TaxTMI 
TaxTMI 
1993 (3) TMI 79
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....partnership deed provided that the name and goodwill of the business would belong to Shri G. M. Bhuta absolutely. Clause 18 further provided that the firm would not stand dissolved on the death of a partner but the surviving partner or partners would succeed to the share of the deceased partner in the partnership business including assets and effects and would undertake all the debts, liabilities and obligations of the partnership in the proportion in which they held their respective shares. This clause also required the surviving partners to pay to the legal representative of the deceased partner as the price of such share the following amounts : (a) The amount, if any, standing to his credit in the books of the partnership. (b) The amount of his share in the net profits accrued up to the date of his death. (c) The amount of his share in the net profits accrued due for a period of one year from the date of his death if the partnership subsisted for such period. (d) The amount of his share in the reserve fund with all accumulations of interest up to the date, if any, of his death. Sub-clause (e) of above clause 18 allowed the surviving partners to make the aforesaid ....
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.... 1967. On his death the business was continued by Shri V. G. Bhuta, the assessee in the present case, as an individual. In the previous year relevant to the assessment year 1967-68, the assessee paid Rs. 30,000 to Tarabai, the widow of the deceased partner, Shri G. M. Bhuta, who had died on September 5, 1963, under clause 18 of the partnership deed dated March 7, 1960. He paid a further sum of Rs. 6,000 to her under clause 19 of the said deed. The Income-tax Officer disallowed the deduction of Rs. 30,000 and the same was confirmed by the Appellate Assistant Commissioner. The assessee filed an appeal before the Tribunal. The Tribunal dismissed the appeal on October 15, 1973, and rejected the assessee's contention that the said sum of Rs. 30,000 was diverted to Mrs. Tarabai by an overriding title before it accrued to him as his income. The Tribunal was of the opinion that the assessee had utilised the income earned by him for paying the price of the share of the deceased partner to his legal representative, Mrs. Tarabai. It appears that the assessee did not pursue the matter any further and accepted the above finding of the Tribunal as final. During the previous year relevant t....
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.... different years, much earlier to that. In this connection, learned counsel referred to clause 18 of the first partnership deed under which Smt. Tarabai was entitled to get certain amounts. The amounts payable to her under clauses (b) and (e) represented the amount of the share of the deceased partner in the net profits of the firm accrued up to the date of his death and the amount of his share in the net profits that would have accrued for period of one year from the date of his death, if the partnership subsisted for such period. Shri. G. M. Bhuta died on September 5, 1963. His legal representative, that is, Tarabai was entitled to the share of net profits of the firm accrued up to September 5, 1963, and also the share in the net profits of the firm accrued due for a Period of one year from that date, i.e., September 6, 1963, to September 5, 1964. Counsel also pointed to sub-clause (e) of clause 18 which allowed the surviving partners to make the aforesaid payment within two years so that their business might not suffer. Similar is the position under the next partnership deed dated March 31, 1964. Under clause 15 thereof, on the death of Shri Talpade, the surviving partner, the a....
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....ssessee being a person maintaining his accounts on the cash system, he is entitled to claim deduction in the year in which the payment is made, irrespective of the year in which the amounts became payable. Counsel also submitted that the amounts in question were collected by the assessee only for convenience and, as such they did not even form part of his total, income as they stood diverted at source to the two widows and vested in them. Counsel also pointed to certain disputes between the assessee and the two widows of the deceased partners as a result of which the amounts payable to them under the relevant clauses of the partnership deeds referred to above could not be quantified. According to him, once it is accepted that there is diversion of some income by overriding title, in the case of an assessee maintaining the cash system of accounting, the year in which the diversion took place is immaterial. What is relevant is the date of payment. In support of his contentions reliance is placed by learned counsel for the assessee on the decisions of this court in the case of CIT v. Crawford Bayley and Co. [1977] 106 ITR 884 and CIT V. Mulla and Mulla and Craigie, Blunt and Caroe ....
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....'s income for the assessment year under reference, that is, 1971-72, because in view of the relevant clauses of partnership deeds, even if it was a case of diversion, it was diversion of income of the particular year which can affect the income of that year only and no other year. It may be expedient to reiterate at this stage that the payment was on two counts. One was on account of the share of the deceased in the net profits of the firm accrued up to the date of his death. So far as this amount is concerned, there cannot be any question of diversion of income because it was a part of the income of the firm for the relevant year and if the deceased partner would have survived he would have got the same. In the event of his death, the amount due to him up to the date of his death would, in the absence of anything to the contrary, go to his legal heirs. The only dispute that can be raised is in regard to the amount payable under clause 18(c) of the first partnership deed and clause 15(c) of the second partnership deed. This is the amount payable to the legal heirs as a price for the share of the deceased partners in the partnership. In the first case, it is equal to the amount o....
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.... the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable..." (emphasis supplied) To the same effect is the decision of the Supreme Court in CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17, where the question of overriding title again came to be considered by the Supreme Court. In this case, it was observed (at page 24) : "An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of income. An obligation to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. The true test for the application of the rule of diversion of income by an overriding title is whether the amount....
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....dow under clause 33 of the partnership deed, annexure "A", and clauses 8 and 34 of the partnership deed, annexure "B", is absolute. When the obligation to pay such amount to the widow of a deceased partner is absolute, there can be no question of application of income by the assessee firm after it accrued to it, In fact, such payment is to be made even though no profit whatsoever may have been made. This provision shows that it is an obligation in the nature of trust. (emphasis supplied) From the above discussion, it is clear that the ratio of this decision has no application to the facts of the present case. Reference was also made to another decision of this court in CIT v. Mulla and Mulla and Craigie, Blunt and Caroe [1991] 190 ITR 198. In that case also the test laid down by the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 was applied to the facts of that case. In that case, the assessee, a firm of solicitors, was under an obligation in terms of the deed of partnership to pay outstanding fees for the work done up to and during the period when the deceased persons were partners. It was held by this court that the amount so paid to the heirs of the deceased ....
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....CIT [1985] 156 ITR 701. This was also a case of a firm of chartered accountants. Here also the partnership deed provided for payment to the widow of the deceased partner of certain specified amounts. A claim was made that the amount paid to the widow amounted to diversion of income by way of overriding title. The Calcutta High Court, while deciding the controversy, discussed the various decisions of the Supreme Court as also the decision of this court in CIT v. Crawford Bayley and Co. [1977] 106 ITR 884. Referring to the decision of this court, it was observed by the Calcutta High Court that the payment made to the widows in the Bombay case was not dependent on the profit or loss of the firm but was an absolute obligation in the nature of a trust which the widows could enforce and it was held in his context to be a case of diversion of income by overriding title. The Calcutta High Court in the above decision, on a perusal of the relevant clause of the partnership deed, clearly held that the payment made by the surviving partners to the widows of the deceased partners could not be held to be an overriding charge. It was held (at page 713) : "It appears that the surviving partners....