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TMI Blog1985 (6) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-10-1979, Shri Deepak K. Doshi, the retiring partner, was to be paid 15 per cent of the net profits in this year and subsequent nine years. After examining the assessee's claim, the ITO held that the payment made and agreed to be made was nothing but a sort of goodwill or payment in lieu of his future profits. He was of the view that it was a capital payment which could not be allowed to be debited in the profit and loss account of the assessee-firm. He, therefore, disallowed this amount of Rs. 10,460. 4. Following the same line of reasoning, the ITO disallowed a sum of Rs. 33,884, which was debited in the profit and loss account for the Samvat year 2036 relevant for the assessment year 1981-82. 5. The assessee took up the matter in appeal and contended before the Commissioner (Appeals) that the payment was only in the nature of revenue expense and that the ratio of the decision of the Supreme Court in the case of Devidas Vithaldas Co. v. CIT [1972] 84 ITR 277 would apply to the facts of the present case. The Commissioner (Appeals) examined the contentions of the assessee and held that Shri Deepak K. Doshi, who retired from the partnership, with effect from 1-7-1979, was ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application of the firm's income and it could not be said that there was any diversion by overriding title but that it was only a case of mere diversion of profits. The Commissioner (Appeals) hence held that the payment could not be considered as an item of expenditure. He, therefore, upheld the disallowance of the payment of Rs. 10,460 for the assessment year 1980-81. Following this decision, he upheld the disallowance of Rs. 33,884 in the appeal for the assessment year 1981-82. The appellant feels aggrieved by these orders of the Commissioner (Appeals). Hence, the present appeals to the Tribunal. 6. Shri R.C. Desai, the learned counsel for the appellant, submitted that the appellant-firm came into existence from 1974, that on 7-11-1978, there was a change in the constitution of the firm when three new partners were admitted with effect from 1-11-1978 and that according to clause 5 of the deed of partnership dated 7-11-1978, all the business assets and liabilities of the previous firm were taken over and carried on by the new firm as a going concern. He pointed out that Shri Deepak K. Doshi, who was shown as partner No. 5 in this deed was one of the new partners, who had joined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision relied on their earlier decision in the case of Seth Motilal Manekchand v. CIT [1957] 31 ITR 735 and pointed out that this decision of the Bombay High Court was not overruled by the Supreme Court decision in the case of Sitaldas Tirathdas. 8. Shri Desai next argued that assuming there was no charge created in favour of the retiring partner, Shri Deepak K. Doshi, yet there was an enforceable obligation against the appellant-firm created by the deed of retirement and, therefore, there could be no accrual of income to this extent to the appellant-firm. 9. It was also submitted that the amount payable to the retiring partner was allowable as revenue expenditure, as the continuing partners had the use of the interest of the retiring partner, Shri Deepak K. Doshi, in the goodwill and other assets of the firm. In this connection, Shri Desai submitted that the business of the appellant-firm was originally carried on by a partnership firm consisting of Kantilal and his brother Kirtanlal from 1940 to 1974 with equal shares under the name and style of Kantilal Bros., that the business of the said firm was in hardware and that they were the agents for the products of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retirement, the partners of the firm had actually applied only a portion of their income after its accrual. In support of this, Shri Raju relied on the clauses in the deed of retirement and clause 7 of the new deed of partnership dated 6-10-1979 and pointed out that this 15 per cent was payable only out of the profits of the firm after accrual of such profits. He submitted that it was only a bounty or boon granted by the appellant-firm to the retiring partner, whose contribution either to the firm's goodwill or to its other assets was almost 'nil'. Shri Raju argued that all the assets including the tenancy rights of the shop and the godown and the agency right were already there in existence and there was no question of any contribution made by Shri Deepak K. Doshi, who was a partner for a short period of eight months only to justify the payment of this sum as for the user of his share in that. He, therefore, submitted that the decision of the Commissioner (Appeals) was correct and that the same should be upheld. Shri Raju further submitted that the decisions relied on by the learned counsel turned on the facts and circumstances of each case and that those decisions were not applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make the annual payment to the retiring partner." [Emphasis supplied] It is the appellant's claim that a charge has been created on all the tangible movable assets of the partnership and its income, for securing the performance of the obligation of the continuing partners to make the annual payment in accordance with clause 4 quoted above to the retiring partner. 14. Clause 7 of the deed of partnership executed by the continuing partners on 6-10-1979 reads as follows : "7. The net profits of the partnership business after defraying all expenses, such as salary, rents, etc., and the payment to be made to Deepak Kantilal Doshi, namely, 15 per cent of the net profit as agreed to in the deed of retirement dated 6-10-1979 and other incidental expenses, shall be divided between the partners in the following proportion : 1. Shri K.L. Doshi, karta of K.L. Doshi HUF 25 per cent 2. Shri S.K. Doshi, karta of S.K. Doshi HUF 25 per cent 3. Shri B.K. Doshi, karta of B.K. Doshi HUF 18 per cent 4. Shri J.K. Doshi, karta of J.K. Doshi HUF 25 per cent 5. Smt. Sudha Bipin Doshi 7 per cent ---------------------- 100 per cent" ---------------------- It would be noticed that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Ltd. of the Tata group for the whole of Bombay city and the State of Maharashtra and also tenancy rights in the shop and godown where the said business is being carried on. These facts have not been controverted before us. 17. It is further seen that interest at 6 per cent per annum is credited on the credit balance in the account of the retiring partner, Shri Deepak K. Doshi. The net profit of the business of the firm is ascertained after debiting the amount of 15 per cent of the profits, which is described as commission paid to Shri Deepak K. Doshi. 18. On the above facts, it is clear that a charge has been created by mutual agreement between the retiring partner and the continuing partners securing the payment of 15 per cent of the net profits of the partnership business for a period of ten years as specified in clauses 4 and 6 of the deed of retirement. This charge is secured on the income, stock-in-trade, cash balance and other tangible movable assets of the partnership. These clauses also create an enforceable legal obligation against the appellant-firm consisting of the continuing partners and in favour of the retiring partner. This payment seems to have been agreed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships have held as follows : "In the creation of a charge no particular words are necessary. A charge may be created even without a writing. Whenever a particular property or fund is earmarked or made a security for the payment of a debt a charge would arise on that property or fund. Section 100 of the Transfer of Property Act is no doubt limited to charges in immovable property only but 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. . . ." This decision of the Bombay High Court fully supports the contentions of the assessee for the allowance of this claim on the basis that there is a diversion of, income by an overriding title consequent to the charge created by the deed of retirement in favour of the retiring partner and that at any rate it is an enforceable legal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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