1994 P T D 886

[203 I T R 249]

[Bombay High Court (India)]

Before B.P. Saraf and U.T. Shah, JJ

COMMISSIONER OF INCOME-TAX

Versus

V.G. BHUTA

Income Tax Reference No. 113 of 1979, decided on 30/03/1993.

Income-tax---

----Income---Diversion of income by overriding title---General principles-- Firm---Clause in deed of partnership that on the death of a partner the firm need not be dissolved---Surviving partners empowered to continue partnership on payment to widow of deceased partner the share of profits of the deceased accrued up to his death and an amount equal to the share of profits which would have accrued to him for a period of one year from the date of his death---Payments made under such clause not diverted by overriding title-- Payments relating to period prior to accounting year---Not deductible in any case.

The true test for finding out if there has been diversion of income by an overriding charge 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 factor. There is a difference between an amount, which a person is obligated 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.

The assessee was a partner in a firm. The other partners were GMB and MKT. Clause 18 of the partnership deed provided that the firm would not stand. dissolved on the death of a partner but the surviving partner or partners would succeed to the shares of the deceased partner in the partnership deed. This clause required the surviving partners to pay to the legal representative of the deceased partner as the price of such share the following amounts: (a) The amount, if any, standing to his credit in the books of the partnership; (b) the amount of his share in the net profits accrued up to the date of his death: (c) the amount of his share in the net profits accrued due for a period of one year from the date of his death, if the partnership subsisted for such period; (d) the amount of his share in the reserve fund with all accumulations of interest, if any, up to the date of his death. Sub-clause (e) of clause 18 allowed the surviving partners to make the aforesaid payments within two years in order to enable them to pay the sum without affecting their business. This clause also provided that the partnership would stand dissolved if the surviving partners did not desire to take over the share of the deceased partner and to continue the partnership business. GMB died in September, 1963, and on his death the partnership was continued by the remaining two parties, viz. the assessee and MKT. A fresh partnership deed was drawn up and clause 15 of the new deed laid down conditions similar to clause 18 of the earlier deed. MKT died in November, 1967, and on his death the business was continued by the assessee as an individual. During the previous year relevant to the assessment year 1971-72, the assessee paid Rs.60,000 to the widow of GMB and Rs.99,333 to the widow of MKT. The assessee claimed these payments as deductions from his income on the ground that the said amounts were diverted before they accrued to the assessee. The Income Tax Officer rejected the contention of the assessee. However, the Appellate Assistant Commissioner and the Tribunal allowed the claim. On a reference:

Held: that the payments were on two counts. One was on account of the share of the deceased in the net profits of the firm accrued up to the date of his death. So far as this amount was concerned, there could not be any question of diversion of income because it was a part of the income of the firm for the relevant year and if the deceased partner had survived he would have got the same. In regard to the amount payable under clause 18(c) of the first deed and clause 15(c) of the second deed, this was the amount payable to the legal heirs as the price of the share of the deceased partners in the partnership. In the first case, it was equal to the amount of his share in the net profits accrued due for a period of one year from the date of his death if the partnership subsided for such period. In the second case also this amount was equal to the share of the deceased in the net profit accrued for a period of one year from the date of his death but the quantum of the profit in this case had to be determined on the basis of the last preceding financial year as per the income submitted to the income-tax authorities as may be certified by any chartered accountant: Both the partnership deeds did not make it obligatory on the part of the surviving partners to pay the above amounts. It was to be paid only if they wanted to take over the share of the deceased partner and to continue the partnership business. The above facts clearly indicated that what was paid under sub-clause (c) of clause 18 of the first partnership deed and clause 15 of the second partnership deed was by way of price of the share of the deceased partners in the partnership. It was at the most an application of income that accrued to the assessee. The surviving partners had been given time of two years in the first case and one year in the second case to pay the amount. There was nothing in these clauses to suggest that there was any diversion of income by overriding title. Even if it were assumed that the payment of the amounts in question was by way of diversion of income by overriding title, it would be a diversion in the earlier years. Under the deed of partnership, in the first case, the diversion would be out of the income for the period from September 6, 1963, to September 5, 1964, which would fall in the assessment year much before the year under consideration. So also in the latter case, even if it was diversion, the diversion would be from the income for the period from November 5, 1967 to November 4, 1968. The Tribunal was not justified in holding that the sums of Rs.60,000 and Rs.99,333 paid to the widows of the deceased partners did not constitute the assessee's income.

CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) applied.

