1982 (7) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Whether the amount credited to Mrs. Margaret Pinto/her estate is deductible by way of diversion by overriding title or as a charge on the profits of the firm.
2. Whether the payment to Mrs. Margaret Pinto/her estate is an application of income and not deductible.
3. Whether the payment to Mrs. Margaret Pinto/her estate is excessive and not justified in law.

Detailed Analysis:

1. Deductibility by Diversion by Overriding Title or Charge on Profits:
The primary issue is whether the amounts credited to Mrs. Margaret Pinto or her estate for the assessment years 1976-77, 1977-78, and 1978-79 can be allowed as deductions either by way of diversion by overriding title or as a charge on the profits of the firm. The Commissioner (Appeals) found that there has been a diversion of income by overriding title, citing several decisions in support. The Tribunal upheld this view, noting that Mrs. Margaret Pinto was entitled to her share of partnership assets and goodwill even after her 'expulsion' from the partnership. The Tribunal referenced section 37 of the Indian Partnership Act, 1932, which entitles an outgoing partner to a share of the profits in the absence of a settlement of accounts. The Tribunal concluded that the payment to Mrs. Margaret Pinto was not gratuitous but in lieu of her rights as an erstwhile partner, making it a diversion of profits by overriding title.

2. Application of Income and Deductibility:
The Income Tax Officer (ITO) argued that the payment to Mrs. Margaret Pinto was merely an application of income and, therefore, not deductible. However, the Tribunal found that the payment was both contractual and statutory, arising from the partnership deeds and section 37 of the Partnership Act. The Tribunal emphasized that the payment was necessary to retain complete rights over the partnership assets and to continue earning profits. Thus, the payment was considered wholly and exclusively for the purpose of business and not merely an application of income.

3. Excessiveness and Justification of Payment:
The departmental representative contended that the payment to Mrs. Margaret Pinto was excessive and not justified in law, arguing that she was only entitled to interest at 7% on the balance to her credit. The Tribunal rejected this argument, stating that there was no evidence to suggest that the 25% share was excessive. The Tribunal noted that in the absence of a settlement of accounts, Mrs. Margaret Pinto would have been entitled to market rate interest on her share of the assets, including goodwill. The Tribunal found the payment to be reasonable and justified, aligning with the provisions of the partnership deeds and statutory requirements.

Conclusion:
The Tribunal upheld the order of the Commissioner (Appeals) for all three years, dismissing the departmental appeals. The Tribunal concluded that the payment to Mrs. Margaret Pinto or her estate was a diversion of profits by overriding title, necessary for the business, and not excessive. The Tribunal emphasized the enforceable rights of Mrs. Margaret Pinto under the partnership deeds and statutory provisions, ensuring her entitlement to the payments in question.