TMI Blog1999 (6) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... tence on 1-7-1985 when the firm by the same name was dissolved with three out of four partners retiring from the firm and the remaining partner Shri Darshan Suman Zaveri, the assessee in the present case, took over the business as a proprietary concern. The erstwhile firm came into existence as per partnership deed dated 2-7-1984 w.e.f. 1-7-1984. Prior to the constitution of the partnership, the same business was done by a Trust under the name and style 'Zaveri Trust', which came into existence as per a deed of settlement dated 15-9-1980 w.e.f. 1-10-1980. With effect from 1-7-1983, the Trustees transferred the business together with all the assets and liabilities to the beneficiaries and accordingly all the beneficiaries later constituted a partnership firm w.e.f. 1-7-1984 as aforesaid. 4. Thus, it may be seen that Zaveri Trust was doing the business for about 4 years after which the partnership under the name and style 'Suman Zaveri Co.' took over the business and continued till 30-6-1985 after which the business was continued by one of the partners of the erstwhile firm as a proprietary concern. 5. On 20-8-1985, the assessee, Shri Darshan Suman Zaveri, entered into three id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Trust. The partnership was at will and so could be dissolved at any time. The provisions in the partnership deed that the retirement of partner by death or otherwise will not result in dissolution of the firm and the remaining partners could continue the business under the same name and style also show that the partners were well aware of the fact that this business had hardly any goodwill. If the business had any goodwill, a provision would have been made in the partnership deed that on retirement of a partner, the share of goodwill would be credited to the account of the outgoing partner. Such is not the cash here. Further, in the dissolution deed dated 1-7-1985, there was no mention of any goodwill. The very nature of the business of the assessee would show that there was no goodwill attached to the business. After analysing some of the case laws cited before him, the CIT(A) did not find any merit in the assessee's contention that there was diversion of income by overriding title. He, therefore, held that the payment of compensation to three erstwhile partners was only an application of income. Since the assessee claimed it as an expenditure, the provisions of section 40A(2) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee disputed the arguments of the Revenue to the effect that there was no goodwill. It is pointed out that the business was in existence from 1980 and since the same trade name was used by the Trust and the partnership and now by the assessee, the business had a goodwill in the market, which was really an asset which belonged to all the partners of the erstwhile firm and, therefore, the licence agreement entered into on 20-8-1985 was perfectly a valid legal document under which the assessee was bound to pay the licence fee as claimed. The learned counsel relied on various pages of the paper book submitted by him in support of his contention. 10. We have considered the rival submissions and the evidence on record. We have also considered various case laws cited on behalf of the assessee and the Revenue during the course of hearing before us and also as appearing in the assessment order, appellate order and the paper book submitted by the assessee. In our view, there are various questions to be decided for arriving at a proper conclusion in respect of the controversy raised in this appeal. The first issue that arises for consideration is whether the erstwhile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and liabilities of the partners inter se were settled once for all as per the accounts finalised as on 30-6-1985. It is after one and a half month i.e., on 20-8-1985 that the licence agreement was executed between the assessee and the other three partners. Legally speaking, Shri Darshan Suman Zaveri was not under any obligation to enter into such a licence agreement as on 20-8-1985 because there was no express provision, as we have stated earlier, either in the partnership deed or in the retirement deed to the effect that the partners had a share in the goodwill of the firm. The only inescapable conclusion that can be drawn in the circumstances is that Shri Darshan Suman Zaveri at his own option or on his volition entered into the licence agreement with the other three parties. Since it was entirely left to him to enter into such a contractual obligation or not, the additional liability incurred by him can only be treated as an application of income earned by him from the business in his capacity as proprietor of the concern. 12. In the light of our observations in the preceding paragraph, it follows that there was no diversion of income at source by overriding title because ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 in 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 even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee who continued 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty. For the assessment year 1962-63, it was claimed that the sum of Rs. 10,000 was the income of the college and hence not part of the appellant's income on the ground that the sum of Rs. 10,000 had got diverted by overriding title to the college and ceased to be the appellant's income. The Appellate Tribunal rejected the contention and the High Court, on a reference, affirmed the decision of the Tribunal. On appeal to the Supreme Court: Held, affirming the decision of the High Court that the appellant family's agreement with the company was only that Rs. 10,000 out of the rent due should be paid directly to the college. This was only a mode of application of the income of the family which made no difference to its liability to pay tax on the entire rent of Rs. 21,000 which had accrued to the family. Nor did the fact that the college had been given a right by the four-party agreement to sue for and recover Rs. 10,000 directly from the company in case of default alter the position. The creation of a charge in favour of the college did not make any difference. It only obliged the company to pay a part of the rent to the college on behalf of the family, but the existence of a mere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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