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2012 (9) TMI 698 - AT - Income TaxCharge on receipts - Diversion of income by overriding title - whether the amount paid by the assessee to wife of deceased partner of the firm is first charge on receipts of the firm in terms of clause 13 of the partnership deed executed on 1.4.2003 - Held that - As decided in P. Bhumi Sudhar Nigam Vs. Commissioner of Income-tax (2004 (12) TMI 17 - ALLAHABAD HIGH COURT) that the principles relating to diversion of income by overriding title are (i) if a third person becomes entitled to receive an amount under an obligation of an assessee even before he could claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title - As in the present case there being an absolute contractual obligation imposed on the continuing firm/partners in terms of clause 13 of the partnership deed executed on 1.4.2003, the assessee firm is required to pay the amount @ 2% of the gross receipts subject to maximum of 3 lacs pa to Mrs. Mehru Menoo Shroof, wife of deceased partner of the firm and this amount being the first charge on receipts of the continuing firm/partners ,apparently, there would be a diversion of income by overriding title. Indisputably, a similar claim has already been accepted by the AO in the AY 2004-05 & 2006-07 no alternative but to allow ground in the appeal - in favour of assessee. Disallowance of General Repairs & maintenance expenses - Held that - As the assessee has merely submitted a copy of ledger account in respect of expenditure exceeding above Rs.20,000/- each amounting to Rs.12,05,946/- while the details of expenditure below Rs.20,000/- are not available . Neither the AR nor the DR could explain the basis for disallowing the amount on repairs nor the impugned order is speaking one. Even the nature of repairs is not brought out in the impugned order nor it is stated that these repairs were current or otherwise. - Thus the order passed by the CIT(A) is cryptic and grossly violative of facets of the rules of natural justice for not passing a reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it - issue remitted back to CIT(A) to pass a speaking order, keeping in mind the mandate of provisions of sec. 250(6) bringing out clearly the nature of repairs ,whether current or otherwise - in favour of assessee by way of remand.
Issues Involved:
1. Justification of disallowance of Rs. 3 lacs being charge on receipts. 2. Justification of disallowance of Rs. 75,971/- out of General Repairs & Maintenance expenses. 3. Legitimacy of reopening the assessment under section 147/148 of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Justification of Disallowance of Rs. 3 lacs Being Charge on Receipts: The core issue revolves around whether the payment of Rs. 3 lacs to Mrs. Mehru Minoo Shroff, the widow of a deceased partner, constitutes a diversion of income by overriding title. The partnership deed stipulated that in the event of a partner's death, the surviving spouse or legal heirs would receive 2% of the gross receipts, subject to a maximum of Rs. 3 lacs annually. The assessee argued that this payment was a first charge on the firm's receipts and thus deductible. The Assessing Officer (AO) disallowed this amount, considering it a mere arrangement to reduce tax liability. The CIT(A) upheld the AO's decision, citing that the payment did not qualify as an expenditure and that the widow had no claim on the firm's goodwill. The Tribunal, however, found that the partnership deed imposed an absolute obligation on the firm to pay the amount, thereby constituting a diversion of income by overriding title. The Tribunal allowed this ground, referencing precedents that supported the concept of income diversion by overriding title. 2. Justification of Disallowance of Rs. 75,971/- Out of General Repairs & Maintenance Expenses: The AO disallowed Rs. 75,971/- from general repairs and maintenance expenses on the grounds that these expenses were unvouched. The CIT(A) upheld this disallowance. The Tribunal noted that the disallowance was made without a clear basis or detailed examination of the nature of the repairs. The Tribunal criticized the CIT(A) for not providing a reasoned order and emphasized the necessity of a detailed and reasoned decision as mandated by Section 250(6) of the Act. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the matter for a fresh decision, instructing the CIT(A) to pass a speaking order that clearly delineates the nature of the repairs. 3. Legitimacy of Reopening the Assessment Under Section 147/148 of the Income-tax Act, 1961: The assessee contested the reopening of the assessment under section 147/148, arguing it was unjustified. However, this ground was not pressed during the Tribunal hearing and was subsequently dismissed. Additional Grounds: Ground no. 1 being general in nature did not require separate adjudication. No additional grounds were raised under ground no. 5. Conclusion: The appeal was allowed partly for statistical purposes, with significant emphasis on the need for detailed reasoning in judicial orders, especially concerning the disallowance of expenses. The Tribunal's decision underscores the importance of adhering to principles of natural justice and providing clear, reasoned judgments in tax assessments.
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