1979 (11) TMI 31 - HC - Income Tax

Summary

Issues:
1. Deduction of payment made by the assessee to his son in computing total income.
2. Interpretation of partnership deed terms and dissolution of partnership.
3. Allowability of payment as a business deduction in the hands of the firm.
4. Consideration of compensation for use of assets and interest on amounts invested post-dissolution.
5. Application of s. 37 of the Indian Partnership Act.

Analysis:
1. The judgment pertains to a reference under s. 66(2) of the Indian I.T. Act, 1922, involving the deduction of a payment made by the assessee to his son in computing total income. The Tribunal allowed a deduction of Rs. 20,182 out of the total payment of Rs. 40,000, considering it as the son's share of profits for the relevant period.
2. The partnership deed between the assessee and his son had provisions for partnership termination after five years, with a notice period for retirement. Disputes arose between them in 1958, leading to a notice of termination and subsequent arbitration proceedings resulting in an award and decree in 1960.
3. The ITO and AAC initially disallowed the deduction, viewing the payment as acquiring a capital asset. However, the Tribunal allowed a limited deduction based on the son's share of profits and other claims, considering it fair to include the profits in the awarded amount.
4. The court upheld the Tribunal's decision, noting that the partnership had ended, and the son was no longer entitled to a share of profits. However, the payment was considered a deductible outgoing in the hands of the assessee due to the utilization of the son's assets post-dissolution, leading to profits.
5. The court clarified that s. 37 of the Indian Partnership Act did not apply in this case due to the specific partnership terms and the subsequent dissolution. The decision affirmed the Tribunal's conclusion, emphasizing the compensation for asset use and interest post-dissolution as a valid business deduction.

The judgment affirms the allowance of the deduction in the hands of the assessee based on the utilization of the son's assets post-dissolution, despite the partnership termination and the absence of a specific adjudication on the son's claims.