Addl. CIT v. Rattan Chand Kapoor (1984) 149 ITR 1 (Delhi); Bose (K.C.) & Co. v. CIT (1985) 156 ITR 701 (Cal.); CIT v. Crawford Bayley & Co, (1977) 106 ITR 884 (Bom.); CIT v. Imperial Chemical Industries (India) (P.) Ltd. (1969) 74 ITR 17 (SC); CIT v. Mulla and Mulla and Craigie, Blunt and Caroe (1991) 190 ITR 198 (Bom.) and CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal.) ref.

G.S. Jetley (P.S. Jetley with him) for the Commissioner.

S.E. Dastur and S.J. Mehta with I.M. Munim for the Assessee.

JUDGMENT

DR. B.P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following question of law at the instance of the Revenue.

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs.60,000 and Rs.99,333 paid to the widows of the deceased partners did not constitute the assessee's income and was rightly excluded by the Appellate Assistant Commissioner from its total income?"

The reference relates to the assessment year 1971-72. The assessee is an individual and an architect by profession. He was carrying on his profession in partnership with his father, Shri G.M. Bhuta, and one Shri M.K. Talpade as partners under the name and style of Messrs G.M. Bhuta and Associates. Clause 6 of the partnership deed provided that the name and goodwill of the business would belong to Shri G.M. Bhuta absolutely. Clause 18 further provided that the firm would not stand dissolved on the death of a partner but the surviving partner or partners would succeed to the share of the deceased partner in the partnership business including assets and effects and would undertake all the debts, liabilities and obligations of the partnership in the proportion in which they held their respective shares. This clause also required the surviving partners to pay to the legal representative of the deceased partner as the price of such share the following amounts.

(a) The amount, if any, standing to his credit in the books of the partnership.

(b) The amount of his share in the net profits accrued up to the date of his death.

(c) The amount of his share in the net profits accrued due for a period of one year from the date of his death, if the partnership subsisted for such period.

(d) The amount of his share in the reserve fund with all accumulations of interest up to the date, if any, of his death.

Sub-clause (e) of above clause 18 allowed the surviving partners to make the aforesaid payments within two years in order to enable them to pay the sum without affecting their business. This clause also provided that the partnership would stand dissolved if the surviving partners did not desire to take over the share of the deceased partner and to continue the partnership business.

Clause 19 of the partnership deed also provided that in the event of the death of Shri G.M. Bhuta, the surviving partners shall be required to pay to his wife. Tarabai Gopalji Bhuta, so long as the partnership continued, in addition to the amounts payable under clause 18, a sum of Rs.500 per month for and during her lifetime provided that the net profit of the partnership during the year amounted to at least Rs.24,000. It was further provided that in the year in which the net profit was less than Rs.24,000 the amount payable to her would be proportionately reduced.

Shri G.M. Bhuta died on September 5, 1963, and on his death the partnership was continued by the remaining two partners, viz., V.G. Bhuta and Talpade. A fresh partnership deed was drawn up on March 31, 1964, effective from the date of death of Shri G.M. Bhuta, that is, September 5, 1963. Clause 15 of the new partnership agreement provided that in the event of the death or retirement of Talpade, the goodwill of the business shall belong to the remaining partner. Shri V.G. Bhuta. It further provided that in the event of death or retirement of Talpade, Shri V.G. Bhuta would pay to his heirs or to him as price of his share, the following amounts:

(a) The amount, if any, standing to his credit in the books of the partner.

(b) The amount of his share in the net profit up to the date of his death or retirement as per the method of accounting adopted by the firm.

(c) The amount of his share in the net profits accrued due for a period of one year from the date of death or retirement, the quantum of profit being determined on the basis of the last preceding financial year as per the income submitted to the Income-tax authorities as may be certified by any chartered accountant.

(d) The amount of his share in the reserve fund with all accumulations of interest up to that date, if any, at the time of his death or retirement.

The above clause also enabled Shri V.G. Bhuta to pay the aforesaid amount within one year so that his business might not suffer.

Shri Talpade died on November 4, 1967. On his death the business was continued by Shri V.G. Bhuta, the assessee in the present case, as an individual.

