TMI Blog2009 (10) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-firm and hence, in our opinion, if we examine the facts of this case in the backdrop of the legal principles in the precedents cited above, there is a diversion of income to the extent of the retirement benefits paid by the assessee-firm as per terms of clause 8.4 to the retired partner. We, therefore, hold that the retirement benefit paid in terms of clause 8.4 cannot be included in the total income of the assessee-firm as to that extent, the income has never reached in the hands of the assessee. We, accordingly, allow the grounds taken by the assessee. In the result, the assessee's appeal is allowed. - Order The order of the Bench was delivered by R. S. Padvekar (Judicial Member).-The assessee has filed this appeal challenging the impugned order of the learned Commissioner of Incometax (Appeals)-XI, Mumbai dated February 2, 2007 for the assessment year 2004-05 on the following ground : "On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) (CIT(A)), has legally erred in rejecting the appellant's claim for payment of Rs. 10,00,000 to a retired partner of the firm." The facts which reveal from the record are as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admission of partners, management of the assessee-firm, date and retirement of partners, remuneration payment, retirement benefits, etc. As per clause 8.4, if any partner retires after the age of 50 years, then he shall be entitled to 25 percent of his average earning which is computed considering his remuneration + share of profits before firm's tax for the period of three completed financial years prior to the retirement of the partner. The firm has to pay the same for the period of five years, and is also provided that the payment shall be made in four quarterly installments. The relevant clause of the partnership deed is as under : "8.4 In the event that any of the parties other than those stated in 8.3 above, resigns, dies or is permanently incapacitated (all of which are hereinafter in this clause 8 referred to as 'retirement') after the age of 50 years, or retires as per clause 4.4, he shall be entitled to 25 percent of his average earnings (remuneration plus share profit (before firm tax) from the firm for a period of 3 completed financial years prior to the retirement, for a period of 5 years. These payments shall be made in four quarterly instalments on June 30, Septemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income. The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case. In our opinion, the case falls outside the rule in Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC) and rather falls within the rule stated by the Judicial Committee in P. C. Mullick's case [1938] 6 ITR 206 (PC)." In the case of C. N. Patuck [1969] 71 ITR 713 (Bom), the assesseerespondent filed a divorce petition before the Parsi Chief Matrimonial Court at Bombay and consent decree was passed. As a result of the compromise, the assessee agreed to make provision for two unmarried daughters which were the offshoot of the said marriage. It was agreed that the assessee would pay Rs. 250 per month to each daughter till their marriage. Moreover, in the event of marriage of each of the said two d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions contained in the two deeds and upon the other circumstances found in the case. But we do not propose to base our decision on Motilal Manekchand's case alone. Since the Supreme Court has clearly laid down the test in Sitaldas Tirathdas's case [1961] 41 ITR 367 (SC) we must too decide this case in the light of that test. Now, it is clear that the true test is whether the amount sought to de deducted, in truth, never reached the assessee as his income. In deciding the question, the nature of the obligation created in each case is the decisive test. Where, however, coupled with an obligation the terms of the document give rise to an overriding charge, then there can be no doubt that there would be created in favour of the charge-holder such an overriding or superior title as would make the amount due under the charge cease to be the income of the assessee altogether. In the present case upon the findings of the Tribunal such a charge has been created but that finding has been disputed on behalf of the Department and so we turn to consider the question whether, upon the circumstances of this case, the finding of the Tribunal that a charge was created in favour of the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1969] 71 ITR 713 (Bom). The Division Bench has in Patuck's case construed the decision of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC), in which the Supreme Court has laid down the test of determining when an amount can be said to be diverted at source as a result of a charge or overriding title. The Supreme Court had observed as follows (page 374) : 'In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not a follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership deed is considered, it is obvious that not only the share in the income of the two partners which is half and half but also the assets of the partnership have been subjected to a charge to the extent of 25 percent of the income of the partnership firm. This 25 percent of the income of the partnership firm cannot be said to belong to any of the two partners, and if at all that income is received by the two partners, it was for and on behalf of the charge-holder. The nature of the charge created by the document of the partnership in clause 17 was clearly such that the charge-holder, Smt. Aloo, had an overriding title to the 25 percent of the profits of the partnership. This amount of 25 percent of the income of the partnership was, therefore, liable to be clearly diverted before the profits reached the partners of the assessee-firm." In the case of Crawford Bayley and Co. [1977] 106 ITR 884 (Bom), the hon'ble Bombay High Court has held as under (page 888) : "The first two contentions of Mr. Joshi can be discussed together, because they are different phases of the same question. In respect of this matter the material question to be considered is, is there diversion of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eu thereof. The payment to the widow of a deceased partner under these partnership deeds is not dependent upon the assessee-firm incurring any profits or losses. It is an absolute obligation and even though there may be no profits in a particular year made by the assessee-firm the obligation to pay to the widow under clause 33 of the partnership deed, annexure 'A', and clauses 8 and 34 of the partnership deed, annexure 'B', is absolute. When the obligation to pay such amount to the widow of a deceased partner is absolute, there can be no question of application of income by the assessee-firm after it accrued to it. In fact, such payment is to be made even though no profits whatsoever may have been made. This provision shows that it is an obligation in the nature of trust. Ordinarily, it is true that a person who is not a party to the contract cannot enforce it, but there are several well recognised exceptions to this rule. One of the well recognised exceptions is a cestui que trust. In a cestui que trust even though a person may not be a party to contract he can enforce his right under contract by adopting appropriate legal proceedings. Such is the case so far as the rights of a wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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