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2008 (12) TMI 671 - AT - Income TaxPayment made to retiring partner - diversion of income or not? - assessee claimed before the CIT(A) that the said payment was an overriding charge on the income, assets and properties of the firm under the partnership agreement and was admissible deduction while computing the taxable income of the firm - CIT(A) held that the payments were not allowable as a deduction in the hands of the firm. HELD THAT:- Reading the terms of the agreement entered into between the parties on March 30, 2000, in continuation with the agreement entered in to on March 30, 2001, it transpires that certain events were taken care of as certainty by the parties. The retirement of Mr. Philip, Mr. Merchant was a certainty as provided in clause 24(b) of the deed dated March 30, 2000. Special terms were agreed between the parties in connection with the retirement of certain partners and in connection with the retirement of other partners of the firm. In respect of Mr. Philip and Mr. Merchant, as per clause 21(b) and (c) the maximum annual payments were provided as is evident from the perusal of our observations in the paras hereinabove. In the circumstances, where the assessee has by its own motion acted on certain terms and conditions with regard to the payments to be made to specified persons on the happening of an event on a particular date, cannot be held to be a charge of its income. The parties cannot pre-determine every event and then claim that one of this event creates overriding charge, especially so when such events were within their control. we are of the view that the payments made to the retiring partners in consensus with the terms and conditions agreed upon between the parties to the agreement are in the nature of an obligation voluntarily agreed to and such an obligation cannot be diversion by an overriding charge. Accordingly, we hold that the payments made to the retiring partners is not allowable as a deduction while computing the profits of the firm being the payments made on capital account. The expenditure incurred by the assessee by way of payments to the retiring partners is only an application of its income, which is on capital account and not allowable as a deduction. There is no merit in the claim of the assessee that it is diversion of income by overriding the charge. We find support from the judgment of the apex court in CIT v. Sitaldas Tirathdas [1960 (11) TMI 17 - SUPREME COURT], wherein it has been held that only such payments " where the obligation to pay flows out of an antecedent and independent title in the former, it would be a case of diversion of income. But, where the obligation is self imposed as gratuitous, it is a case of application of income". The payment made by the assessee to its retiring partners in the facts of the case before us is a self imposed obligation being gratuitous and hence application of income. Accordingly, we disallow the claim of the assessee in respect of the payments made to the retired partners. The ground of appeal raised by the assessee is thus dismissed.
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