In the previous year relevant to the assessment year 1967-68, the assessee paid Rs.30,000 to Tarabai, the widow of the deceased partner, Shri G.M. Bhuta, who had died on September 5, 1963, under clause 18 of the partnership deed, dated March 7, 1960. He paid a further sum of Rs.6,000 to her under clause 19 of the said deed. The Income Tax Officer disallowed the deduction of Rs.30,000 and the same was confirmed by the Appellate Assistant Commissioner. The assessee filed an appeal before the Tribunal. The Tribunal dismissed the appeal on October 15, 1973, and rejected the assessee's contention that the said sum of Rs.30,000 was diverted to Mrs. Tarabai by an overriding title before it accrued to him as his income. The Tribunal was of the opinion that the assessee had utilized the income earned by him for paying the price of the share of the deceased partner to his legal representative, Mrs. Tarabai. It appears that the assessee did not pursue the matter any further and accepted the above finding of the Tribunal as final.

During the previous year relevant to the assessment year 1971-72, to which this reference relates, the assessee paid Rs.60,000 to Mrs. Tarabai under various clauses of the partnership deed, dated March 7,1960, and Rs.99,333 to Mrs. Talpade under clauses 15(b) and (c) of the partnership deed, dated March 31, 1964. The assessee claimed these payments as deduction from his income on the ground that the said amounts were diverted before they accrued to the assessee. The Income Tax Officer rejected the contention of the assessee that the aforesaid amount was diverted to the widows of the two deceased partners by an overriding title before it accrued to him as his income. The Income Tax Officer held that the assessee had paid the said amount to them out of his income. He, therefore, disallowed the claim of the assessee for deduction.

On appeal, the Appellate Assistant Commissioner allowed both the claims on the ground that in view of the various clauses in the two partnership deeds, the amounts paid by the assessee stood diverted by an overriding title.

Against the order of the Appellate Assistant Commissioner the Revenue went in appeal to the Income Tax Appellate Tribunal ("the Tribunal"). The appeal of the Revenue was rejected by the Tribunal and the claim of the assessee for deduction of the two amounts in the year under reference was sustained.

Aggrieved by the order of the Tribunal, the Revenue applied for reference of the question of law set out above to this Court, which the Tribunal has done under section 256(1) of the Act.

The submission of counsel for the Revenue is two-fold. First, that the payment in question is payment of capital nature being the price of the share of the deceased partners paid to their successor and as such, the question of claim of deduction from the income of any such amount cannot arise. The second submission of counsel for the Revenue is that even if the contention of the assessee is to be accepted that by virtue of the relevant clauses of the two partnership deeds there was diversion by overriding title of the amount in question which were due in pursuance of the terms of the two partnership deeds, it will have no effect on the income of the assessment year under reference that is 1971-72, because on perusal of the relevant clauses of the partnership deeds it is clear that the diversion by overriding title was not in the year under reference but in different years, much earlier to that. In this connection, learned counsel referred to clause 18 of the first partnership deed under which Smt. Tarabai was entitled to get certain amounts. The amounts payable to her under clauses (b) and (c) represented the amount of the share of the deceased partner in the net profits of the firm accrued up to the date of his death and the amount of his share in the net profits that would have accrued for a period of one year from the date of his death, if the partnership subsisted for such period. Shri G.M. Bhuta died on September 5, 1963. His legal representative, that is Tarabai was entitled to the share of net profits of the firm accrued up to September 5,1963, and also the share in the net profits of the firm accrued due for a period of one year from that date, i.e. September 6, 1963 to September 5, 1964. Counsel also pointed to sub-clause (e) of clause 18 which allowed the surviving partners to make the aforesaid payment within two years so that their business might not suffer. Similar is the position under the next partnership deed, dated March 31, 1964. Under clause 15 thereof, on the death of Shri Talpade, the surviving partner, the assessee herein, was required to pay as price of his share, the amount of his share in the net profits up to the date of his death as per the method of accounting adopted by the firm and also the amount of his share in the net profits accrued due for a period of one year from the date of his death. The quantum of profit in the latter case was to be determined on the basis of last income submitted to the Income Tax Officer. Under the above clause, one year's time was allowed to make the payment so that his business might not suffer. Shri Talpade died on November 4, 1967. So, his widow was entitled to the profits up to November 4, 1967, and further profits accrued due for a period of one year from that date, that is, for the period from November 5, 1967 to November 4, 1968. The payment was to be made in one year computed from the date of the death which fell on November 4,1968 or even computed from the last date for which the profits were payable which fell on November 4, 1969. In the former case, under clause 18, the payment was to be made within two years from the date of death. The last date for payment, therefore, was September 5, 1965. The submission of counsel for the Revenue is that in case of diversion by overriding title, the date of payment is immaterial. The relevant year will be the year in which the income gets diverted. In that view of the matter, it is submitted that even if the contention of the counsel or the assessee regarding diversion of payment by overriding title is to be accepted, it might affect the income of the assessment years 1964-65 and 1965-66 in the first case and the income of the assessment years 1968-69 and 1969-70 in the second case. It cannot have any effect on the income of any year subsequent thereto.

