ITAT ‘D’ Bench, Mumbai
Before P. M. Jagtap (AM) and
R. S. Padvekar (JM)
ITA No. 3269/Mum./2007
A.Y. : 2004-05. Decided on : 12-10-2009
Counsel for assessee/revenue : Sunil M. Lala & Dhanesh
Bafna/Sanjay Agarwal
S. 28 — Contractual payment made by the assessee firm to
its retiring partners, in terms of the partnership deed, is not includible in
the total income of the assessee since to that extent income has never reached
the hands of the assessee.
Per R. S. Padvekar :
Facts :
The assessee, a partnership firm, claimed a sum of Rs.10
lakhs towards payment made by it to its retiring partner, as per the terms of
the partnership deed. The partnership deed provided that a partner retiring
after a specified age would be entitled to receive from the firm an amount,
computed in the manner stated in the deed, for a period of 5 years from the
date of retirement. Before the Assessing Officer (AO) the claim was made
u/s.37 of the Act. The AO held that the amount was not allowable as a
deduction.
Aggrieved, the assessee preferred an appeal to the CIT(A)
where this sum was contended to be not taxable on the principles of diversion
of income by overriding title. The CIT(A) held that the amount paid was
application of income. He, accordingly, dismissed the assessee’s appeal.
Aggrieved, the assessee preferred an appeal to the
Tribunal. The Tribunal noted the relevant clause of the partnership deed and
also the judicial precedents relied upon by the assessee.
Held :
Payment of retirement benefits for a period of five years
from retirement was a contractual obligation of the assessee. The retired
partner had nothing to do with the profit earned or losses suffered by the
assessee firm, but the quantum of retirement benefits had been fixed. On
facts, there was a charge on the profits of assessee firm. The Tribunal upon
considering the facts and the legal principles laid down in the precedents
relied upon by the assessee held that there was diversion of income to the
extent of the retirement benefits paid by the assessee firm to the retired
partner. The Tribunal held that the retirement benefit paid in accordance with
the terms of the partnership deed was not to be included in the total income
of the assessee firm as to that extent the income never reached the hands of
the assessee.
The assessee’s appeal was allowed.
Cases referred to :
1. CIT v. Sitaldas Tirathdas, 41 ITR 367 (SC)
2. CIT v. Crawford Bayley & Co., 106 ITR 884 (Bom.)
3. CIT v. Nariman B. Bharucha & Sons, 130 ITR 863
(Bom.)
4. CIT v. C. N. Patuk, 71 ITR 713 (Bom.)
