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Issues Involved:
1. Whether the payment made to Bhagirathibai by virtue of the deed of dissolution dated 29th June, 1949, could be allowed as a deduction against the profits of the firm styled as Motilal Manekchand & Sons or against the share income from the firm in the hands of the partners? Issue-Wise Detailed Analysis: 1. Deduction Against Firm's Profits or Partners' Share Income: Facts and Background: Motilal Manakchand, his wife Bhagirathibai, and his son Maganlal formed a Hindu undivided family (HUF) which was assessed in the past for the managing agency commission of Pratap Mills Ltd., Amalner, and New Pratap Mills Ltd., Dhulia. After a partition on 29th June, 1949, the managing agency business ceased to belong to the HUF and was taken over by a partnership consisting of Motilal and Maganlal. The deed of dissolution stipulated that Motilal and Maganlal would pay Bhagirathibai a portion of their commission from the managing agency. Tribunal's Findings: The Tribunal held that the firm of two partners earned the commission and had not undertaken any liability to make payments out of its commission to Bhagirathibai. The liability was of the individual partners. Therefore, the claim for deduction as a revenue deduction was rejected. The Tribunal also opined that the payment to Bhagirathibai was an appropriation of profits, subject to section 12A. Court's Analysis: The Court considered the real income of the partners, Motilal and Maganlal. It emphasized that the real income should be ascertained, and any part of the income that is diverted before it becomes the income of the assessee should be excluded. The deed of dissolution indicated that Bhagirathibai had a legal enforceable right to a portion of the commission, suggesting an overriding title to that portion. Legal Precedents: The Court referred to the Privy Council decision in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal, where it was held that sums diverted by a legal obligation before becoming the income of the assessee should not be considered as the assessee's income. This principle was applied to the present case, indicating that the income of Motilal and Maganlal should be considered after deducting the amount payable to Bhagirathibai. Conclusion: The Court concluded that the amount paid to Bhagirathibai did not form part of the income of the partners. Therefore, the real income of the partners should be reduced by the amount payable to Bhagirathibai before ascertaining their taxable income. Reframed Question and Answer: The Court reframed the question to: "Whether on the facts and in the circumstances of the case, the amount paid by the assessee partner to Bhagirathibai is to be deducted before ascertaining his taxable income?" The answer to this reframed question was in the affirmative. Order: The Commissioner was ordered to pay the costs, and the question was answered in the affirmative.
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