On the basis of the above submissions, learned counsel for the Revenue submitted that the Tribunal was not justified in holding that the two amounts paid to the widows of the two deceased- partners in terms of the relevant clauses of the partnership deeds referred to above did not constitute the assessee's income for the assessment year under consideration, that is, 1971-72, and in confirming the exclusion of the same from the total income as allowed by the Appellate Assistant Commissioner.

Learned counsel for the assessee, Shri Dastur, on the other hand, submitted that there was diversion by overriding title and the assessee being a person maintaining his accounts on the cash system, he is entitled to claim deduction in the year in which the payment is made, irrespective of the year in which the amounts became payable. Counsel also submitted that the amounts in question were collected by the assessee only for convenience and, as such they did not even form part of his total income as they stood diverted at source to the two widows and vested in them. Counsel also pointed to certain disputes between the assessee and the two widows of the deceased partners as a result of which the amounts payable to them under the relevant clauses of the partnership deeds referred to above could not be quantified. According to him, once it is accepted that there is diversion of some income by over-riding title, in the case of an assessee maintaining the cash system of accounting, the year in which the diversion took place is immaterial. What is relevant is the date of payment.

In support of his contentions reliance is placed by learned counsel for the assessee on the decisions of this Court in the case of CIT v. Crawford Bayley & Co. (1977) 106 ITR 884 and CIT v. Mulla and Mulla and Craigie, Blunt and Caroe (1991) 190 ITR 198. Reliance is also placed on the decision of the Calcutta High Court m CIT v. Orient Supply Syndicate (1982) 134 ITR 12 and the Delhi High Court in Addl. CIT v. Rattan Chand Kapoor (1984) 149 ITR 1.

We have given our careful consideration to the rival submissions of counsel for both the parties. The payments made in the instant case by the assessee evidently are not revenue expenditure. These can be either capital expenditure being the price of the share of the deceased partners payable to their legal representatives or it can be a case of diversion of income by overriding title. Earlier in the previous year 1967-68, when two sums of Rs.30,000 and Rs.6,000 were paid to Smt. Tarabai, widow of the deceased partner, Shri G.M. Bhuta, under clause 18 of the first partnership deed, dated March 7, 1960, the claim of the assessee for deduction of the same on the ground of overriding title was not accepted by the Tribunal. It was held to be payment of price of the deceased partner's share to his legal representative. No deduction was allowed. The facts and circumstances in the case under reference are the same. In the first case, the payment is under the same deed Of partnership to the very same person. In the second, though there is a minor difference in the relevant clauses, substantially, they are similar to those in the earlier deed. According to counsel for the assessee, the decision of the Tribunal in respect of the earlier year cannot operate as res judicata and in that view of the matter, the nature of the payment should be decided afresh in this case.

As earlier indicated, on a perusal of the facts and circumstances and the relevant clauses of the two partnership deeds, it is clear that the payment in question is not a revenue expenditure. It can be either a capital expenditure or diversion of income by overriding title or application of income after it has been earned by the assessee. We do not propose at this stage to examine the question whether payment of the amounts in question is capital in nature. We will first examine the controversy as to whether there was any diversion of income by overriding title or it was a case of application of income after it had been earned by the assessee. We will also examine whether even assuming that it is a case of diversion of income by overriding title, it can have any effect on the assessee's income for the assessment year under reference, that is, 1971-72, because in view of the relevant clauses of partnership deeds, even if it was a case of diversion, it was diversion of income of the particular year which can affect the income of that year only and no other year.

It may be expedient to reiterate at this stage that the payment was on two counts. One was on account of the share of the deceased in the net profits of the firm accrued up to the date of his death. So far as this amount is concerned, there cannot be any question of diversion of income because it was a part of the income of the firm for the relevant year and if the deceased partner would have survived he would have got the same. In the event of his death, the amount due to him up to the date of his death would, in the absence of anything to the contrary, go to his legal heirs. The only dispute that can be raised is in regard to the amount payable under clause 18(c) of the first partnership deed and clause 15(c) of the second partnership deed. This is the amount payable to the legal heirs as a price for the share of the deceased partners in the partnership. In the first case, it is equal to the amount of his share in the net profits accrued due for a period of one year from the date of his death if the partnership subsisted for such period. In the second case also this amount is equal to the share of the deceased in the net profit accrued for a period of one year from the date of his death but the quantum of the profit in his case has to be determined on the basis of the last preceding financial year as per the income submitted to the Income-tax authorities as may be certified by any chartered accountant. It may also be noted here that both the partnership deeds do not make it obligatory on the part of the surviving partners to pay the above amounts. It was to be paid only if he wanted to take over the share of the deceased partner and to continue the partnership business. If he did not want to do so, he might refuse to pay this amount to the legal representatives of the deceased partner and in that case the partnership would stand dissolved.

