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TMI Blog2009 (10) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of Rs.10,00,000 as a retirement benefit to one of his partners namely Shri Rakesh Khanna, who retired during the year. The said payment was as per clause 8.4 of the deed of partnership dated July 4, 2002 and the said amount is payable annually for the period of five years after retirement." It appears that before the Assessing Officer, the assessee has claimed the said amount as a deduction under section 37(1) of the Act, but the Assessing Officer rejected the claim of the assessee and has made the addition for determining the total income. The assessee challenged the said addition before the learned Commissioner of Income-tax (Appeals) and took a plea that the amount paid to the retiring partner of the assessee-firm namely Shri Rakesh Khanna was not taxable on the principles of diversion of income by overriding title. The learned Commissioner of Income-tax (Appeals) has referred to the decision of the hon'ble Supreme Court in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) and he was of the opinion that the payment made to the retired partner was a pure case of application of fund. He has also rejected the claim of the assessee that the said expenditure also sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Nariman B. Bharucha and Sons [1981] 130 ITR 863 (Bom); and (iv) CIT v. C. N. Patuck [1969] 71 ITR 713 (Bom). The only solitary issue we have to consider is that on the facts of the this case, whether the income to the extent of the remuneration paid to the retired partner in pursuance of clause 8.4 of the deed of partnership, is diverted and it has never reached in the hands of the assessee-firm. In the case of Sitaldas Tirathdas [1961] 41 ITR 367 (SC), the hon'ble Supreme Court has held as under (page 374) : "These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decision in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f decisions on the issue, held as under (page 724) : "It was contended by Mr. Joshi on behalf of the Department that Seth Motilal Manekchand's case [1957] 31 ITR 735 (Bom) was followed by the Division Bench of this court in deciding Sitaldas Tirathdas's case [1958] 33 ITR 390 (Bom) and since the decision of this court in Sitaldas's case was reversed by the Supreme Court [1961] 41 ITR 367 (SC) it must be held that Motital Manekchand's case is also impliedly overruled. We are unable to accept his contention because in the decision in Sitaldas's case the Supreme Court expressly referred to Motilal Manekchand's case and discussed it on page 374 of 41 ITR. In regard to the several other cases which they discussed, the Supreme Court in Sitaldas's case stated whether those cases in their opinion were rightly decided or were incorrectly decided. For instance, in considering the case of CIT v. Makanji Lalji [1937] 5 ITR 539 (Bom) they stated that that case was open to serious doubt in view of Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC). They also pronounced that D. R. Naik's case [1939] 7 ITR 362 (Bom) was correctly decided. So far as Motilal Manekchand's case is concerned, they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not exhaustive of the nature of charges contemplated in Indian law as can be seen from a number of decisions in which charges have been held to be created even against property other than immovable property or against merely a particular fund. It is sufficient if, having regard to all the circumstances of the transaction, the document shows an intention to make the particular property or fund a security for the payment of the money mentioned therein. In Nathan Lal v. Durga Das, AIR 1931 All 62 a Division Bench of the Allahabad High Court held that, in order to constitute a charge, it is not necessary to employ any technical terms but where the intention of the parties concerned was to indicate in unambiguous language that a definite fund should be employed for the discharge of a particular debt or claim and there is no ambiguity either as to the amount of the debt or the amount of the claim out of which the debt has to be satisfied, the transaction amounts to a charge. In that case in a registered lease a provision was made that the lessee should deduct from the annual rent a certain portion as repayment of a sum of money already borrowed by the lessor from him and it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N. Patuck's case [1969] 71 ITR 713 (Bom) as follows at page 721 : '. . . the Supreme Court laid down that where a charge is created or, upon the facts and circumstances, a charge can be found, it would not be a case of mere application of a portion of his income by the assessee to discharge an obligation but a case in which an overriding charge is created by the assessee and he becomes only a collector of another's income. In other words, whenever a charge is created or exists, an overriding title is created in the charge-holder and, to the extent of the charge, the income of the assessee ceases to be his income, because the charge-holder has the paramount right by virtue of his overriding title to recover that income before it reaches hands of the assessee.' (underlining is ours) The Division Bench has thus clearly laid down that whenever a charge is created, the effect of the charge is that to the extent of the charge, the income which has been made the subject of the charge ceases to be the income of the assessee and that the charge creates an overriding title in favour of the charge-holder to recover the income before it reaches the hands of the assessee. The position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. If regard be had to the relevant provisions of the partnership deeds, annexures 'A', 'B' and 'C', it is quite apparent that this is not a case of application of income after it accrued due to the assessee, but it is clearly a case of diversion of income by an overriding title in respect of payment. Under these partnership deeds the assessee-firm is to continue for an indefinite period and it is not going to be disso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise in the present case, because deduction is claimed not as an expenditure under the exception but it is claimed by way of payment made in respect of items which are obligations in the nature of trust and such payments are required to be made before the income even accrued to the assessee." In the present case, it is the contractual obligation on the assessee-firm to pay the retirement benefits for the period of five years in terms of clause 8.4. It is pertinent to note here that the retired partner has nothing to do with the profit earned or losses suffered by the assessee-firm, but the quantum of the retirement benefits has been fixed. In pursuance of clause 8.4, there is a charge on the profits of the assessee-firm and hence, in our opinion, if we examine the facts of this case in the backdrop of the legal principles in the precedents cited above, there is a diversion of income to the extent of the retirement benefits paid by the assessee-firm as per terms of clause 8.4 to the retired partner. We, therefore, hold that the retirement benefit paid in terms of clause 8.4 cannot be included in the total income of the assessee-firm as to that extent, the income has never reached ..... X X X X Extracts X X X X X X X X Extracts X X X X
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