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TMI Blog1983 (1) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... ndra Shukla were partners in their representative capacity on behalf of their respective HUFs. Clauses 11 and 12 of the above deed are relevant and are reproduced below : "11. That the parties to this deed have also agreed to create a paramount charge amounting to 6.25 per cent on the profit accruing in the business in favour of Lok Sewa Mission, a charitable institution of Kanpur. Hence onwards the said 6.25 per cent shall be received by the firm and the partners as trustees for the benefit of Lok Sewa Mission. Further that the Lok Sewa Mission shall be entitled to get the said profits amounting to 6.25 per cent by virtue of this paramount charge created in its favour and until the date of actual payment the same shall be held by firm and partners in trust for the Lok Sewa Mission. 12. That at the end of every year a profit and loss account shall be prepared and the net profit ascertained after the deduction of the said charge created in clause 11 hereof, or the net loss, as the case may be, shall be distributed amongst the partners as follows : Name of the partner Share Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITO. His view was upheld by the Tribunal in IT Appeal No. 1246 (All.) of 1978-79. The Tribunal, in this connection, agreed with the view taken by it in the case of Mahendra Shukla Packaging Industries [IT Appeal No. 1848 (All.) of 1976-77 dated 15-1-1978], where also a similar claim was made. The Tribunal in that case had held that since Lok Sewa Mission was not a party to the agreement amongst the partners for payment of 6.25 per cent of the profits, it had no actionable claim, which could be enforced if the firm or the partners refused to make any such payment. This is what the Tribunal observed in this order : "We have, considered the rival submissions. It is necessary to point out that the obligation for payment of 6.25 per cent of the profits to Lok Sewa Mission was the agreement amongst the partners in the instrument of partnership to which the Lok Sewa Mission was not a party. Lok Sewa Mission, therefore, had no actionable claim which could be enforced if the firm or the partners refused to pay the amount. We also have the authority of the Hon'ble Supreme Court in the case of K. A. Ranchor v. CIT wherein their Lordships laid down that under the law of partnership it was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (originally constituted) that the earlier Bench dealing with the appeal for the assessment year 1974-75 had held that it was only an application of income. The Bench was not able to readily agree with the view taken by the earlier Bench. It was also brought to its notice that the earlier Bench had no occasion to consider a later decision of the Supreme Court in the case of CIT v. Tollygunge Club Ltd. [1977] 107 ITR 776. The Bench of the Tribunal hearing the matter, therefore, felt that it required to be considered by a Special Bench. It was, in these circumstances, that the present Bench was constituted by the President. 9. The learned counsel for the assessee submitted before us that vide clauses 11 and 12 of the partnership deed dated 27-3-1973 quoted above, a charge had been created in the course of carrying on of the assessee-firm's business and the partners had made themselves as trustees to the extent of 6.25 per cent of the total profit of the firm. According to him, the net profit of the firm could be ascertained only after deduction of the above charge, which was an integral part of the carrying on of the assessee's business. He formulated some legal propositions, which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application of a portion of the income to discharge an obligation and not a case in which by an overriding charge, the assessee became only a collector of another's income. The Court, of course, observed that the matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income which was not the case. The Court also observed that the present case fell within the rule stated by the Judicial Committee in P. C. Mullick v. CIT [1938] 6 ITR 206. 11. The submission of the learned departmental representative as also of the counsel for the assessee was that the true test for deciding a similar issue had been laid down by the Supreme Court in the above case of Sitaldas. If we examine the present case in the light of the principle laid down by the Supreme Court, then our conclusion obviously would be against the assessee. It cannot be said that 6.25 per cent profit which the assessee sought to deduct, in truth, never reached the assessee as its income. At the most, it could be said that the assessee was obliged to apply a part of its profit out of its income by way of payment as charity to Lok Sewa Mission. It cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing words : ". . . Now if it were merely a case of the discharge of a personal obligation by the assessee in favour of his two daughters, we are at a loss to know why the two partners of the assessee should have been made parties to the agreement. The fact that they were made parties to the agreement and agreed themselves to pay to each of the daughters the amounts of the maintenance due to them out of the remuneration and the one-third share in the profits of the partnership, clearly shows that it was the intention of the parties that the source or the profits should be bound. That part of the profits thus could never become the income of the assessee. Once a stipulation like this was made in the document it is clear to our mind that the profits could never have been obtained directly by the assessee himself. On the other hand, the daughters would be entitled directly to claim the maintenance out of the profits from the two partners who had agreed to pay the same to them and to that extent they would have a title superior to that of their father in the profits. That would constitute such an overriding title as would make that portion of the profits which was payable to them c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The last case of Sita Ram also stands distinguished. In fact, in this case there were a number of facts including a partnership deed by which the deity was made a partner in the firm. On a perusal of the facts of the case, it was held that the income of the business to the extent of one-half never belonged to the assessee and it went to the deity through an overriding title. 