The above facts clearly indicate that what is paid under sub-clause (c) of clause 18 of the first partnership deed and clause 15 of the second partnership deed is by way of price of the share of the deceased partners in the partnership. It is at the most an application of income that accrued to him. The surviving partner has been given time of two years in the first case and one year in the second case to pay the amount. We do not find anything in these clauses to suggest that there was any diversion of income by overriding title.

What is diversion of income by overriding title is no more a subject- matter of legal controversy. As observed by the Supreme Court in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (at 374):

"The true test for the application of diversion of income by an overriding charge, 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 deducible; 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 ad 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..." (Emphasis supplied).

To the same effect is the decision of the Supreme Court in CIT v. Imperial Chemical Industries (India) (P.) Ltd. (1969) 74 ITR 17, where the question of overriding title again came to be considered by the Supreme Court. In this case, it was observed (at page 24):

"An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of income. An obligation to apply the income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible. The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted in truth never reached the assessee as his income."

Considering the facts of the present case in the light of the judgments of the Supreme Court, we do not find that there was any diversion of income at source by overriding title. Sub-clause (c) of clauses 18 and 15 of the two partnership deeds respectively put an obligation on the surviving partners to pay certain amounts by way of price of the share of the deceased partner to his legal representative. Even the payment was not to be made immediately and it could be deferred for a period of two years in the first case and one year in the second case. All these factors clearly go to show that it is a case of application or apportionment of income and not of diversion by overriding title. The fact that the application was to discharge an obligation undertaken by the assesses the decision of this Court in CIT v. Crawford Bayley & Co. (1977) 106 ITR 884, where the payment by the surviving partner to the legal representative of the deceased partner was held to be payment by reason of an overriding title. It was also under the relevant clause of the partnership deal, which required the surviving partner to make payment at the rates specified therein during her lifetime. We have considered the above judgment and also the clauses of the partnership deeds set out therein. We find that the payment to the widow of the deceased partner under the partnership deed in that case was not dependent upon the assessee-firm having any profit or loss. It was an absolute obligation and even though there may be no profit in a particular year made by the assessee-firm, the obligation to pay to the widow under the relevant clauses of the partnership deed was there. It is in the light of such clauses of the partnership deed under which the payments were made to the widow of the deceased partner, that it was held by this Court in that case that it was a case of diversion of income by an overriding charge.. This Court observed (at page 889):

"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 clause 33 of the partnership deed, Annexure `A', and clauses 8 and 34 of the partnership deed, Annexure "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 profit whatsoever may have been made. This provision shows that it is an obligation in the nature of trust. (Emphasis supplied).

From the above discussion, it is clear that the ratio of this decision has no application to the facts of the present case.

Reference was also made to another decision of this Court in CIT v. Mulla and Mulla & Craigie, Blunt and Caroe (1991) 190 ITR 198. In that case also the test laid down by the Supreme Court in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 was applied to the facts of that case. In that case, the assessee, a firm of solicitors, was under an obligation in terms of the deed of partnership to pay outstanding fees for the work done up to and during the period when the deceased persons were partners. It was held by this Court that the amount so paid to the heirs of the deceased partner cannot be assessed as the income of the firm. This decision also had been rendered in an altogether different context and does not help us in deciding the controversy before us.

Learned counsel for the assessee also referred to the decision of the Calcutta High Court in CIT v. Orient Supply Syndicate (1982) 134 ITR 12 and of the Delhi High Court in Addl. CIT v. Rattan Chand Kapoor (1984) 149 TTR 1. So far as the Calcutta decision is concerned, it relates to the deduction of payment made by way of contribution to the employees' provident fund in fulfilment of statutory liability. The question for consideration was in which year the deduction can be claimed. Similarly, in the Delhi case also, the controversy was in regard to the year in which the sales tax liability of the assessee could be allowed as a deduction. In both the cases the Court considered the method of accounting followed by the assessee. Learned counsel for the assessee tried to lay emphasis on the fact that the assessee in the present case had been maintaining the cash system of accounting and, as such, the amounts in question though diverted in the earlier years, could be claimed as deduction from the income of the year in which they were paid because the delay was caused due to some dispute in regard to the quantum.

