1990 (9) TMI 32 - HC - Income Tax

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 ... Firm - Income - Whether, the sum collected by the assessee-firm and paid by it to the estate of the deceased partners during the year of account ended March 31, 1969, in terms of the partnership deeds dated March 20, 1968, March 17, 1969, and July 10, 1969, constituted the income of the present firm for the assessment year 1969-70 ? - entitlement to the share in the profits of the firm for the work done by the firm up to the date of their respective deaths and the continuing partners were under a legal obligation to make payment of the share of the deceased partners in the profits of the firm for the work done by it up to the date of their deaths to their legal heirs - HELD THAT:- We have no difficulty in holding that in the facts of the case, the Calcutta High Court decision in CIT v. G. Basu and Co. [1988 (12) TMI 41 - CALCUTTA HIGH COURT] is squarely applicable. In the Calcutta case, two firms were carrying on practice as chartered accountants. They were facing certain troubles on account of disputes and differences among the partners. The dispute was referred to an arbitrator for settlement. Pursuant to the award of the arbitrator and in consequence of the deed of retirement, three partners of one of the firms retired in December, 1969. As per the terms of the deed of retirement, certain specific items of outstanding fees were directly assigned to the retiring partners. The question arose whether those outstanding fees which were directly assigned to the retiring partners represented the income of the firm. Observing that there was a legal obligation in terms of the deed of retirement to pay in a particular manner the erstwhile partners in respect of realisation of fees after their retirement, it was held to be an instance of the source of income being subject to an obligation. The outstanding fees paid to the retiring partners as per the terms of the deed of retirement were held not assessable as the income of the firm. Incidentally, the Calcutta High Court had, in this regard, referred to and relied upon the Supreme Court decision in the case of CIT v. Sitaldas Tirathdas [1960 (11) TMI 17 - SUPREME COURT] and the Madras High Court decision in the case of Devarajulu Chetty (V. N. V.) and Co. v. CIT [1950 (1) TMI 9 - MADRAS HIGH COURT]. As stated, in the present case also, the amount, the assessee-firm paid to the heirs of late Shri Petigara and late Shri Khambata under a legal obligation and the amount was never received by or reached the assessee-firm as its income. Accordingly, we answer the question referred to us in the negative and in favour of the assessee. 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 884Outcome: 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.