2012 (12) TMI 86 - AT - Income Tax

Disallowance made on account of payment made by the assessee to the spouse of its diseased partner Held that - Deed of partnership referred to in the supplementary partnership deed, the main logo and mark GAGRATS were assigned along with goodwill and all tangible and intangible rights to Mr. J.R. Gagrat and Mr. R.J. Gagrat jointly as their absolute and exclusive property - when the name, logo and mark belonged to Mr. J.R. Gagrat and Mr. R.J. Gagrat, there was no question of payment for their use to the wife of Mr. J.R. Gagrat especially in the event of his retirement - payment of Rs. 12 lakhs made to Mrs. M.J. Gagrat, therefore, was not a case of diversion of income by overriding title and it was only case of giving benefit to one individual who was neither a partner of the firm nor in any way related to the professional work of the firm - it was clearly a gratuitous payment made by the assessee firm which was not an allowable business expenditure u/s 37(1) In favor of revenue

Summary

Issues:
Addition of Rs.12 lakhs made by AO as disallowance on payment to deceased partner's spouse.

Analysis:
The appellant, a firm of solicitors and advocates, filed an appeal against the order of the CIT (A) regarding the disallowance of Rs.12 lakhs made by the AO on payment to the deceased partner's spouse. The appellant claimed the payment was a charge on its income, allowable under section 37(1), based on the partnership deed and relevant case laws. However, the AO rejected the claim, stating that the income was earned without hindrance and the payment lacked documentary evidence of being a professional expenditure. The CIT (A) upheld the disallowance, emphasizing the lack of genuineness in the supplementary partnership deed and the absence of a valid reason for the payment to the deceased partner's spouse. The appellant argued that the payment was necessary to continue the firm's profession under the partnership deed terms. The DR countered, highlighting subsequent partnership deeds and licensing agreements that negated the need for such a payment. The Tribunal observed the ownership of the firm's name and goodwill, concluding that the payment to the deceased partner's spouse was gratuitous and not a legitimate business expenditure. The Tribunal upheld the CIT (A)'s decision, dismissing the appeal.

This case involved a crucial issue of determining the deductibility of a payment made by the appellant to the deceased partner's spouse. The appellant's contention that the payment was a legitimate business expense under section 37(1) was refuted by the authorities, citing lack of substantiating evidence and contradictory partnership agreements. The Tribunal's analysis focused on the ownership rights of the firm's name and goodwill, concluding that the payment was gratuitous and not essential for the firm's operations. The alternative argument of diversion of income by overriding title was also dismissed, affirming the disallowance of the payment. The judgment underscores the importance of substantiating business expenses and aligning financial transactions with legal agreements to support deductibility claims.