal in the case of the recipients are as under" *


(iv) The compensation attributable to the relinquishment of the shares of the retiring partners and the share of goodwill which they allowed the firm to retain, was on capital account


(v) No transfer is involved when a partner retires from a firm receiving his share of assets or money in lieu thereof, and, therefore, no capital gains are chargeable to tax on such occasion


(vi) Goodwill is not a capital asset within the meaning of section 2(14) of the Income-tax Act and there is, therefore, no question of any capital gains, arising Out of the transfer of the goodwill for capital gains taxation


(vii) The compensation relatable to the restrictive covenant is a capital receipt. It is also not liable to capital gains tax as freedom to carry on business of a similar nature cannot be described as property within the meaning of a capital asset


(viii) There is, therefore, no liability to tax on any part of the amounts received by Shri G. D. Gopal and Shri G. D. Naidu and others either as income or as capital gains


(ix) The disposal of the undertakings by Naidu and Gopal could not be treated as amounting to a business in itself yielding taxable surplus and the contention of the Department that the surplus realised by Shri Naidu and Shri Gopal should be assessed as business income is, therefore, rejected


It is against these orders of the Tribunal at the instance of the Revenue, that the first nine questions set out above have been referred


Learned counsel for the Revenue strenuously contended that though the entire transaction has taken the form of retirement of old partners stage by stage and the coming in of the new partners also stage by stage, ultimately by the end of the financial year, all the old partners have retired and the entirety of the firm from April 1, 1964, consisted of only a new group of partners, and in effect it amounts to a transfer of the business by the old partners to an entirely new set of partners and that, therefore; the entire amount received as compensation should be treated as an initial outlay by the new firm for acquisition of an asset, namely, the business of the firm. In this connection, she also contended that it is the substance of the matter that should be taken into account and not the form that has been adopted by the assessee in order to evade or avoid payment of tax. Colourable devices in order to evade tax could not be encouraged. She referred to the decision in McDowell and Co. Ltd. v. Commercial Tax Office). That related to avoidance of excise duty by dealer by making the purchaser pay the excise duty and thereby trying to reduce the taxable turnover of the dealer. While dealing with the general question as to whether tax avoidance devices should be permitted or encouraged, the Supreme Court, after a consideration of the English decisions, deprecated the practice and observed (p. 160)

"We think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not no skillful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. justice Holmes, who said, 'Taxes are what we pay for a civilized society. I like to pay taxes. With them 'buy civilization.' But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai J., in Wood-Polymer Ltd., In re and Bengal Hotels Ltd., where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of taxIt is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay , Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction." *


Let us now assume that the parties intended that all the old partners should retire and the new partners should take over the business of the firm., The question for consideration is what is the nature of the transaction. There can be no doubt that so far as the old partners are concerned, it amounted to a dissolution of the partnership and the receipt of the amounts was distribution or division or allotment of the assets of the firm among the partners. So far as the cash compensation paid by the new partners referable to the assets and goodwill of the firm are concerned, the cash takes the place of the assets of the partnership and that is the normal way of dissolving a partnership also. The compensation paid or relatable to the restrictive covenant not to carry on similar business for a period of five years is in the nature of a separate transaction unconnected with the business or the assets of the partnership. That the distribution of this compensation among the partners does not amount to a transfer is also clear from the decision of the Supreme Court in Malabar Fisheries Co. v. CIT. In that case, a firm consisting of four partners carried on six different businesses. The firm was dissolved on March 31, 1963, and under the deed of dissolution executed by and between the partners, one concern was taken over by one of the partners, the remaining five concerns by two of the other partners and the fourth partner received a sum of Rs. 3, 81, 082 in lieu of his respective shares in the assets of all the businesses of the firms. It appears that during the four assessment years 1960-61 to 1963-64, the firm had installed various items of machinery in respect of which it received development rebate in its respective tax assessments under section 33 of the Act. On dissolution of the firm on March 31, 1963, the Income-tax Officer took the view that section 34(3)(b) of the Act applied on the ground that there was a sale or transfer of the machinery by the firm within the period mentioned in that section and accordingly, acting under section 155(5) of the Act, he withdrew the development rebate allowed to the firm for the said assessment years. The dissolved firm through one of its erstwhile partners preferred appeals against the order of the Income-tax Officer withdrawing the development rebate. But the Appellate Assistant Commissioner dismissed the appeals. The matter was carried in further appeal to the Tribunal and the Tribunal held that the distribution of the assets of the firm consequent on its dissolution did not amount to a sale or transfer and, therefore, the transaction would not come within the purview of section 34(3)(b). At the instance of the Revenue, two questions were referred to the High Court. The first question was, whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that there was no question of sale and that it was only an adjustment of the mutual rights of the partners and that the provisions of section 34(3) were not applicable, and the second question was, whether, on the facts and in the circumstances of the case, there was a transfer of assets within the meaning of the words 'otherwise transferred' occurring in section 34(3)(b) of the Income-tax Act. The High Court answered the second question in the affirmative and against the assessee and in view of that answer, declined to answer the first question. On a further appeal, the Supreme Court held (p. 59)

".. ...... it seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets, all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution, the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution." *