We do not find force in the above submission. The question of the year of payment will be relevant only in a case where the deduction is claimed from the income. Where the assessee's case is one of diversion of income, it has nothing to do with the year of payment. The charge must be on some income of some specific property or business of a particular year or years and the result of the diversion will be that the income so diverted will be deemed never to have accrued to the assessee in that year, and even if it is collected by him, it shall be deemed to be collected by him as a trustee. It must be remembered that under section 4 of the Income Tax Act, the charge is on the income of each year and if a particular amount was ordinarily to form part of the income of that particular year but for the diversion thereof by reason of overriding title. It is the income of that particular year alone which shall get reduced by such diversion and of no other year.

Reference may also be made in this connection to the decision of the Calcutta High Court in KC. Bose & Co. v. CIT (1985) 156 ITR 701. This was also a case of a firm of chartered accountants. Here also the partnership deed provided for payment to the widow of the deceased partner of certain speed amounts. A claim was made that the amount paid to the widow amounted to diversion of income by way of overriding title. The Calcutta High Court, while deciding the controversy discussed the various decisions of the Supreme Court as also the decision of this Court in CIT v. Crawford Bayley and Co. (1977) 1(K ITR 884. Referring to the decision of this Court, it was observed by the Calcutta High Court that the payment made to the widows in the Bombay case was not dependent on the profit or loss of the firm but was an absolute obligation in the nature of the trust which the widows could enforce and it was held in this context to be a case of diversion of income by overriding title. The Calcutta High Court in the above decision, on a perusal of the relevant clause of the partnership deed, clearly held chat the payment made by the surviving partners to the widows of the deceased partners could not be held to be an overriding charge. It was held (at page 713):

"It appears that the surviving partners agreed to apply a part of the income of the partnership for the purpose of discharge of a limited obligation. It also cannot be held that the income of the subsequent partnership did not accrue fully in the hands of the partnership or any part thereof was diverted by an overriding title or that the said partnership had become only a collector of the said amounts for the widow."

On a careful consideration of the various decisions referred to above and applying the test laid down by the Supreme Court in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 to the facts of the present case, we are of the clear opinion that this is not a case of diversion of income by overriding title. It is a clear case of application of income in fulfilment of a legal obligation after it has arisen or accrued to the surviving partners. In that view of the matter, the question of overriding title or allowing the deduction from the income cannot arise.

However, under the facts of the present case even if it is assumed for a moment that the payment of the amounts in question was by way of diversion of income by overriding title, then also it will not make any difference in so far as the outcome of the case is concerned because the deduction has been claimed by the assessee in the instant case in the assessment year 1971-72. If it be a case of diversion of income it will be diversion in the earlier years. Under the deed of partnership, in the first case, the diversion will be out of the income for the period from September 6, 1963 to September 5, 1964, which will fall in the assessment year much before the year under consideration. So also in the latter case, even if it is diversion, the diversion would be from the income for the period from November 5, 1967 to November 4,1968. This also will be from the income of the previous year relevant to an assessment year, which is earlier to the year under consideration. That being so, even if the contention of the assessee in regard to diversion of income by overriding title is accepted, it will make no difference to the result of this case. So far as the contention based on the system of accounting followed by the assessee is concerned, we have already made it clear that it cannot have any relevance in the case of diversion of income by overriding title, moreso in a case like the present one where under sub-clause (c) of clauses 18 and 15 of the partnership deed what was diverted was a share of the income accrued which was a part of the income accrued during the particular period of one year. Thus, the diversion, if at all, was to take place from the income of that particular year and the payment thereof also was to be made within a period of two years and one year respectively which again clearly goes to show that this payment and nothing to do with the system of accounting followed by the assessee or the actual date of payment.

In the light of the foregoing discussion, we are of the clear opinion that the Tribunal was not justified in holding that the sum of Rs.60,000 and Rs.99,333 paid to the widows of the deceased partners did not constitute the assessee's income. In that view of the matter, we answer the question referred to us in the negative, that is, in favour of the Revenue and against the assessee.

Under the facts and circumstances of the case, we make no order as to costs.

M.BA./154/T.F.

Order accordingly.