MALIK, CJ. :- The assessee-firm entered into an agreement with Messrs. E. Sefton and Company, Ltd., which company was incorporated under the Indian Companies Act with its Head Office ,at Mirzapur. The assessee-firm agreed to finance the business of Messrs. E. Sefton and Company, Ltd., for purchasing raw wool and other manufacturing expenses etc. at a rate of interest mentioned in the agreement, dated 9th April 1940. The agreement further provided that this contract was to remain in force for a period of five years, that the assessee-firm and Messrs. E. Sefton and Company, Ltd., were to put up a Weaving and Finishing Plant to make blankets and blanketting at Mirzapur or at any other place which may be mutually agreed upon, that the two parties would work with the object of executing Government and private contracts for the supply of blankets, blanketting and yarn or for any other woollen products which, in the opinion of both the parties, could be profitably handled and that, during the period of five years that the business was to run, the profits were to be shared between them in the proportion of 40 per cent and 60 per cent, that is, the assessee-firm getting 60 per cent of the profits. It was further provided that, during the period of five years, the assessee-firm or Messrs. E. Sefton and Company, Ltd., were not to undertake directly or indirectly a similar business without their mutual consent obtained in writing. There were other terms in this agreement, Ex.T-A, a copy of which is included in the paper book. It is not necessary for us to set out those terms. In short, the assessee-firm and Messrs E. Sefton and Company, Ltd., entered into a partnership to carry on business on certain terms and to share profits and losses, the assessee-firm further undertaking to finance the concern on certain terms mentioned in the document.

The business was carried on for a period of more than one year but on 22nd Nov., 1941, the parties mutually agreed to terminate the agreement. A sum of Rs.25,962/-, (wrongly mentioned by the Tribunal for Rs.25,942) was already in the hands of the assessee-firm. Under the Cancellation Agreement, dated 22nd November, 1941, it was agreed that a further sum of Rs.25,000/- would be paid to them "in lieu of all their claims as regards damages, etc. and share, of profits during the period of co-operation and future ". Paragraph 10 of this agreement runs as follows :

"10. That this agreement has been entered into by the parties in a friendly spirit and leaves no malice on either side and that Mr. Shiva Lall of Messrs. S. Laul and Co. will continue to assist the "Manufacturers" (Messrs. E. Sefton and Co., Ltd.) in the matter of continuing the contracts obtained from the Government of India, as and when opportunity arises, except undertaking any pecuniary liability." The Income-tax Officer claimed that the whole of this amount of Rs.50,962/-, was taxable income which had accrued to the assessee for the financial year ending with 31st March, 1942, which was the relevant account period for the year of assessment with which we are concerned. The assessee-firm had divided the sum of Rs.50,962/- into two parts. He claimed Rs.13,694/- as share of profits and Rs.37,248/-as compensation for the termination of the contract. There was thus no dispute as regards Rs.13,694/- and as regards Rs.37,248/-, the matter went up to the Income-tax Appellate Tribunal which held on 16th January 1945, that

"this amount will, therefore, be liable to income-tax as they are of the same nature as the profits that will accrue from time to time. The appellants have no justification to urge that they received any amount as damages after obtaining a sum for future profits also. We find that amounts received by the appellants were for the accrued as well as for the future profits."

2. The assessee-firm. made an application under S.66(1), Income-tax Act and formulated four questions for reference to this Court. The Income-tax Appellate Tr