COMMISSIONER OF INCOME-TAX, ...

VS CRAWFORD BAYLEY
& CO.
LAW OF DIRECT TAXATION
Bibliography
BACKGROUND OF THE CASE :
“In this case the question arises related to the assessment year 1950 -60 and 1963-64
from April 1 ,1957 the assessee was governed by the partnership deed which was dated
on march 14 1957 under the deed of partnership on that deed one of the partner was Mr.
V. R. Nath. And later he died on may 27 1958 after his death a new deed was produced
and came to existence from april 1, 1959. And this was called as a annexure B latter
MR .D.T Lawrie who was a partner of this firm also died and after his death also a
supplementary deed was came into existence which was known as the annexture c”

The clause 33 of the annexure a contains a condition that

" In the event of death of an active partner or a sleeping partner leaving a widow, the
continuing active partners shall during her life (or until the firm is wound up as provided
in clause 38) make to such widow a monthly payment equivalent to Rs. 15 for each year
of her husband's service as a partner prior to his death, or his becoming a sleeping
partner, whichever be the earlier, but subject to a maximum payment of Rs. 300 per
month and under deduction of any income-tax payable by the widow in respect of such
monthly payment."

The total payment of 3,000 was made as a payment to MRS Nanth at the rate of rs 3000
per month so it is deducted in the financial assessment year 1959 -60

In the event of death of the sleeping partner leaving a widow the active partner should
pay Rs 50 each year of her husband's service as a partner prior to his death, or his
becoming a sleeping partner, whichever be the earlier, but subject to a maximum
payment of Rs. 1,000 per month and under deduction of any income-tax payment by the
“widow in respect of such monthly payment. If there are two or more widow the
aggregate amount payable to them shall be limited to Rs 2,500 per month payable to
each. The payment made to Mrs. Nath was claimed as deduction in the assessment year
1960-61 and the payments made to Mrs. Nath and Mrs. Lawrie were claimed as
deductions in the assessments for the subsequent years, i.e., 1961-62 onwards.”

‘But this was rejected by the income tax officer for a reason that the widow was not
parties to the agreement so they not have a right to claim the amount and liability over the
company and the payment made to them is purely voluntary and it is open to the
partners to receive or the stop the payment as the commissioner stated this the firm
appel to the appellate assistance commissioner. The appel was dismissed . In a further
appeal by the assessee-firm before the Appellate Tribunal it was urged on behalf of the
assessee that payments made to Mrs. Nath and Mrs. Lawrie represented amounts that
were diverted from the firm's coffers by an overriding title and that as the legal
representatives of Mr. Nath and Lawrie did not receive anything towards the goodwill of
the firm the payments to Mrs. Nath and Mrs. Lawrie should be looked upon as the rent of
goodwill so as to be allowable as business expenditure. On the other hand, it was
contended on behalf of the revenue that the payments made to Mrs. Nath and Mrs.
Lawrie constituted application of income after it accrued to the assessee-firm and that
there was no binding obligation for making these payments as it was open to the partners
to dissolve the firm and enter into a fresh agreement whenever a partner died without
undertaking any liability towards the widow of the deceased partners. The Tribunal took
the view that the obligation to pay an annuity to the widow of any deceased partners was
not an undertaking .”
 “Each partner when he entered into the firm as a partner knew that on his death or
retirement the firm is not going to be dissolved because it was expressly provided in the
partnership deed that the firm will continue indefinitely. Ordinarily, when a partner dies
or retires, the firm is dissolved and accounts are drawn up and the retiring partner or in
the case of the death of a partner his legal representative will be entitled to a share in the
goodwill of the firm and the properties of the firm. In the present case, the outgoing
partner or the legal representative of a deceased partner was only entitled to get back his
capital and that too in installments without interest. Provision for payment to a widow of
the deceased partner was made on a modest scale. The Tribunal rejected the contention
on behalf of the revenue that the widow had no enforceable right against the surviving
partners, or the obligation to pay was a mere voluntary obligation.”

JUDGEMENT AND THE RELEVENT PROVISSION :

“ If regard be had to the relevant provisions of the partnership deeds, annexures "A", "B"
and "C", it is quite apparent that this is not a case of application of income after it accrued
due to the assessee, but it is clearly a case of diversion of income by an overriding title in
respect of payment. Under these partnership deeds the assessee-firm is to continue for an
indefinite period and it is not going to be dissolved by mere death or retirement of any
partner. There is a clear and explicit provision in all the partnership deeds that an active
partner becoming a sleeping partner or upon the death or retirement of any active partner,
the surviving or continuing active partner or partners shall succeed to the share 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 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 profits whatsoever may have been
made. This provision shows that it is an obligation in the nature of trust. Ordinarily, it is
true that a person who is not a party to the contract cannot enforce it, but there are several
well recognized exceptions to this rule. One of the well recognized exceptions is a cestui
que trust. In a cestui que trust even though a person may not be a party to a contract he
can enforce his right under contract by adopting appropriate legal proceedings. Such is
the case so far as the rights of a widow of a deceased partner under these partnership
deeds are concerned. Such payments have to be made by reason of an overriding title and
there is no question of income being applied by the assessee-firm after it accrued to it.
Further, it should be noted that no question of allowing an expenditure under section
10(2)(xv) of the Indian Income Tax Act, 1922, or the corresponding provisions of the
Income Tax Act, 1961, arise in the present case, because deduction is claimed not as an
expenditure under the exception but it is claimed by way of payment made in respect of
items which are obligations in the nature of trust and such payments are required to be
made before the income even accrued to the assessee. Since a deduction is permissible
under section 10(1) of the Act the question whether it is permissible under section 10(2)
(xv) does not arise for consideration. THE REVENUE SHALL PAY THE COSTS OF
THE ASSESSEE.”
 ByBY

CHARRAN SA

BC0180010