Allowability of deductions on account of payments made by the assessee to the retired partners and wives of deceased partners while computing the total income

A.F. Ferguson & Co. Vs. The Asst. Commissioner of Income Tax–  The dispute is regarding allow-ability of deductions on account of payments made by the assessee to the retired partners and wives of deceased partners while computing the total income. The payments had been made under the provisions of partnership deed.

The same issue had been examined by the Tribunal in assessee’s own case for assessment year 2003-04 in ITA No. 1113/M/2007. The Tribunal after examination of various clauses of partnership deed noted that retired partners and spouses of deceased partners had an overriding title up to certain percentage of gross fees collected by the firm subject to certain conditions. Thus the provisions of partnership deed created overriding title in favour of these persons on certain percentage of receipts irrespective of the fact whether there was profit or not. The Tribunal observed that the case of the assessee was covered by the decision of the Tribunal in case of C.C. Chokshi & Co. in ITA No. 492 to 495/M/2003 in which a similar claim had been allowed. The Tribunal after detailed discussion and after referring to the judgement of Honourable Supreme Court in case of CIT vs. Sitaldas Tirathdas (41 ITR 367) and the judgement of Honourable Supreme Court in case of Prince Khandelrao Gaikwar vs. CIT (16 ITR 294) and several other judgements held that it was a case of diversion of income and not application of Income. The facts in this year are identical. The ld. DR has placed reliance on the judgement of Honourable Bombay High Court in the case CIT vs. V.G. Bhuta (supra), which had also been cited by the Department before the Tribunal. We have also gone through the said judgement and find that the said case is distinguishable. In that case, the clause 18 of the partnership deed provided that the firm would not stand dissolved on the death of the partner but the surviving partner or partners would succeed to the share of the deceased partner in the partnership deed. The clause required that the surviving partners had to pay to the legal representative of the deceased partners certain amounts as price of such shares. The Honourable Court noted that the partnership deed did not make it obligatory on the part of the surviving partners to pay the amounts. It was to be paid only if they wanted to take over share of the deceased partner and continue partnership business. This clearly indicated that what was paid was by way of price of share of the deceased partner in the partnership deed. The Honourable High Court accordingly held that at the most it was application of income that had accrued to the assessee and the dis-allowance of the claim had accordingly been upheld. The facts in case of the assessee are obviously distinguishable and therefore, the said judgement will have no application in the present case. We, therefore, respectfully following the decision of the Tribunal in assessee’s own case for assessment years 2003-04 and 2004-05 (supra) set aside the order of CIT(A) and allow the claim of the assessee.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 663/Mum/2010

Assessment Year : 2006- 07

A.F. Ferguson & Co. Vs. The Asst. Commissioner of Income Tax

Date of pronouncement : 10th August, 2011

ORDER