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TMI Blog1985 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... e party of the first part, his widow will be credited with a sum of Rs. 50,000 and in the case of the party of the third part, his widow will be credited with sum of by Rs. 16,000 debiting the amounts to the goodwill account. These sums of Rs. 50,000 and Rs. 16,000 will be repayable at the rate of Rupees three hundred only per month to the widow of the party of the first part or to her nominee in case of her demise prior to the full repayment of Rs. 50,000 and at the rate of Rupees one hundred only per month to the widow of the party of the third part or her nominee in case of her demise before the full payment of Rs. 16,000. These monthly instalments of Rs. 300 and Rs. 100 will be payable on the last working day of the month for which the instalments are due. For the due payment of these amounts all assets including outstanding fees, cash and bank balances would remain charged. This would, however, not affect the settlement of account of any retiring or deceased partner in terms of clauses 17 or 20 hereof." The partnership was continued thereafter by the said three partners under successive deeds, respectively, dated July. 31, 1961, and July 31, 1963. The goodwill and assets o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in the said clause that for due payment of this amount to the widow, all the assets of the partnership including fees, cash and bank balances would remain charged and the widow would be entitled to a statement of account at the end of each financial year of the partnership. In terms of that agreement, Mrs. K. C. Bose is credited with Rs. 50,000 on May 19, 1965, and goodwill account debited. The payment of Rs. 1,000 per month for the first two years and of Rs. 500 per month thereafter until the entire sum of Rs. 50,000 is paid to her or after her demise, to her nominee or until this business or practice is discontinued, whichever is earlier, will be a charge on all the assets including outstanding fees, cash and bank balances of this partnership and as such should be met out of and deducted from the cash receipts every month." In the assessment years 1966-67, 1967-68, 1968-69 and 1969-70, the relevant accounting years ending on the 31st July of the calendar years 1965, 1966, 1967 and 1968, the assessee paid to the widow of K. C. Bose diverse amounts aggregating Rs. 2,500, Rs. 12,000, Rs. 10,500 and Rs. 6,000, respectively, in the said assessment years and debited the said amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee for the purpose of computation of its assessable income. If the outgoing did not form part of the real income of the assessee, there would be no question of its deduction from the total income. If it was held that the outgoing was a part of the real income of the assessee, only then the question would arise whether it was an expenditure in the nature of capita I or revenue. The question referred was limited to the query whether the outgoings constituted a diversion of income under an overriding title and obligation. Learned advocate submitted that under the relevant clause in the deed of partnership, the entire assets of the assessee including its outstanding fees, cash and bank balances remained charged for the payments which was a condition for carrying on the business of the partnership by the surviving partners. Therefore, the outgoings constituted a diversion of income by an overriding title and obligation created by the charge. It was also submitted that the deductions allowable under section 24 of the Income-tax Act, 1961, were not relevant. The question arose over the concept of real income under section 28 of the Act. Learned advocate for the Revenue cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge. In the present case, the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to the extent diverted his income from him and has directed it to his stepmother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands." (b) P. C. Mullick v. CIT [1938] 6 ITR 206 (PC): In this case, testator had directed his executors to pay Rs. 10,000 out of the income of the estate on the occasion of his " adya sradh " to the person entitled to perform the ceremony. The executors claimed that the said amount did not constitute a real income of the estate as they were bound to pay the same under the directions of the testator and, therefore, should be excluded from the assessable income of the estate. The Privy Council rejected such contention and observed that " It is simply a case in which the executors having received the whole income of the estate apply a portion in particular way pursuant to the directions of their testator, in whose shoes th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any charge created on any of his properties. In the assessment years involved, the assessee claimed deduction of the amounts paid by him under the decree contending that there had been diversion of his income to the extent of the said amounts. The Supreme Court found that the wife and children of the assessee received from the assessee a portion of his income after he received the same as his own income. It was held that this was a case of application of income to discharge an obligation and not a case where by an overriding charge the assessee became only a collector of another's income. It was held that the position would have been different if an overriding change had existed either upon the property of the assessee or his income. The Supreme Court observed as follows (p. 374): ".. ...... 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 require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng agent. The said part of the commission, it was agreed, would be retained by the principal and adjusted against the debts of the outgoing sole selling agent to the principal. On such facts, it was held by a Division Bench of the Allahabad High Court that the part of the commission earmarked for liquidation of the dues of the outgoing agent was part of the income accruing to the assessee, and would be retained by the principal for adjustment only after it was earned. There was no diversion of income before accrual but there was an application thereof after it was earned. The entire commission was assessable to income-tax. (i) CIT v. Woodlands Co. [1967] 64 ITR 177 (Mys): In this case, sons who were carrying on business in partnership with their father succeeded to the share of the latter on his death under a bequest with a condition that they would pay a fixed monthly sum to their sister. The sons thereafter executed a fresh deed of partnership under which the assets of the firm were charged for payment of the monthly amount to their sister. On the question whether the amounts payable to the sister should be excluded from the assessable income of the firm, the Mysore High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of their allowance and to that extent the remuneration and profits of the assessee ceased to exist and could not be taxed in his hands. (l) CIT v. Imperial Chemical Industries (India) P. Ltd. [1969] 74 ITR 17 (SC) : In this case, I.C.I. (Exports) Ltd., a foreign company, terminated the services of its four selling agents in India and appointed Imperial Chemical Industries (India) P. Ltd., the assessee, as the sole selling agents. It was agreed that the former selling agents would be paid a fixed percentage of commission to be earned by the assessee for three years from the said date as compensation. It was held by the Supreme Court that, on the facts, the payment of compensation by the assessee to the ex-selling agents was not under any overriding title created either by an act of parties or by operation of law. The amounts paid reached the assessee as its income and were not deductible in computing the assessee's taxable income. (m) Devidas Vithaldas Co. v. CIT [1972] 84 ITR 277 (SC): In this case, a chartered accountant was carrying on his profession in the name of Devidas Vithaldas Co. He constituted a partnership with another chartered accountant by a deed res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finitely and that on the death of a partner, the surviving partners and not the legal representatives would succeed to the share of the deceased. The payments to be made to the widows were not dependent upon the profit or loss of the firm but was an absolute obligation in the nature of a trust which the widows could enforce. It was held that such payments were to be made under an overriding obligation and were not includible in the assessable income of the firm. CIT v. State Bank of India [1957] 31 ITR 545 (Cal), Mahesh Prasad v. CIT[1967] 66 ITR 547 (All), Hans Raj Gupta v. CIT [1969] 73 ITR 765 (Delhi), CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1 (SC), CIT v. Birla Gwalior (P.).Ltd. [1973] 89 ITR 266 (SC), CIT v. Dr. Awasthi [1976] 105 ITR 320 (All), Surajratan Damani v. CIT [1977] 106 ITR 576 (Bom) and CIT v. Sri Jagannath Jew [1977] 107 ITR 9 (SC) were also cited. The said decisions do not lay down anything further and need not be considered in detail. To appreciate the controversy in this case, it is necessary to consider the nature of the transaction involved. The Tribunal has proceeded on the basis that on the death of K. C. Bose, the assessee purchased ..... X X X X Extracts X X X X X X X X Extracts X X X X
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