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TMI Blog1982 (12) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, at the time of making the profit and loss account and balance sheet a due provision was made for Rs. 41,967.63 out of the profits for the legal heirs in view of section 37 of the Partnership Act. The assessee claimed the deduction for the above amount. The ITO did not discuss the issue in detail. He disallowed the claim of the assessee mentioning that the provision made was not admissible. 2. The assessee came in appeal before the Commissioner (Appeals) and contended that clause 16 of the old deed provided that the assets and liabilities of the partnership upon dissolution shall be dealt with in accordance with the provisions of the Indian Partnership Act and since the account of the deceased partner was not settled, the legal heirs were entitled to one-third share in view of sections 14 and 37 of the Partnership Act. The assessee placed reliance on sections 14 and 37 of the Partnership Act. It was also stated that since the accounts were not settled, the legal heirs filed a suit in the Calcutta High Court in which the firm and the surviving partners were made parties. It was strongly urged that the amount of Rs. 41,967.63 was provided as per section 37 of the Partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability. Accordingly, he did not accept the claim of the assessee. The Commissioner (Appeals) in detail has discussed the matter in para 5 of his order as follows : "5. I have carefully considered the facts and circumstances of the case and the submission made before me. The point for determination is as to whether the amount of Rs. 41,967 can be allowed as business expenditure or as a diversion by overriding title. The learned counsel for the appellant has laid a great emphasis upon section 37 of the Partnership Act according to which it was obligatory on the surviving partners to make a provision of the deceased partner's share to the legal representatives. Section 37 of the Partnership Act provides that the legal representatives are entitled on the option to be exercised by them to such share of the profits as may be attributable to the use by the firm of the deceased partner's share of the property of the firm or to interest at 6 per cent per annum on the amount of his share in the property of the firm. In the present case the legal representatives have not exercised any option and the provision for one-third share has been made by the appellant suo moto. It appears that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership, dated 24-9-1976. 3. Extract of entry passed in journal in respect of liability under section 37 of the Indian Partnership Act, 1932, to the estate of the deceased partner, N. L. Jalan, for the year ended on 31-3-1977. 4. Balance sheet and profit and loss account for the year ended on 31-3-1977. 5. List of outstanding liabilities as appearing in the balance sheet as at 31-3-1977. 6. Extract of entry passed in journal in respect of liability under section 37 of the Indian Partnership Act, 1932 to the estate of the deceased partner, N. L. Jalan, for the year ended on 31-3-1978. 7. Balance sheet and profit and loss account for the year ended on 31-3-1978. 8. List of outstanding liabilities as appearing in the balance sheet as at 31-3-1978. 9. Extract of entry passed in journal in respect of liability under section 37 of the Indian Partnership Act, 1932 to the estate of the deceased partner, N. L. Jalan, for the year ended on 31-3-1979. 10. Balance sheet and profit and loss account for the year ended on 31-3-1979. 11. List of outstanding liabilities as appearing in the balance sheet as at 31-3-1979. 12. Copy of assessment order in respect of the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in the absence of any agreement the claim of the assessee could not be allowed. The claim of the legal heirs was based upon the statutory provision of section 37 of the Partnership Act and hence no separate agreement was required. He was not correct equally in saying that the deduction was claimed on mere provision and there was no ascertained liability. The liability was ascertained in view of section 37 of the Partnership Act and hence it was not a provision but it was an ascertained liability which was claimed in the assessment. He also referred to the fact that the heirs subsequently filed a suit in the Hon'ble Calcutta High Court and the injunction was granted. It shows that their consent was not taken while the new partnership was carried on by the existing two partners. The assessee's counsel also referred to the order of the AAC for the assessment year 1978-79 where he allowed the claim of the assessee for that year. He also relied upon the cases relied upon before the Commissioner (Appeals) and further relied upon Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC). 4. Shri B. N. Sarkar, the departmental representative, strongly relied upon the order of the Commissioner (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the surviving partners at a valuation to be agreed upon with him. However, it has been indicated in the subsequent deed of 1976 that none of the deceased heirs approached the parties hereto to be admitted in the said partnership. This fact has been challenged and ultimately the partners through a journal entry has made a provision for Rs. 41,967.63 by way of an annuity and has claimed deduction in the assessment. The claim through a journal entry as appearing at page 20 of the assessee's paper book, was made as follows : "LIBERTY CINEMA Re : Outstanding Liabilities Extract from the Journal for the year ended on 31-3-1977 Dr. Cr. Rs. Rs. Annuity account 41,967.63 To outstanding liabilities 41,967.63 (Being the amount payable to deceased partner late N. L. Jalan as per section 37 of the Partnership Act, now provided) Calculation : Profit before charging Annuity Rs. 1,25,902.89 Opening capital employed Rs. 7,32,050 out of which deceased partner's share Rs. 2,44,018, i. e. one-third of total capital (a) one-third of profit Rs. 41,967.63 (b) 6 per cent interest on capital Rs. 2,44,018= Rs. 13,642 (a) being higher amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been provided in the accounts. The Commissioner (Appeals) after analysing the cases cited by the assessee, has indicated that the claim of the assessee could not be allowed because there was no agreement. The agreement in the present case was not required at all. The clauses contained in the two partnership deeds read with section 37 of the Partnership Act create statutory liability upon the continuing partners to pay a sum as indicated in section 37 of the Partnership Act to the legal representative. The observation of the Commissioner (Appeals) is not correct that there was a provision and no ascertained liability. The liability was ascertained in view of section 37 of the Partnership Act. Under the above circumstances, if the facts of the case along with the various case laws cited by the assessee are taken into consideration, it was correct that there was a liability for the legal heir's share of profit and/or interest and hence the same could be allowed as deduction. The plea of the assessee has been accepted in the subsequent assessment year 1978-79 by the AAC who, vide his order dated 12-8-1981 has allowed the interest claimed by the assessee at Rs. 14,641. Accordingly the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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