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TMI Blog1997 (2) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts relating to the case are as under : The assessee is a registered firm carrying on wholesale business in paper. During the previous year relevant to the assessment year 1974-75, the assessee consisted of four partners including one minor, who were admitted to the benefits of the partnership. Before the firm came into existence, there was another firm of different constitution and the said firm was dissolved with effect from March 31, 1973, and the business of the said firm was taken over by the continuing partners with effect from April 1, 1973. The deed of dissolution provided that the outgoing partners were enabled to share the profit of the firm up to the end of March 31, 1973, and to the amounts standing to their credit in their capital accounts inclusive of their share of profits as at the end of March 31, 1973. The outgoing partners were also entitled to the commission income of the firm relating to the period prior to their retirement, but not received by the said firm up to the end of March 31, 1973. There is no dispute about the fact that there were certain transactions in respect of which the old firm earned certain commission but it was not received by the old ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's income and that the order of the Commissioner holding that the said income received by the retiring partners, never belonged to the continuing partners at any point of time and it is not a case of application of income was correct in law. The order of the Income-tax Tribunal is the subject-matter of the present tax case. Mr. S. V. Subramanian, learned senior counsel appearing for the Department, submitted that the same firm continued and when some of the partners retired, there was only reconstitution of the members of the firm. According to learned senior counsel, the firm earned the income and the other considerations are not quite relevant in taxing the income earned by the firm. According to learned senior standing counsel, when the firm paid the money to the retired partners, it was only an application of its income to its partners. According to learned senior standing counsel that the clause provided in the retirement deed for payment to the retired partners does not divert the income by an overriding title and it is open to the firm to set off its normal expenses against the commission income earned and if a loss has occurred by setting off of the expenses, there wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same. In other words, the right to the money or the title to the money vested with the retired partners. Therefore, when the firm received the commission payment subsequent to March 31, 1973, for the work done prior to March 31, 1973, the firm has received it as a trustee for the benefit of the retired partners. The money was received by the firm because there was no privity of contract between the retired partners and the third parties as regards the payment of the commission. The relevant clauses in the deed make it clear that the firm undertook the responsibility of collecting the commission for and on behalf of the retired partners. Therefore, when the firm received the commission income, it has to hand over the entire commission income earned to the retired partners. In that sense, the firm acted merely as an agent or a trustee for the retired partners in the matter of the receipt of the commission for the work done prior to the date of their retirement. In other words the amount sought to be taxed, never reached the assessee as a part of its income and it cannot also be said that the continuing partners received the money in their own right. They have no right over the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84, wherein by the deed of partnership by which the assessee was constituted, it was provided that on the death of any of the partners, his widow would be entitled to a monthly payment, subject to a maximum amount from the continuing acting partners. Two of the partners of the firm died and certain payments were made to the widows of the deceased partners and the Bombay High Court noted that the partnership was to continue indefinitely and that on the death of a partner, the surviving partners would succeed to the share of the deceased in the firm. It was also noticed that the payments made to the widows were not dependent upon the profit or loss of the firm, but there was an absolute obligation in the nature of the trust created which the widows could enforce. It was, therefore, held that such payments were made under an overriding obligation and not includible in the assessable income of the firm. We are of the opinion that the decision of the Bombay High Court is applicable to the facts of the case rather than the decision of the Calcutta High Court in K. C. Bose and Co.'s case [1985] 156 ITR 701. In the decision before the Calcutta High Court, a personal obligation was imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in that case there was no absolute obligation on the part of the surviving partners to pay money, but, on the other hand, the deed of partnership in the instant case clearly imposed an absolute obligation on the surviving partners to realise the commission that accrued up to the date of retirement and pay the same to the retired partners. This obligation has to be discharged irrespective of the fact whether the assessee-firm had made a profit or not and, equally the retired partners have an enforceable right to receive the said commission. The obligation, on the part of the assessee to pay to the retired partners would arise upon the receipt of the commission and it must also be remembered that the commission was earned for the work done prior to their retirement. The substance of the entire transaction is that the assessee-firm was collecting money as a trustee for and on behalf of the retired partners. The finding of the Tribunal on the facts clearly establishes that when the assessee collected the money, there was an existing liability to pay commission to the retired partner and the important feature is that it is not possible or permissible for the assessee to set off its e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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