9911796707
TMI Blog2012 (9) TMI 698X X X X Extracts X X X X X X X X Extracts X X X X ..... s.1,19,38,802/- filed on 28.10.2005 by the assessee, a partnership firm carrying on the profession of Ophthalmology surgeons, was processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act). During the course of assessment proceedings for the AY 2007-08, the Assessing Officer[AO in short] noticed that Mrs. Mehru Minoo Shroff w/o Late Dr. M.S. Shroff , deceased partner of the firm, continued to receive 2% of the gross receipts subject to a maximum of Rs.3 lacs in terms of deed of partnership dated 1.4.2003. According to the AO, this was merely an arrangement to reduce the tax liability of the firm and therefore, the amount of Rs.3 lacs paid to Ms. Mehru Minoo Shroff was disallowed in the AY 2007-08. In the light of his findings in the AY 2007-08, the AO reopened the assessment for the year under consideration u/s 147 of the Act, after recording reasons in writing, with the service of a notice u/s 148 of the Act issued on 30.03.2010. In response, the assessee submitted that return filed on 28th October, 2005 may be treated as return in response to notice u/s 148 of the Act. During the course of reassessment proceedings, the AO referred to clause 13 of partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership dated 01.04.2003. Dr. M.S. Shroff died on 15.03.2004. Vide order sheet entry dated 19.10.2010, assessee was asked to show cause why charge on receipts not be disallowed being payment made to wife of ex-partner of the firm who has no reason to be paid since the said charge has been debited to the P & L a/c of the firm. Vide submission dated 20.11.2009; assessee submitted that the amount payable to Mrs. Mehru Minoo Shroff was a charge on the income of the firm. It was diversion of income by an overriding title which was created vide valid agreement. It is seen that the partnership firm was a family partnership comprising of Late Dr. M.S. Shroff. The claim of the appellant would be rejected on the following grounds: - (i) The said claim is not 'expenditure' in true sense. (ii) The wife of the deceased partner has no claim on the firm's name. The goodwill i.e., the name of the partnership firm was not the property of anyone individual. Even if it is considered that the firm has earned a name J goodwill over a period of year, the sustain ability of the firm's name would largely depend on the work done by the present partners. Any new work, in the absence of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed amount in monthly installment was a disposition of property after death in nature of a conditional bequest and could not be held to be a transaction of sale simpliciter - Held, yes - whether merely because surviving partners agreed to apply a part of income of partnership for purpose of limited obligation, in could not be held that income of subsequent partnership did not accrue fully in hands of partnership or any part thereof was diverted by an overriding title or that said partnership had become only a collector of said amounts for widow - Held yes - Whether, therefore, said amounts were not allowable as deduction from total income of assessee - Held, yes." In view of the reasoning [(i to iii) supra], the claim of Rs.300000 j - as (Annuity)" is disallowed. I have perused the case laws cited by the appellant. The facts of the present case are different and distinguishable from the case laws relied upon by the appellant. I have duly considered the contention of the Assessing Officer and also perused the case law i.e. KC Bose & Co. Vs CIT 156 ITR 701 (Cal.) (1985). The Assessing Officer has rightly disallowed the claim of Rs..300000/- paid to Mrs. Shroff. The order of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wife is not surviving will be entitled to receive 2% of the gross receipts every year for a period of 10 years from the date of death subject to a maximum of Rs.9,00,000/- per annum from the continuing Firm or from the Partner who carries on the profession under the name and style of SHROFF EYE CENTRE. This amount will be first charge on the receipts of the continuing Firm/Partner." 5.2 The plea of the assessee is that the amount payable to Mrs. Mehru Minoo Shroff was a first charge on the receipts of the firm in terms of aforesaid clause 13 of the partnership deed dated 1.4.2003 and was, thus diversion of income by an overriding title, which was created under a valid agreement. The ld. AR relied upon the number of decisions in this connection .In Sitaladas Tirathdas (supra) ,Hon'ble Apex court while referring to decisions in Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC) and in P.C. Mullick's case [1938] 6 ITR 206 (PC) laid down a test to determine as to whether or not income is diverted before it reaches the assessee and observed as under:- "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. If regard be had to the relevant provisions of the partnership deeds, Annexs. 