TMI Blog2012 (9) TMI 698X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to pay the amount @ 2% of the gross receipts subject to maximum of 3 lacs pa to Mrs. Mehru Menoo Shroof, wife of deceased partner of the firm 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 no alternative but to allow ground in the appeal - in favour of assessee. Disallowance of General Repairs & maintenance expenses - Held that:- As the assessee has merely submitted a copy of ledger account in respect of expenditure exceeding above Rs.20,000/- each amounting to Rs.12,05,946/- while the details of expenditure below Rs.20,000/- are not available . Neither the AR nor the DR could explain the basis for disallowing the amount on repairs nor the impugned order is speaking one. Even the nature of repairs is not brought out in the impugned order nor it is stated that these repairs were current or otherwise. - Thus the order passed by the CIT(A) is cryptic and grossly violative of facets of the rules of natural justice for not passing a reasoned order, which should reflect appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 partnership deed dated 01.04.2003, stipulating that in the event of death of the partner wife of the partner or his legal heirs in the event wife is not surviving, shall 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.3 lacs in case of first partner viz. Dr. M.S Shroff and Rs.6 lacs in the case of remaining two partners.. Dr. M.S. Shroff died on 15.03.2004. Consequently, partnership was reconstituted in terms of partnership deed executed on 15.3.2004 . The clause 13 was also modified. To a query by the AO during the course of reassessment proceedings, the assessee replied that amount payable to Mrs. Mehru Minoo Shroff was a first charge on the receipts of the firm, being diversion of income by an overriding title. However, the AO did not accept the submissions of the assessee and disallowed an amount of Rs.3 lacs. 3. On appeal, the assessee contended that in terms of clause 13 of partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual. 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 main partner, Late Dr. Shroff, will come to the firm not based on goodwill but based on the performance of the firm which matters in the long run. (iii) Even if it is hypothetically assumed for the sake of discussion that the payment on account of goodwill is to be made as per the partnership deed, than the basis for arriving at a figure per month/annum from the firm for her lifetime is not provided in the deed. Even otherwise, the amount earmarked is very unreasonable. Allowing such claim distorts the true picture of net profit of the firm and such claims are not provided in the statutes either. (iv) Reliance is placed on the following case law of KC Bose Co. Vs CIT 156 ITR 701 (Cal.) (1985) "Diversion of income by overriding title" --- Meaning of. In determining whether there has been diversion of income by overriding title, it is the nature of the obligation which is the decisive fact. There is a difference between an amount whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer is sustained. Appeal on this ground is dismissed. 4. The assessee is now in appeal before us against the aforesaid findings of the ld . CIT ( A) . The ld . AR on behalf of the assessee while carrying us through clause 13 in the partnership deed dated 1.4.2003 15th March, 2004 mentioned that amount payable to Mrs. Mehru Minoo Shroff wife of Late Dr. M.S. Shroff was charge on the receipts of the firm. While referring to assessment order for the AYs 2004-05 and 2006-07, the ld . AR contended that their claim was allowable, following the principle of consistency. Since the amount payable to Mrs. Mehru Minoo Shroff was a charge on the receipts of the firm, the ld . AR while referring to decisions in CIT Vs. Sitaladas Tirathdas, (1961) 41 ITR 367, 374-5 (SC); CIT vs. Subramaniam Brothers , 236 ITR 148 ( Mad.) ; CIT vs. Sunil J Kinariwala,259 ITR 10(SC) and RSM Co. Vs. Addl . CIT (2010) 125 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [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. 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 follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee , who eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 his death, his legal representative will not be entitled to any share in the goodwill of the firm or compensation in lieu 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 cl . 33 of the partnership deed, Annex. A , and cls . 8 and 34 of the partnership deed, Annex. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00. 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 clauses 17 or 20 hereof." 5.41 The Tribunal in the aforesaid case , found that the assessee had purchased the share of late K.C. Bose in the goodwill of the firm on the death of the latter at a definite price of Rs.50 , 000 and thereby acquired a capital asset. It was held that the amount represented a capital expenditure even though it was to be paid in instalments over a period. The Tribunal held further that though the assets of the assessee including fees remained charged for the payment of the said amount, it would not make any difference in the nature of the expenditure and, as such, the assessee was not entitled to claim deduction of the said amounts on the ground that the same was being paid under an overriding title in favour of the widow. On appeal by the assessee , Hon ble High Court found that the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 without anything further to be done to the retired partners. Accordingly, Hon ble High Court held that there was an absolute obligation imposed on the continuing partners to hand over the commission to the retired partners and the income was diverted by overriding title. In a similar situation, in V. N. V. Devarajulu Chetty and Co. v. CIT [1950] 18 ITR 357, Hon ble Madras High Court held that that where a new firm which merely collected the money on behalf of the old firm and bank the same to the new firm (sic), the new firm could not be assessed. 5.5 In CIT v. Sunil J. Kinariwala [2003] 259 ITR 10, Hon ble Apex court, after referring to the decisions of the Privy Council in the cases of Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 and P.C Mullick v. CIT [1938] 6 ITR 206 and of the apex court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 expenses exceeding Rs.20,000/- each, amounting to Rs.12,05,946/- on account of repairs maintenance.The AO disallowed an amount of Rs.75,971/- out of general repairs and maintenance expenses of Rs.35,46,971/- on the ground that the expenses to that extent were unvouched. 8. On appeal, the ld. CIT(A) upheld the findings of the AO, finding no reason to interfere with the assessment order. 9. The assessee is now in appeal before us against the aforesaid findings of the ld . CIT ( A) . The ld . AR on behalf of the assessee while relying decision dated 9.4.2010 in ACIT Vs. Talbros Engineering Ltd. in ITA no. 4166/Del./09 for the AY 2004-05 and Shanker Trading Co.(P) Ltd. Vs. ACIT, 152 Taxman 49(Delhi) contended that adhoc disallowance could not be made. On the other hand, the ld . DR supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 foregoing, especially when the ld. CIT(A) have not passed a speaking order , we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the aforesaid issue, afresh in accordance with law, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the ld. CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act ,bringing out clearly the nature of repairs ,whether current or otherwise. With these observations, ground no. 3 in the appeal is disposed of . As a corollary, ground no. 2 in the appeal does not survive for our adjudication at this stage 11 Ground no.4 relating to reopening of assessment was not p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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