1976 (7) TMI 57 - HC - Income Tax

Diversion By Overriding Title In Part In The Nature Partnership Deed Provision For Payment

Summary

Issues:
- Determination of whether payments made to widows of deceased partners should be excluded from the assessments of the assessee in the respective years.

Analysis:
The judgment pertains to the assessment years 1959-60 to 1963-64, focusing on payments made to widows of deceased partners by a firm governed by partnership deeds. The partnership deeds outlined obligations regarding payments to widows, with specific clauses dictating the amounts and conditions. The dispute arose when the Income-tax Officer rejected the deduction claim by the assessee, arguing that the payments were voluntary and not binding obligations. The Appellate Assistant Commissioner upheld this decision, emphasizing the absence of an overriding title or charge on the firm's property for the payments. However, the Appellate Tribunal ruled in favor of the assessee, highlighting the trust-like obligation on surviving partners to make payments to widows, distinct from voluntary acts. The Tribunal rejected the revenue's argument that the widows had no enforceable rights, emphasizing the nature of the obligation as a trust.

The main contention raised by the revenue, represented by Mr. Joshi, encompassed several points. Firstly, it was argued that there was no diversion by overriding title or charge on the firm's properties for the payments. Secondly, it was contended that the payments represented an application of income after it accrued to the assessee-firm, rendering them non-deductible for assessing the firm's income. Thirdly, it was claimed that the expenditure was not solely for the business purposes. Lastly, it was argued that there was no trust-like obligation regarding the payments, citing a Supreme Court decision. The Tribunal's decision was based on the distinction between diversion of income before it reaches the assessee and application of income post-receipt. The Tribunal found that the payments to widows were obligations in the nature of a trust, not dependent on the firm's profits or losses, making them deductible.

The judgment delved into the partnership deeds' provisions, emphasizing the perpetual nature of the firm and the clear obligations regarding payments to widows. It was established that the payments were not contingent on the firm's financial performance, constituting an absolute obligation akin to a trust. The judgment highlighted that the widow's rights under the partnership deeds could be enforced through legal proceedings, despite not being direct parties to the contracts. The court concluded that the payments were not an application of income post-receipt but a diversion by an overriding title, making them deductible. The judgment affirmed the Tribunal's decision, ruling in favor of the assessee and directing the revenue to bear the costs.