'A', 'B' and 'C', it is quite apparent that this is not a case of application of income after it accrued due to the assessee, but it is clearly a case of diversion of income by an overriding title in respect of payment. Under these partnership deeds the assessee-firm is to continue for an indefinite period and it is not going to be dissolved by mere death or retirement of any partner. There is a clear and explicit provision in all the partnership deeds that upon an active partner becoming a sleeping partner or upon the death or retirement of any active partner, the surviving or continuing active partner or partners shall succeed to the share of the outgoing active partner in the partnership business and the property and goodwill thereof. The surviving or continuing active partners are also to undertake all the debts, liabilities and obligations of the partnership. Thus, it is quite clear having regard to these provisions that even though a partner may cease to be a partner by reason of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d part during the continuance of the partnership, their shares in the goodwill of the firm would automatically pass on to the continuing partners and as a consideration therefor, in the case of the party of the first part, his widow will be credited with a sum of Rs. 50,000 and in the case of the party of the third part, his widow will be credited with sum of by Rs. 16,000 debiting the amounts to the goodwill account. These sums of Rs. 50,000 and Rs. 16,000 will be repayable at the rate of Rupees three hundred only per month to the widow of the party of the first part or to her nominee in case of her demise prior to the full repayment of Rs. 50,000 and at the rate of Rupees one hundred only per month to the widow of the party of the third part or her nominee in case of her demise before the full payment of Rs. 16,000. These monthly instalments of Rs. 300 and Rs. 100 will be payable on the last working day of the month for which the instalments are due. For the due payment of these amounts all assets including outstanding fees, cash and bank balances would remain charged. This would, however, not affect the settlement of account of any retiring or deceased partner in terms of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the widows could enforce, Hon'ble High Court concluded. But such are not the facts and circumstances in the appeal before us. In the instant case, in terms of clause 13 of the partnership deed dated 1.4.2003, absolute obligation is cast on the continuing Firm or the Partner/s who carry on the profession under the name and style of SHROFF EYE CENTRE. In Subramaniam Brothers.(supra) the deed of partnership imposed an absolute obligation on the surviving partners to realise the commission that accrued up to the date of retirement and pay the same to the retired partners. This obligation has to be discharged irrespective of the fact whether the assessee-firm had made a profit or not and, equally the retired partners had an enforceable right to receive the said commission. The obligation, on the part of the assessee to pay to the retired partners arose upon the receipt of the commission and the commission was earned for the work done prior to their retirement. The substance of the entire transaction was that the assesse firm was collecting money as a trustee for and on behalf of the retired partners. The assessee, as soon as the amount was collected, had to hand over the money wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he could claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title ; 6. In the light of view taken in the aforesaid decisions, there being an absolute contractual obligation imposed on the continuing firm/partners in terms of clause 13 of the partnership deed executed on 1.4.2003, the assessee firm is required to pay the amount @ 2% of the gross receipts subject to maximum of 3 lacs pa to Mrs. Mehru Menoo Shroof and this amount being the first charge on receipts of the continuing firm/partners ,apparently, there would be a diversion of income by overriding title. Indisputably, a similar claim has already been accepted by the AO in the AY 2004-05 & 2006-07. In view of the foregoing, we have no alternative but to allow ground no.2 in the appeal . 7. Ground no.3 in the appeal relates to disallowance on account of repairs. During the course of assessment proceedings , the assessee submitted details of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on thereon and the reasons for the decision. The requirement of recording of reasons and communication thereof by the quasi- judicial authorities has been read as an integral part of the concept of fair procedure and is an important safeguard to ensure observance of the rule of law. I t introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. Hon'ble jurisdictional High Court in their decision in Vodafone Essar Ltd. Vs. DRP,196 Taxman423(Delhi) held that when a quasi judicial authority deals with alis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. We may point out that a 'decision' does not merely mean the 'conclusion'. I t embraces within its fold the reasons forming basis for the conclusion. [Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)] .As already observed, the impugned order suffers from lack of reasoning and is not a speaking order on the disallowance out of repairs and maintenance. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
