Profit share to deceased partners' estates held diversion by overriding title, not taxable income of firm, AY 1969-70

HC held that amounts collected by the assessee-firm and paid to the estates of deceased partners, in terms of the partnership deeds, did not constitute taxable income of the firm for AY 1969-70. The deceased partners were contractually entitled to a share of profits attributable to work performed up to their dates of death, and the continuing partners were under a binding legal obligation to pay this to the legal heirs. As the sums were diverted at source by overriding title and never accrued as income to the firm, they were not assessable in its hands. Question answered in favour of the assessee-firm.

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Issues involved:
The judgment addresses the question of whether a sum collected by an assessee-firm and paid to the estate of deceased partners constitutes the income of the present firm for a specific assessment year.

Details of the Judgment:

Partnership Deeds and Legal Obligations:
The firm, a reputed firm of solicitors, had partnership deeds specifying that in the event of retirement or death of a partner, the retiring partner or the estate of the deceased partner was entitled to a share of profits for work done by the firm. After the death of partners, new partnership deeds were executed, maintaining similar clauses regarding profit sharing.

Income Assessment:
The assessee-firm declared the sum received on behalf of deceased partners in its income for the assessment year. The Income-tax Officer treated this amount as the firm's income, but the Appellate Assistant Commissioner directed its exclusion. The Tribunal upheld this decision, stating that the collected sum did not constitute the firm's income assessable to tax.

Legal Arguments:
The Revenue contended that the firm, despite changes in its constitution, was required to be assessed for its entire income. The counsel for the assessee argued that the collected amounts were not received as the firm's income but were diverted at source due to legal obligations.

Judicial Precedents:
The Tribunal's findings aligned with the Calcutta High Court decision in a similar case, where outstanding fees paid to retiring partners were not considered as firm income. The Bombay High Court concurred with this view, emphasizing that the amounts paid to deceased partners' heirs did not represent the firm's income.

Conclusion:
The High Court held that the sum paid to deceased partners' heirs was not assessable as the firm's income, as it was paid under a legal obligation and did not reach the firm as income. Citing legal precedents, the Court ruled in favor of the assessee, answering the question in the negative.

Significant Legal References:
- Calcutta High Court decision in CIT v. G. Basu and Co. [1990] 182 ITR 472
- Madras High Court decision in V. M. V. Devarajulu Chetty and Co. v. CIT [1950] 18 ITR 357
- Supreme Court decision in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367
- Bombay High Court decision in CIT v. Crawford Bayley and Co. [1977] 106 ITR 884

Outcome:
The Court ruled in favor of the assessee, holding that the sum paid to deceased partners' heirs was not the firm's income and should not be assessed as such. No costs were awarded in the matter.

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