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Issues Involved:
1. Whether the commission paid to the retiring partner, Shri Deepak K. Doshi, constitutes a capital payment or a revenue expense. 2. Whether the payment to Shri Deepak K. Doshi is a diversion of income by an overriding title or merely an application of the firm's income. Detailed Analysis: Issue 1: Capital Payment vs. Revenue Expense The appellant, a partnership firm, claimed a commission payment to Shri Deepak K. Doshi, a retiring partner, as a revenue expense for the assessment years 1980-81 and 1981-82. The Income Tax Officer (ITO) disallowed the claims, considering the payments as capital payments, not allowable as revenue expenses. The Commissioner (Appeals) upheld the ITO's decision, stating that Shri Deepak K. Doshi, who retired after only eight months as a partner, had no significant business experience or goodwill that could justify the payments. The Commissioner (Appeals) concluded that the payments were not for the use of any goodwill of Shri Deepak K. Doshi, and thus could not be considered revenue expenses. Issue 2: Diversion of Income by Overriding Title The appellant argued that the payments to Shri Deepak K. Doshi were a diversion of income by an overriding title, as per clauses in the deed of retirement, which created a charge on the firm's assets and income to secure these payments. The appellant cited the Supreme Court decision in CIT v. Sitaldas Tirathdas and the Bombay High Court decision in CIT v. C.N. Patuck to support their claim. The Commissioner (Appeals) disagreed, stating that there was no diversion by overriding title but merely an application of the firm's income after its accrual. The Commissioner (Appeals) held that the payments were not an item of expenditure but an application of income, thus disallowing the claims for both assessment years. Tribunal's Findings: Examination of Documents The Tribunal examined the partnership deed and the deed of retirement. It noted that the retiring partner, Shri Deepak K. Doshi, had released his share in the profits and assets of the partnership but was entitled to 15% of the net profits for ten years, secured by a charge on the firm's assets. Legal Precedents and Arguments The Tribunal referred to the Supreme Court decision in Devidas Vithaldas & Co. and the Bombay High Court decision in C.N. Patuck, which supported the appellant's claim that the payments constituted a diversion of income by an overriding title. The Tribunal noted that the charge created by the deed of retirement constituted an enforceable legal obligation against the firm. Conclusion The Tribunal concluded that the payments to Shri Deepak K. Doshi were indeed a diversion of income by an overriding title, as a charge was created on the firm's assets and income. The Tribunal also held that the payments could be considered revenue expenses, as they were for the continuing use of the retiring partner's interest in the firm's goodwill, agency rights, and tenancy rights, which were not evaluated at the time of his retirement. Final Judgment The Tribunal allowed the appeals, holding that the appellant was entitled to the deduction of the amounts paid to the retiring partner in both assessment years.
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