TMI Blog1980 (4) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... rietor of the business carried on in the name of the assessee-firm which was then an unregistered firm. The assessee later took his two sons, Shri Jal and Shri Minoo, as partners and formed a partnership. The partnership agreements were changed from time to time, but we are concerned with the deed of partnership dated 24th September, 1963, by which Shri Nariman was made a sleeping partner as from 1st April, 1963, because he was disabled from working as a partner. Each of the two sons was given 37 1/2 paise profits in the partnership and the father, Shri Nariman, was a partner to the extent of 25 paise as against 50 paise originally. One of the clauses on the construction of which the decision of the present reference depends was cl. 17, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two partners, Shri Jal and Shri Minoo. Shri Nariman died on or about 16th May, 1964. The total amount payable to Smt. Aloo in the assessment year in question, that is, 1965-66, came to Rs. 15,638 in respect of which the firm made a claim for deduction. The ITO rejected this claim on the ground that (1) the payment was not for earning the profits of the business, (2) the widow was the mother of the two surviving partners and the payment was made for considerations other than business, and (3) the payment was not a charge on the profits since nothing could have prevented the partners from dissolving the partnership. Before the AAC, it was contended on behalf of the assessee that the said amount of Rs. 15,638 did not constitute a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the firm and, to that extent, the income of the firm was diverted by an overriding title and the amount paid to Smt. Aloo was, therefore, not taxable in the hands of the firm. At the instance of the revenue, arising out of this order of the Tribunal the following question has been referred to this court: "Whether, on the facts and in the circumstances of the case, it was rightly held that there was a valid charge in favour of Mrs. Aloo on the profits of the firm and to that extent the income of the firm was diverted by an overriding title ? " Having heard the counsel for the parties, we are satisfied that the case is expressly covered by the decision of this court in Patuck's case [1969] 71 ITR 713 (Bom). The Division Bench has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere a charge is created, the Division Bench observed in Patuck's case [1969] 71 ITR 713 (Bom) as follows at page 721: " ........ the Supreme Court laid down that where a charge is created or, upon the facts and circumstances, a charge can be found, it would not be a case of mere application of a portion of his income by the assessee to discharge an obligation but a case in which an overriding charge is created by the assessee and he becomes only a collector of another's income. In other words, whenever a charge is created or exists, an overriding title is created in the charge-holder and, to the extent of the charge, the income of the assessee ceases to be his income, because the charge-holder has the payment right by virtue of his overri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the partnership firm. This 25% 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 partnership in cl. 17 was clearly such that the charge-holder, Smt. Aloo, had an overriding title to the 25% of the profits of the partnership. This amount of 25% of the income of the partnership was, therefore, liable to be clearly diverted before the profits reached the partners of the assessee-firm. Consequently, the question referred to us must be answered in the affirmative and in favour of the assessee. The revenue to pay the costs of this refere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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