New firm became assessee.

VISWANATHA SASTRI, J. :- The following two questions have been referred to us :

1. Whether in the circumstances of the case, the tribunal was right in upholding the decision of the Income-tax Officer that the profit of the firm should be apportioned between the three present partners and not between the five old partners as claimed by the applicants ?

2. Whether in the alternative, the Tribunal was right in disallowing the sum of Rs. 18,911-12 0 paid to the old partners on the ground that the payment has been made out of the profits earned by the applicant firm ?

The facts which have given rise to this reference have to be briefly stated. V.N.V. Devarajnlu Chetty and Co. a firm of five partners started a wholesale business in piece goods, Indian and foreign, in September 1940. On 31st October 1942, two of the five partners retired from the firm and the three surviving partners thereafter carried on the business under the same name and style as before, but as a new firm. This new firm is the assessee in the case and the applicant for reference to this Court. Each of the two outgoing partners who had a three annas share in the old firm, was paid a sum of Rs. 6399-6-8 for his share of the assets and profits of the old firm up to the date of dissolution as the result of an arbitration award. This settlement was subject, however, to a reservation of the rights of the two retiring partners in respect of certain for-ward contracts for the purchase of piece goods from abroad that had already been entered into by the old firm, but the deliveries under which had not been effected. In respect of these goods, of the quantity of 336 bales, it was decided that the outgoing partners should fix their value and allow the partners of the new firm to deal with the goods and pay the retiring partners a part of the profits. As the deliveries under these forward contracts were problematic owing to the conditions created by the last was and the prices of foreign piece goods were also shooting up, it was not possible at the time of the dissolution of the old partnership to settle the rights of the partners inter se in respect of these forward contracts. A quantity of 317 bales arrived from Manchester about September 1943 and these bales were taken delivery of and sold by the new firm and the profits on such sales were realised by the new firm. The arbitrators directed that each of the two old partners should be paid by the new firm a sum of Rs. 6530 in respect of the interest of the old partners in the goods and their share of the profits realised by the sale of the 317 bales. A further quantity of 17 bales, arrived sometime later and these goods were also taken delivery of and sold at a profit by the new firm. A sum of Rs. 2935-14-0 was paid to each of the two old partners by the new firm in respect of their interest in these goods and their share of the profits arising from their sale on 16th March 1944, the two old partners executed a deed of release in favour of the new firm consisting of three continuing partners reciting therein the aforesaid arrangements and payments. The new firm was assessed by the Income-tax Officer for the year of account ending 31st March 1944, the assessment year being 1944-45, in the sum Rs. 45,088 as the profits of their business for the year. This sum of Rs. 45,088 included the sum of Rs. 18,911-12-0 paid to both of the old partners in respect of the goods which arrived under the forward contracts entered into by the old firm but which were sold by the new firm. The new firm, the assesses in this case, claimed that the sum of Rs. 45,088 should be apportioned among the five old partners and not among the three continuing partners who alone had been registered as a firm in the year of assessment. The assessee also contended, in the alternative, that in computing the profits of the year of account, the sum of Rs. 18,911-12-0 paid in that year to the old partners by the new firm, should be deducted from the sum of R