1982 (12) TMI 63 - AT - Income Tax

Summary

Issues Involved:
1. Admissibility of the deduction claimed by the assessee for the provision made for the legal heirs of the deceased partner.
2. Application of Section 37 of the Indian Partnership Act.
3. Validity of the provision made for the legal heirs in the absence of an agreement.
4. Determination of whether the provision constituted an ascertained liability or a mere provision.

Issue-wise Detailed Analysis:

1. Admissibility of the deduction claimed by the assessee for the provision made for the legal heirs of the deceased partner:
The assessee, a registered firm, claimed a deduction for Rs. 41,967.63, which was provided for the legal heirs of the deceased partner, Shri Nandlal Jalan, in view of Section 37 of the Partnership Act. The Income Tax Officer (ITO) disallowed the claim, stating that the provision made was not admissible. The Commissioner (Appeals) upheld the ITO's decision, noting that the legal heirs did not exercise their option under Section 37, and that the provision was not an ascertained liability but a mere provision.

2. Application of Section 37 of the Indian Partnership Act:
The assessee contended that according to Section 37 of the Partnership Act, the legal heirs were entitled to a share of the profits or interest at 6% per annum on the deceased partner's share in the property of the firm. The Commissioner (Appeals) found that since the legal heirs did not exercise their option, the provision made by the assessee was not in accordance with Section 37. However, the Tribunal noted that the legal heirs did not decline to join the partnership and were entitled to profit and/or interest under Section 37. The Tribunal held that the liability was ascertained in view of Section 37, and thus, the provision made was valid.

3. Validity of the provision made for the legal heirs in the absence of an agreement:
The Commissioner (Appeals) argued that there was no agreement for paying profit and/or interest to the legal heirs, and thus, the claim could not be allowed. The Tribunal disagreed, stating that the claim was based on the statutory provision of Section 37 of the Partnership Act, which did not require a separate agreement. The Tribunal emphasized that the statutory liability created by Section 37 was sufficient to validate the provision made by the assessee.

4. Determination of whether the provision constituted an ascertained liability or a mere provision:
The Commissioner (Appeals) concluded that the provision was not an ascertained liability but a mere provision, as it was not credited to the deceased partner's account but taken to the liabilities account. The Tribunal found this objection incorrect, noting that the liability was ascertained based on the statutory provision of Section 37. The Tribunal also observed that the provision for interest in subsequent years was made in strict compliance with Section 37, indicating that the liability was indeed ascertained.

Conclusion:
The Tribunal allowed the appeal, directing the ITO to allow the assessee's claim for the provision made for the legal heirs of the deceased partner. The Tribunal held that the provision was valid under Section 37 of the Partnership Act, constituted an ascertained liability, and did not require a separate agreement. The Tribunal's decision was based on the statutory liability created by Section 37 and the facts of the case, including the subsequent acceptance of the claim by the AAC for the assessment year 1978-79.