1988 (8) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Diversion of income by overriding title.
2. Legal claim after the death of Mrs. Margaret Pinto.
3. Notice of severance and exercise of option by Mrs. Margaret Pinto.
4. Enforceability of the contract by Mrs. Margaret Pinto.
5. Necessity of the payment for carrying on the business.

Summary:

1. Diversion of Income by Overriding Title:
The core issue was whether the 25% share of profit paid to Mrs. Margaret Pinto constituted a diversion of income by an overriding title or charge. The court referred to the Supreme Court's decision in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, which established that income diverted before it reaches the assessee is deductible. The court found that Mrs. Pinto had pre-existing rights in the partnership and its assets, and the new partnership deed dated April 1, 1975, created a pre-existing charge at source, resulting in the diversion of income at source. Therefore, the payment to Mrs. Pinto was not taxable in the hands of the firm.

2. Legal Claim After the Death of Mrs. Margaret Pinto:
The Revenue contended that there was no legal claim after Mrs. Pinto's death on June 14, 1975. The court rejected this argument, stating that the obligation to compensate Mrs. Pinto was recognized in the partnership deed and devolved on her estate upon her death. The Tribunal's conclusion that her heirs could claim the amount was upheld.

3. Notice of Severance and Exercise of Option by Mrs. Margaret Pinto:
The Revenue argued that Mrs. Pinto had not issued any notice to sever her connection with the firm, nor had the other partners exercised their option as provided in the 1961 deed. The court found that Mrs. Pinto did not voluntarily retire or sever her connection; rather, she was excluded by the other partners who provided compensation for the use of her share in the firm's assets. Therefore, the conditions of clause 10 of the 1961 deed were not applicable.

4. Enforceability of the Contract by Mrs. Margaret Pinto:
The Revenue contended that Mrs. Pinto, not being a party to the 1975 deed, could not enforce her rights under it. The court held that although Mrs. Pinto was not a party to the deed, she had an interest in the firm's assets, and the compensation clause was for the user of her share. Thus, she had an enforceable right to recover the compensation, and the contention of the Revenue was rejected.

5. Necessity of the Payment for Carrying on the Business:
The Revenue argued that the payment was not necessary for carrying on the business. The court found that the firm could not have carried on its business without utilizing Mrs. Pinto's interest in the assets. Therefore, the payment was necessary for the business, and the Revenue's contention was dismissed.

Conclusion:
The court answered the questions referred to it in the affirmative and against the Revenue, upholding the Tribunal's decision that the 25% share of profit paid to Mrs. Margaret Pinto was deductible in computing the total income of the assessee.