Diversion at source vs application of income: partnership deed payment to an institution was not deductible

A partnership deed cannot, by itself, justify deduction of a share of profits paid to an institution unless there is a supporting legal basis and the payment operates as a diversion at source. Where the deed does not create an overriding charge on the profits, the income first accrues to the partners and is only thereafter applied to make the payment. On that reasoning, the amount is treated as an application of income, not a deductible diversion at source, and the claimed deduction was not allowable.

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Issues: Whether, on a proper interpretation of clauses (10) and (11) of the partnership deed, the assessee-firm was entitled to deduction of 6.25% of the profits paid to the institution concerned.

Analysis: No provision of law supporting the claimed deduction was shown. A deduction could not be claimed merely because the partnership deed provided for payment of a portion of profits. The deed did not create an overriding charge on the profits; the income first accrued to the partners and only thereafter was a part of it applied for payment to the institution. The amount was therefore an application of income and not a diversion at source.

Conclusion: The assessee-firm was not entitled to the deduction; the question was answered in favour of the Revenue.

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