1980 (4) TMI 39 - HC - Income Tax

Summary

Issues involved: Valid charge in favor of Mrs. Aloo on the profits of the firm and income diversion by an overriding title.

Summary:

The case involved a partnership where a clause in the deed of partnership created a charge in favor of Mrs. Aloo, the widow, on the profits of the firm after the death of her husband, one of the partners. The dispute arose when the firm claimed a deduction for the amount payable to Mrs. Aloo, which the Income Tax Officer (ITO) initially rejected. The matter progressed to the Tribunal, which held that a valid charge existed in favor of Mrs. Aloo, diverting the income of the firm by an overriding title.

The Tribunal relied on the decision in CIT v. C. N. Patuck [1969] 71 ITR 713, which established that a charge creates an overriding title, diverting the income before it reaches the assessee. The Tribunal concluded that the income paid to Mrs. Aloo was not taxable in the hands of the firm. The revenue challenged this decision, leading to a reference to the High Court.

Upon considering the arguments and precedents, the High Court found that the case aligned with the principles set out in Patuck's case. The court emphasized that when a charge is created, the income subject to the charge ceases to be the income of the assessee, and an overriding title is established in favor of the charge-holder. In this instance, the charge created by the partnership deed gave Mrs. Aloo an overriding title to 25% of the firm's profits, which was diverted before reaching the partners.

Therefore, the High Court answered the question in the affirmative, ruling in favor of the assessee and directing the revenue to pay the costs of the reference.