17. We are, therefore, of the opinion that the guiding principle for deciding the case continues to be the test laid down by the Supreme Court in the case of Sitaldas. We have already held by applying this test that the profit to the extent of 6.25 per cent of the firm was not diverted by any overriding charge or title and that it continued to belong to the firm till it was paid to Lok Sewa Mission. 18. The next proposition of law formulated by the learned counsel for the assessee was that the assessee-firm was a separate entity and that it was receiving its income only subject to the charge created by the partners to the extent of 6.25 per cent of its profits. According to him, therefore, the real income of the assessee-firm was less by that amount. In this connection, he referred to the decision of the Guj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the decision of the Bombay High Court in CIT v. Crawford Bayley & Co. [1977] 106 ITR 884. This decision is again distinguishable on its own facts. In this case, two of the partners of the assessee-firm had died. A supplementary deed was executed subsequently. Under the provisions of the partnership deeds, the widows of the deceased partners were made some payments monthly. They were claimed as deductions. The ITO rejected the claim holding that the widows were not parties to the agreement, that they had no rights against the firm, that the payments to them were purely voluntary, that it was open to the partners to modify or stop making payments without the consent of the widows, and that as the payments had to be made irrespective of profits or losses resulting to the firm, they had no bearing on the income of the firm and were not a charge on the firm. The Tribunal held that there was an obligation in the nature of a trust on the surviving partners to make payments and accepted the claim of the assessee. The High Court following the decision of the Supreme Court in Sitaldas' case held that the payments to the widows were not dependent upon the profits or losses of the firm, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the fees to be recovered from the clients by the firm was only an actionable claim assignable by him as any other property. The right to profit arose only when the accounts were settled, i. e., on 31-12-1970. At that time, the assessee had already assigned his said right or source of income to his sons irrevocably and his sons alone were thereafter entitled to receive the said amount and not the assessee. Similarly, in the case of Nandiniben Narottamdas, the assessee had made a gift of her respective shares in the two firms in favour of the beneficiaries of the trust, which meant a gift of the share in profits and losses of the firms. It was held that the assessee had divested herself of the income producing apparatus or asset and that by the overriding title created in favour of the beneficiaries of the trust, the share income of the assessee stood diverted even before it reached her. As pointed out above both these cases are distinguishable. There is no such gift or assignment by the assessee-firm in favour of any person. What the assessee did was only to divert a part of its profit after it had reached it for which there was no overriding title or obligation. In the case b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceives the income not only on his behalf, but on behalf of the partners of the sub-partnership. However, the distinguishing feature of this case was that both the profits and losses of a partner in the registered firm were to belong to the sub-partnership as an asset. In the present case, on the other hand, Lok Sewa Mission is entitled to receive only a part of the profit and is not to bear a part of the loss of the assessee-firm. This case, therefore, falls within the ratio laid down by the Supreme Court in the case of K. A. Ramachar. 28. The learned departmental representative, on the other hand, submitted that in the profits and loss account of the assessee, a deduction of Rs. 11,540 was claimed like any other expenditure and, therefore, it had to be treated as part of the assessee's income accruing to it from its business. The question whether the expenditure claimed was allowable or not was entirely a different matter. 29. During the course of hearing, reference was also made to the two decisions of the Supreme Court in the cases of Tollygunge Club and CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60. As rightly pointed out by the learned departmental representative th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had to be acted upon by the partners. However, this, by itself, does not help the assessee as, in our opinion, it does not create any overriding charge or title in favour of Lok Sewa Mission. Similarly, we also do not agree with his view that there was no evidence that Lok Sewa Mission had accepted the offer or it was a party to any arrangement. That fact is not fatal to the case of the assessee. However, that by itself, also does not help the latter. 31. In this connection, we will also like to refer to a recent decision of the Allahabad High Court in Addl. CIT v. Rani Pritam Kunwar [1980] 125 ITR 102. It was held in this case that in order that a payment should be treated as a diversion at source, it is necessary that it should have been made under some legal obligation. Such legal obligation must attach to the source of income. In other words, for such a payment there should be an overriding charge, a charge which is created under any law for the time being in force or by virtue of Court's decree or by a voluntary settlement or the obligation must be such that though not made a specific charge on the property, it could be enforced in a court of law. None of these tests are s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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