There can, therefore, be no doubt that so far as the old partners who received the compensation are concerned, that part of the compensation referable to the assets and goodwill amounts to a distribution of the assets amongst themselves. As rightly pointed out by the Tribunal, the total compensation paid by the assessee-firm to the old partners is (a) for the share in the assets ; (b) for the share of the goodwill ; and (c) for the restrictive covenant in terms of section 36(2). So far as the assessee-firm is concerned, there can be no doubt that that part of the amount referable to acquisition of shares in the assets and the share of the goodwill would be on capital account as it is in the nature of an initial outgoing. That has been so held by the Tribunal also. The Tribunal also has with reference to each one of the services determined the value of the share in the assets and the share in the goodwill. So far as the balance amount which was paid in respect of the restrictive covenant is concerned, the Tribunal held that it is in the nature of a separate understanding or transaction, that it could not be said that the assessee-firm has secured an enduring advantage and that, therefore, the payment can only be treated as a revenue outgoing. We are unable to agree with learned counsel for the Revenue that the payment towards restrictive covenant was also on capital account or that it could amount to an acquisition of an advantage of an enduring nature. In support of this contention, learned counsel referred to Blaze and Central (P.) Ltd. v. CIT and CIT v. Jalan Trading Co. P. Ltd. The latter is a case where an assessee, a private company took over under a deed of assignment the benefit of a sole selling agency agreement acquired by the firm on May 1, 1951. The agreement with the manufacturers was for two years with a right of renewal at the option of the selling agent. Under the deed of assignment, the assessee-company was to pay the assignor firm, in consideration of the assignment,

"as and by way of royalty an amount equivalent to 75 per cent. of their profits and commission, remuneration and other moneys received from the manufacturers" *


. The question was whether the sum of Rs. 7, 93, 837 being 75 per cent. of its net profits paid by the assessee-company to the firm was allowable as a business deduction. The assessee was a new company at the time when it acquired the benefit of the sole selling agency agreement. On those facts, it was held that it had acquired under the assignment, the right to carry on the business of sole selling agency on a long-term basis subject to renewal of the agreement, stipulating to pay 75 per cent. of its annual net profits, and that, therefore the expenditure related to the acquisition of a capital asset and was not admissible as a deduction. We are unable to see how this decision is in any way helpful to learned counsel for the Revenue for contending that there was any acquisition of any benefit in the present case. Further, as seen from the facts in this case, the right to carry on the business of sole selling agency was acquired by the assessee-firm on a long-term basis and was also subject to renewal agreement. On the other hand, in the present case, the restrictive covenant is operative only for a period of five years. It may be also mentioned that in the present case, it is not new business of the assessee, though the new partners have come in for the first time. The old business of the outgoing partners was being carried on by the new partners and we have already pointed out that even the Income-tax Officer has registered the firm under the Income-tax Act for the subsequent years alsoIn Blaze and Central (P) Ltd. v. CIT the facts were these. The assessee which was carrying on business of arranging exhibition of advertisement and film shorts in licensed public cinema theatres in the four Southern States of Madras, Andhra, Kerala and Mysore, entered into an agreement with one Saraswathi Publicities who was also carrying on similar business on behalf of two companies in the four States. Under the said agreement, Saraswathi Publicities agreed to part with its business in the four States for a period of 9 years in consideration of the assessee paying a sum of Rs. 1, 50, 000. This court held th

at the assessee had taken over the business carried on by Saraswathi Publicities for a consideration of Rs. 1, 50, 000 though it was for a period of 9 years. It was further held that the assessee not only derived an advantage by eliminating competition and also acquired a business which generated income. It is in those circumstances, this court held that the sum of Rs. 1, 50, 000 paid by the assessee was capital in nature and was not allowable as a revenue expenditure. It may be seen from the facts of that case that that case also related to an acquisition of an existing competitive business, whereas in our case it is only a restrictive covenant. No separate business of the old partners was acquired or any competition was eliminated by such acquisition. Since there is no acquisition of any business by payment of the amount referable to the restrictive covenant and there is no benefit of an enduring nature being acquired, we are in entire agreement with the Tribunal that the payment can only be treated as a revenue outgoing and not capital in nature. These findings will answer questions Nos. 6, 7, 8 and 9 and all those questions are answered in favour of the assessee and against the RevenueSo far as the amount received by the old partners referable to their share in the partnership and the goodwill is concerned, though they are received on capital account as held by the Supreme Court in Malabar Fisheries Co. v. CIT it is only a distribution of the assets of the partnership among the partners involving no transfer of an asset and, therefore, there could be no question of any capital gains also. The question whether the compensation received for restrictive covenant can be taxed as income or capital is directly covered by the decision in CIT v. Saraswathi Publicities In that case, it was held that a receipt referable to the restrictive convenient was a capital receipt not liable to income-tax. The decision in CIT v. N. Palaniappa Gounder is an authority for the position that the compensation received by the outgoing partners or the old partners in respect of their share in the partnership cannot be taxed as revenue receipts nor can it be said that there was any element of capital gains arising merely because of the valuation of his share on the retirement of the assessee from the firm resulted in an excess over the book value of the net assets of the firm referable to his share. The above two decisions are directly applicable to the facts of this case and we confirm the finding of the Tribunal and accordingly we answer the first five questions referred to above relating to the recipients in the affirmative and in favour of the assessee The only other question which remains to be considered relates to the penalty. On this question, in view of the answers given to the above questions, it has to be said that the same may not arise at all for consideration. Even otherwise we are satisfied that there is no contumacious conduct calling for any penal action in this matter. The assessee-firm has placed all the materials before the authorities. Of course, they were contending for a particular position contrary to the view taken by the Income-tax Officer, but, that cannot call for any penalty under section 271(1)(a) of the Act. We, therefore, answer the 10th question also in the affirmative and against the RevenueThere will be an order accordingly. The assessees will be entitled to their costs, one set in T.C. Nos. 1496 to 1501 of 1977, another set in T.C. Nos. 1502 to 1507 of 1977 and a third set in T.C. Nos. 1508 and 1509 of 1977 and 15 of 1978. Counsel's fee in each of these sets is Rs. 500.