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TMI Blog2008 (12) TMI 671X X X X Extracts X X X X X X X X Extracts X X X X ..... ants of the said partnership are applicable. During the year under consideration the assessee claims to have been paid Rs. 16,18,140 to its retired partners as per clause 22 of the partnership deed dated March 30, 2001, and the said amount was claimed as an expenditure of the firm. The Assessing Officer was of the view that there was no provision to pay any amount to the retired partners and even as per the Income-tax Act, only remuneration and profits of the firm was to be given to the existing partners. The Assessing Officer thus held that the clauses being created by the assessee without considering the provisions of the Indian Partnership Act was nothing but goodwill paid to the retired partners in respect of paying any lump sum to them. Accordingly, it was held by the Assessing Officer that the amount was treated as goodwill, which was capital in nature and the same was disallowed. The assessee claimed before the Commissioner of Income-tax (Appeals) 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. The Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and since the same is diverted at source, it is not the income of the assessee. The assessee is not claiming any expenditure and there is no question of which being a capital or revenue expenditure. The learned Departmental representative or the Revenue submitted that the assessee is a partnership firm and the provisions of the Act with regard to the assessability of the income of the partnership in the hands has been amended. Section 40(b) of the Act provides what is deductible under amended provisions of the Act. The learned Departmental representative further submitted that what is not allowable are the amounts which are payable to the non-working partners. The learned Departmental representative further submitted that if we go by the proposition that nobody can question the nature of payments being made by the firm and allow these amounts then there is no sanctity of law. The learned Departmental representative stated that in the year under appeal, i.e., the assessment year 2002-03 the new scheme of assessability of partnership existed and the reliance by the learned authorised representative on the various judgments of the hon' ble Bombay High Court were cases of before amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge over such income, assets and properties of the firm." Clause 21 (e) provides as under: "(e) The amount so paid in each year pursuant to this clause 21 being a revenue expense of the firm shall be deducted before calculating the profits of the firm for distribution among the continuing partners." Under clause 23, on the retirement or death of any partner, the partnership shall pay to him or his legal heirs the amount standing to his credit in the partnership books as on the date of his retirement/death and in respect of the current year, the apportioned profits on a time basis from the commencement of the year to the date of his revenue and it was pointed out that all the clauses in the agreement were decisive of the nature of expenditure. The learned Departmental representative further stated that the said expenditure was not allowable under law and the agreement between the parties was a self serving document, which has been executed for claiming a deduction, but it is not allowable under the Act. The learned authorised representative in reply submitted that the reliance placed by the learned Departmental representative on Doshi Motors v. ITO [1989] 29 ITD 551 (Pune) and ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all not be entitled to any claim in the goodwill etc. As per clause 10, the contribution into capital of the firm is agreed upon and Mr. Iyer one of the partners shall not be required to contribute to the said capital. Clause 13 (c) of the agreement provides that each of the retiring partners shall have no association with the name of the firm and it further provides that retiring partner shall not during his life time irrespective of receiving any payments under clause 21 hereof, engage in or be concerned or interested in any business or profession, otherwise than as director, lecturer, writing/contributing articles for any books, magazines etc. and it is further provided that such person shall not compete with that of this partnership in the city of Mumbai or in any place within an area in the radius of 50 miles from the city of Mumbai, except with the consent of the majority of the continuing partners. It is also provided in the said sub-clauses that such person shall not directly or indirectly accept professional work of any nature from such persons who are the clients of the firm. Clause 18(a) of the partnership deed provides that Mr. Philip shall first be paid out of the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Mr. Philip had retired from the partnership with effect from May 31, 2000 and Mr. Iyer and Mr. Merchant have retired from the partnership with effect from March 31, 2001. In the preamble itself it has been provided that the said partnership shall be continued from April 1, 2000 to March 31, 2001, and thereafter at will. The terms of the partnership are identical to the terms of the partnership deed dated March 30, 2001, except for clause 11, wherein it has been provided that each partner shall give a loan of amount specified in annexure II. The covenants relating to retirement are provided in clause 22 of the deed dated March 30, 2001. The covenants of clause 22 are identical to the covenants of clause 21 of the deed dated March 30, 2000. It has been provided in clause 21(b) and (c) the terms of annual payment to Mr. Philip and Mr. Merchant with effect from May 31, 2000/March 31, 2001. Clause 21(d) provides that a charge on income and assets and properties of the firm has been created for such payments and clause 21(e) provides for its deduction being a revenue expense of the firm before calculating the profits of the firm for distributing among the continuing partners. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided that the firm will not be dissolved on the death of any of the partners. The deed also provided that share of profits up to the date of retirement or death of partner shall be paid to his legal heirs. The firm was maintaining its accounts on cash basis, where such amount on account of outstanding fees was paid to the heirs of the deceased for the work done up to and during the period when the deceased persons were partners, was held to be income not arising to the firm. (ii) CIT v. C. N. Patuck [1969] 71 ITR 713 (Bom) : The assessee was a partner in the firm and he created a charge to the extent of Rs. 250 of its income in favour of his daughters, for which a charge was created by a tripartite agreement between the assessee, his daughters and the firm. It was held by the hon' ble High Court that the true test is whether the amount sought to be deducted in truth, never reached the assessee as his income. It was further held that "In deciding the question, the nature of obligation created in each case is the decisive test" . It was also held "In the creation of charge, no particular words are necessary. A charge may be created even without a writing. Whenever a particular pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not the income diverted by overriding title. In the light of the principles laid down by the apex court and various High Courts, we have to consider the agreement entered into between the parties in the present case. We have already referred to the relevant provisions of the partnership deed in the paras hereinabove. As per clause 21 of the partnership deed of the agreement dated March 30, 2000, the conditions are laid for the payments to be paid to a person on his retirement or on his becoming permanently incapacity or on the death of the partner. The clauses provide that all such payments are to be made irrespective of whether or not the firm is in profit but it is further provided that the said payments shall be made from the future profits of the firm. The clauses also provided that the payments to the retiring partner/partners on their retirement, incapacity or death shall be restricted to the extent of 10 per cent. of the profits of the partnership in any accounting year and all the amounts above 10 per cent. of the profits of the partnership shall abate in profit sharing ratio. In the said deed dated March 30, 2000, clauses relating to retirement of Mr. Philip, Mr. Mercha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case 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 learned authorised representative for the assessee had relied on the decision of the co-ordinate bench of the Tribunal in the case of M/s. C. C. Chokshi and Co. v. Joint CIT. From the perusal of the facts in para 9 wherein clause 22 of the partnership deed has been incorporated it transpires that the amounts have been paid to the retiring partners on account of the following : (a)(i) amounts billed, but not received, (ii) work completed, but not billed, and (iii) work partly completed and not billed as at the date of death of retirement, as the case may be, having regard to the fact that the partnership follows the cash system of accounting, and (b) (i) in consideration of the retiring partner or the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. I. T. A. No. 2863/Mum/2006 : Revenue' s appeal : The only issue raised by the Revenue in its appeal is as under : " 1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 5,70,000 out of the petty cash expenses claimed made by the assessee." The assessee had debited Rs. 28,54,436 under the head other expenses. The claim of the assessee before the Assessing Officer was that the said expenses were incurred by way of petty cash expenses, i.e., cleaning and office charges, tea and coffee expenses, files transport and storage charges etc. The Assessing Officer disallowed 20 per cent. out of the said expenses on ad hoc basis. The Commissioner of Income-tax (Appeals) deleted the disallowance as no particular defect had been indicated by the Assessing Officer. The learned Departmental representative for the Revenue placed reliance on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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