1993 (3) TMI 79 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sums paid to the widows of deceased partners constituted the assessee's income.
2. Whether these sums were deductible from the assessee's total income based on the concept of diversion of income by overriding title.

Summary:

Issue 1: Whether the sums paid to the widows of deceased partners constituted the assessee's income.

The High Court of Bombay examined whether the sums of Rs. 60,000 and Rs. 99,333 paid to the widows of deceased partners constituted the assessee's income for the assessment year 1971-72. The court noted that the payments were made under clauses of the partnership deeds, which required the surviving partner to pay certain amounts as the price for the share of the deceased partners. The court emphasized that these payments were not revenue expenditures but either capital expenditures or applications of income after it had been earned by the assessee. The court concluded that these payments did not represent a diversion of income by overriding title but were applications of income, and thus, they constituted the assessee's income.

Issue 2: Whether these sums were deductible from the assessee's total income based on the concept of diversion of income by overriding title.

The court analyzed whether the sums paid to the widows were deductible from the assessee's total income based on the concept of diversion of income by overriding title. The court referred to the Supreme Court's test in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, which distinguishes between an amount diverted before it reaches the assessee and an amount applied to discharge an obligation after it has reached the assessee. The court determined that the payments in question were obligations to be fulfilled after the income had accrued to the assessee, thus constituting applications of income rather than diversions by overriding title. Consequently, these sums were not deductible from the assessee's total income.

The court also addressed the argument that the assessee maintained his accounts on a cash system and thus should be allowed deductions in the year of payment. The court rejected this argument, stating that the system of accounting is irrelevant in cases of diversion of income by overriding title. The court concluded that even if the payments were considered diversions by overriding title, they would affect the income of earlier years, not the assessment year 1971-72.

Conclusion:

The High Court of Bombay held that the Tribunal was not justified in excluding the sums of Rs. 60,000 and Rs. 99,333 from the assessee's income. The court answered the question in the negative, favoring the Revenue and against the assessee.