Back
1988 Supreme(Kar) 355
Karnataka High Court
Commissioner of Income - tax, Karnataka-II Bangalore - Appellant
Versus
Pompei Tile Works - Respondent
Decided On : 08-12-88
I.T.R.C. : 128 of 1983
G.Sarangan, H.RAGHAVENDRA RAO, K.SRINIVASAN INDRAJEETH SHAH
The main legal point established in the judgment is that the payment to Mrs. Margaret Pinto constituted a diversion of income by an overriding title, and the payment was necessary for the purpose of carrying on the business.
Headnote:
Income Tax - Partnership Deed - 1961 - 1975 - Clause-5 - Diversion of Income - Over-riding Title - Mrs. Margaret Pinto - Assessment Year 1976-77
Fact of the Case:
Partnership deed dated 1st November 1961 formed a partnership with a provision for a share of 25% of profit or loss to Mrs. Margaret Pinto. Serious misunderstandings and disputes arose, leading to a new partnership in 1975. Mrs. Margaret Pinto ceased to be a partner and died issueless. The new firm claimed that 25% of the profits credited to her account did not constitute a part of the assessee's income.
Finding of the Court:
The Tribunal held that an effective and valid charge was created in favor of Mrs. Pinto, which was enforceable in the court of law. The income of the firm to that extent was diverted by an overriding title, and the amount paid to and credited to Mrs. Pinto's account was not taxable in the hands of the Department.
Issues: The main issues were whether the payment to Mrs. Margaret Pinto constituted a diversion of income by an overriding title, and whether the payment was necessary for the purpose of carrying on the business.
Ratio Decidendi: The court found that the payment to Mrs. Pinto constituted a diversion of income at the source, and the obligation for diversion of income to her came into existence at the time when the new firm came into existence. The court also held that the payment was necessary for the purpose of carrying on the business.
Final Decision: The court rejected all contentions raised by the Revenue and answered the questions in the affirmative and against the revenue.
( 1 ) UNDER a deed dated 1st of November 1961 (i) Mr. Francis Xavier Denis Pinto; (ii) mr. Harold Charles Pinto; (iii) Mr. Guthbert joseph Pinto; (iv) Mrs. Margaret Pinto and (v) Mrs. Deanna Lobo formed a partnership which provided for a share of 25% of profit or loss to Mrs. Margaret Pinto. The deed also provided that an outgoing partner had to give 3 months' notice of intention in writing to sever his/her connection with the partnership and the continuing partners had an option to purchase his/her share at a price as provided in clause-10 of the said deed. The purchase price was to be calculated in the manner provided in clause-10 of the deed. There is a provision in the deed for settlement of dispute amongst the partners by arbitration.
( 2 ) FOR some time prior to 1-4-1975 serious misunderstandings and disputes having arisen between Mrs. Margaret Pinto and other partners, Mrs. Deanna Lobo having expressed her desire for retirement from partnership and Mrs. Francis Xavier pinto having died, a new partnership was entered into between: 1. Mr. Harold Charles,pinto 2. Mr. Guthbert Joseph Pinto. 3 ). David J. Pinto Sons of deed. 4 ). Paul J. C. Pinter Francis Xavier pinto 5 ). Mrs. Beatrice Pinto (who replaced deanna-Lobo by a deed dt. 1-4-1975)
( 3 ) THE said partnership-deed provided, interalia, at clause-5, the following:"the profit or loss to be divided and distributed among the Partners as referred to above shall be ascertained in the manner prescribed hereinafter. The profit or loss for the working of the Firm shall be first ascertained by charging all the expenses incurred for the purpose of the business of the Firm and also after charging the interest paid or payable to the partners on their deposits and also any salary payable to the working and managing Partners. In case such annual working after charging interest and salary results in a profit, a sum representing 25% of such profits arrived at shall be charged to the profit and loss account towards the rights of Mrs. Margaret Pinto, who by her actions allowed herself to keep out of the partnership having certain rights conferred under law for the user of the partnership assets and her Partnership interest. The amount ascertained as payable to Mrs. Margaret Pinto under law as also under the covenants of this partnership Deed shall be a charge on the income of the Firm. Such income as is ascertained after making due provision towards the rights of Mrs. Margaret Pinto under law and by means of this agreement of the firm shall alone be the income of the Firm which is to be divided and distributed among the Partners. In the case of loss, Mrs. Margaret Pinto is entitled to 6% (Six) percent interest per annum on the amount outstanding to her credit and the loss so arrived at after providing for the interest on the amounts standing to her credit towards the user of assets of the firm and her partnership interest shall be the loss of the firm to be divided and distributed among the partners, in accordance with terms as set out above. "
( 4 ) IN the circumstances set-forth above, the said Mrs. Margaret Pinto ceased to be a partner of the firm and other partners with certain changes either on account of death or on account of retirement, as stated above, continued to carry on the business of the old firm without any settlement of accounts as between them and Mrs. Margaret Pinto who ceased to be a partner for whose benefit the aforesaid provision was made. Mrs. Margaret pinto died on 14-6-1975 issueless and there are disputes pending regarding the question of succession to her estate.
( 5 ) THE new firm that came into existence by the said deed dated 1-4-1975 is the asses- see in this case and for the assessment year 1976-77, it claimed that an amount of rs. 35,594/- calculated at 25% of the profits credited to the account of Mrs. Margaret pinto did not constitute a part of the assessee's income at all, but was diverted by an over-riding title or charge. The Asses
