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2019 (7) TMI 169 - AT - Income TaxPayment made to retiring partner and legal heirs of the deceased - diversion of income or not? - whether the payment made by the assessee-firm to retiring partners and legal heirs of the deceased partners in terms of the Partnership Deed amounts to diversion of income by over riding title and thus, excludible from total income in the hands of the firm or not? - change in agreement clause - HELD THAT:- From a perusal of clause No.16 of the old agreement and clause nos. 13 and 14 of the new agreement, it is amply clear that in sum and substance the only difference is that in old agreement amounts payable to the retiring partners and legal heirs were not quantified and it only prescribed a method for quantification of amount, whereas in the new agreement the amount to be paid to the partners on retirement and otherwise is duly quantified. Apart from the aforesaid, we do not find difference in the terms and conditions prescribed in the two agreements. The terms of the Partnership Deed dated 01.04.2001 are also in line with the old agreement except that the amount to be paid to the retiring partners and legal heirs have been quantified in the new agreement. Thus, when the fact situation remains the same, we do not find any reason for not following the decision of the Hon’ble Bombay High Court in assessee’s own case [1990 (9) TMI 32 - BOMBAY HIGH COURT]. Since the Hon’ble High Court has already considered the decision of CIT v. Sitaldas Tirathdas [1960 (11) TMI 17 - SUPREME COURT], we are not discussing the applicability of the said case to the facts of the present case; and, it would suffice to note that the Assessing Officer has erred in placing reliance on the aforesaid decision. New agreement clearly spells out that the liability to pay income tax on amount received by the retiring partners or beneficiary will be on them and not on the assessee-firm. Thus, liability to pay tax, if at all, in terms of the agreement also, is upon the partner or the beneficiary receiving such payment. As such, it is the partners or beneficiaries receiving such payment who should be taxed and not the assessee. Further, it is also observed from the terms of the agreement that the above payment were to be set-aside at the threshold from the receipts of the firm and will, thus, not reach the hands of the other partners of the firm and, therefore, cannot be treated as income of the assessee-firm who has merely acted as a pass through entity for this payment. We, accordingly, set-aside the order of CIT(A) and direct the Assessing Officer to allow the exclusion on account of payment made to retiring partners and legal heirs of the deceased partners. - Decided in favour of assessee.
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