LIBERTY CINEMA Vs. INCOME TAX OFFICER
INCOME TAX APPELLATE TRIBUNAL
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Y. Upadhyay, Vice President -
(1.) THE asscssee is a registered firm. THE last partnership deed was constituted on 4-2-1953. THE partners, according to the above deed, were Shri Nandlal Jalan, Vithalbhai Bhimji Mansata and Shiva Prosad Jaiswal. Shri Nandlal Jalan died on 24-4-1976. In Clause 4 of 1953 deed it was provided that the death of any partner shall not dissolve the partnership. THE legal representative of the deceased partner shall be admitted into the partnership in place of the deceased partner unless the legal representative elects to sell his shares to the surviving partners at a valuation to be agreed upon with him. THE continuing partners executed a fresh deed of partnership on 24-9-1976 in which it was indicated that none of the heirs and legal representatives of Shri Nandlal Jalan since deceased, has approached the parties to be admitted in the partnership in the place and stead of the deceased. However, at the time of making the profit and loss account and balance sheet a due provision was made for Rs. 41,967.63 out of the profits for the legal heirs in view of Section 37 of the Partnership Act. THE assessee claimed the deduction for the above amount. THE ITO did not discuss the issue in detail. He disallowed the claim of the assessee mentioning that the provision made was not admissible.
(2.) The assessee came in appeal before the Commissioner (Appeals) and contended that Clause 16 of the old deed provided that the assets and liabilities of the partnership upon dissolution shall be dealt with in accordance with the provisions of the Indian Partnership Act and since the account of the deceased partner was not settled, the legal heirs were entitled to one-third share in view of Sections 14 and 37 of the Partnership Act. The assessee placed reliance on Sections 14 and 37 of the Partnership Act. It was also stated that since the accounts were not settled, the legal heirs filed a suit in the Calcutta High Court in which the firm and the surviving partners were made parties. It was strongly urged that the amount of Rs. 41,967.63 was provided as per Section 37 of the Partnership Act which was obligatory on the surviving partners and, therefore, this amount was clearly allowable as business expenditure/diversion by overriding title or charge. The assessee relied on Vithaldas Thakordas & Co. v. CIT  14 ITR 822 (Bom.), V.N.V. Devarajulu Chetty & Co. v. CIT  18 ITR 357 (Mad.), CIT v. Harjivandas Vithal-das  60 ITR 613 (Guj.) and CIT v. Travancore Sugars & Chemicals Ltd.  88 ITR 1 (SC). The Commissioner (Appeals) made reference to the ITO and the ITO reported the matter indicating the following points:
(i) That, on the facts and in the circumstances of the case, the constitution of the new partnership between the surviving partners is such that profit-sharing ratio is 50 per cent each.
(ii) That the original partnership deed does not speak about the provision for allowing the retiring/deceased partner or his representatives any share of profits of the firm.
(iii) That nowhere the deceased partner exercised nor by (sic) his representatives about any option as contemplated in Section 37 of the Tndian Partnership Act.
(iv) That assuming but not admitting that any profit is payable to the deceased partner or his legal representative, this can be held as an appropriate portion of profits and not a liability for expenses.
(v) That the entry does not show that the liability is payable to late Nandlal Jalan.
(vi) That the capital account of the deceased partner has not been credited with the amount.
(vii) That the alleged liability is a mere provision and not an ascertained liability.
(viii) That the subsequent years' accounts prove that only interest has been charged and no annuity amount was charged in the profit and loss account.
(ix) That the interest charged in profit and loss account has not been credited in the capital account of the deceased partner in the assessment year 1978-79.
The Commissioner (Appeals), accordingly, discussed the arguments of the assessee but, however, he found that the legal heirs did not exercise their option in view of Section 37 of the Partnership Act. It was also noted by him that the assessee had only paid interest in the subsequent two years. He found that there was no agreement on the basis of which the profit and/or interest would have been paid to the legal heirs and finally he concluded that the assessee merely made a provision but there was no ascertained liability. Accordingly, he did not accept the claim of the assessee. The Commissioner (Appeals) in detail has discussed the matter in para 5 of his order as follows:
5. I have carefully considered the facts and circumstances of the case and the submission made before me. The point for determination is as to whether the amount of Rs. 41,967 can be allowed as business expenditure or as a diversion by overriding title. The learned Counsel for the appellant has laid a great emphasis upon Section 37 of the Partnership Act according to which it was obligatory on the surviving partners to make a provision of the deceased partner's share to the legal representatives. Section 37 of the Partnership Act provides that the legal representatives are entitled on the option to be exercised by them to such share of the profits as may be attributable to the use by the firm of the deceased partner's share of the property of the firm or to interest at 6 per cent per annum on the amount of his share in the property of the firm. In the present case the legal representatives have not exercised any option and the provision for one-third share has been made by the appellant suo moto. It appears that in the subsequent years instead of one-third of profits only interest has been provided. Since no option was exercised by the legal representatives it cannot be said that the amount provided by the appellant is in accordance with the provisions of Section 37 of the Partnership Act. In view of this the question that it is diversion at source by overriding title does not arise. It also cannot be allowed as a business expenditure since it is not an expenditure which is laid out for the purpose of carrying on business. The profits for this year amounted to Rs. 1,25,902 out of which one-third was credited to the annuity account and the remaining amount has been divided equally amongst the surviving partners. Thus the amount of Rs. 41,967 is clearly an appropriation of profits after the profits have been earned and is not an outgoing of the business. The learned Counsel for the appellant has relied upon several decisions as mentioned above but in these cases the facts were different. The payments made in all these cases were as per agreements and these payments were necessary for the carrying on of the business. In the present case the amount provided is neither on the basis of any agreement nor is in accordance with the provisions of Section 37 of the Partnership Act. Moreover, even if it is to be considered as business liability, it is clearly a provision and not a liability that has accrued. As mentioned above the amount has been provided suo moto and not according to any option exercised by the legal representatives. It has also not been credited to the deceased partner's account but has been taken to the liabilities account. If it was an ascertained liability which was definitely payable to the legal representatives, then there was no reason for not crediting the account of the deceased partner with this sum. Moreover in the current year one-third share has been provided while in the subsequent years only interest has been credited. This clearly shows that the quantification of the liability was also not fixed. I, therefore, agree with the ITO that it is a case of mere provision which cannot be allowed as a deduction. The addition of Rs. 4 is, therefore, sustained.
Shri N.K. Poddar, the counsel for the assessee, has filed a paper book containing 48 pages. The paper book included:
1. Copy of deed of partnership, dated 4-2-1953.
2. Copy of deed of partnership, dated 24-9-1976.
3. Extract of entry passed in journal in respect of liability under Section 37 of the Indian Partnership Act, 1932, to the estate of the deceased partner, N.L. Jalan, for the year ended on 31-3-1977.
(3.) BALANCE sheet and profit and loss account for the year ended on 31-3-1977.;
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