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TMI Blog1988 (8) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... o having expressed her desire for retirement from the partnership and Mr. Francis Xavier Pinto having died, a new partnership was entered into among : 1. Mr. Harold Charles Pinto, 2. Mr. Guthbert Joseph Pinto, 3. David J. Pinto, sons of the deceased, Francis Xavier Pinto 4. Paul J. C. Pinto, and 5. Mrs. Beatrice Pinto (who replaced Deanna Lobo by a deed dated April 1, 1975). The said partnership deed provided, inter alia, in clause 5, the following "The profit or loss to be divided and distributed among the partners as referred to above shall be ascertained in the manner prescribed hereinafter. The profit or loss for the working of the firm shall be first ascertained by charging all the expenses incurred for the purpose of the business of the firm and also after charging the interest paid or payable to the partners on their deposits and also any salary payable to the working and managing partners. In case such annual working after charging interest and salary results in a profit, a sum representing 25% of such profits arrived at shall be charged to the profit and loss account towards the rights of Mrs. Margaret Pinto, who, by her actions, allowed herself to keep out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r favour and the income of the firm to that extent was diverted by overriding title the overriding charge was on the profits of the firm and to that extent the income of the firm was diverted by an overriding title ; and the amount paid to and credited to Mrs. Pinto's account was, therefore, not taxable in the hands of the firm. At the instance of the Revenue, the following question has been referred to this court under section 256(1) of the Income-tax Act, 1961 ("the Act" for short) : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the Commissioner of Income-tax (Appeals)'s order who held that 25% of the share of profit paid to the ex-partner and to her estate has to be deducted in computing the total income of the assessee ?" Sri K. Srinivasan, learned counsel for the Revenue, contended that (1) A close reading of clause 5 of the deed extracted above discloses that there is no diversion of income by an overriding title resulting either from the statute or contract and the payment is only a voluntary payment of income and hence not deductible (2) Mrs. Margaret Pinto having died on June 14, 1975, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attached to the income and a similar obligation attaching to the source of income. If the obligation is on the receipt of the income and not on the source of it, the legal effect is different. In the one case, income is diverted at source and hence cannot be deemed to have accrued or arisen therefrom. In the other case, the income has accrued and, therefore, it has to be applied in a particular manner. In the former case, the income is not included at all. In the latter case it is. Where a person is obliged to spend something out of certain income on a specified object, there are two ways in which the object can be achieved. His receiving the income himself and spending it on the object; the payer's retaining the amount of income and spending it himself on the object. In one case, there is actual receipt, but not in the other. The liability to pay tax does not depend on actual receipt. Even if it is actually received, it may not be liable, just as even though it is not actually received it can be liable, if the doctrine of diversion applies. There is ample authority as to the concept of income which is diverted by an overriding title or charge before it reaches the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is compensatory in nature. The compensation paid to her is measured in terms of profit and in the event of loss at 6% interest. When compensation is measured with reference to or in terms of profit, that does not become profits, but is an amount computed by reference to profits with an obligation to pay the same even when there is a loss. It has been held by the Supreme Court in Senairam Doongarmall's case [1961] 42 ITR 392, 397 thus : "The compensation which was paid in the two years was no doubt paid as an equivalent of the likely profits in those years ; but, as pointed out by Lord Buckmaster in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue [1922] 12 Tax Cas 427 and affirmed by Lord Macmillan in Van den Berghs Ltd. v. Clark [1935] 3 ITR (Eng. Cas) 17, there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test ...... It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue." It is the quality of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutely essential for a right of action. Mrs. Pinto, not being a party to the deed dated April 1, 1975, is a stranger to the said contract and, hence, she cannot enforce her right, if any, under the said deed. Undoubtedly, though stranger to a contract cannot, as a general rule, sue upon the contract, except in certain circumstances, in the present case, though Mrs. Pinto is not eo nomine a party to the deed dated April 1, 1975, the assessee-partners are entitled to confer a benefit on Mrs. Pinto as cestui que trust in such a way that the latter may sue in her own right to enforce her contract. She has an interest in the assets of the firm the user of which, is compensated by the clause in question which also sets out the measure of the same. It is, therefore, difficult to accept that she had no enforceable right to recover such compensation. Apart from any other aspect, the right to the user of the firm's assets, to the extent of her share, will definitely constitute consideration for the payment provided in the contract and although she may be stranger to the contract, she is not a stranger to such consideration. Looked at from any angle, the contention of the Revenue that she ha ..... 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