The main legal point established in the judgment is that payments made to retiring partners can be allowable deductions under Section 37 of the Indian Partnership Act, 1932, if they represent an overriding title.

( 1 ) THE Tribunal, Allahabad, has referred the following question of law under Section 256 (1) of the IT Act, 1961 (hereinafter referred to as "the Act"), for opinion to this Court ;

"whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee is entitled to claim a deduction of Rs. 62,865 is legally correct ?"

( 2 ) BRIEFLY stated, the facts giving rise to the present reference are as follows : the reference relates to the asst. yr. 1977-78. The respondent-assessee is a firm originally consisting of the following partners : 1. Shri Hari Prasad 2. Smt. Uma Devi 3. Shri Jiwat Ram Sharma 4. Shri Jai Kishan Sharma (son of No. 3)5. Shri Risat Das 6. Smt. Manjoo Jain 7. Shri Shyam Sunder Das 8. Shri Madan Mohan Das as per the terms of the deed, the heirs of the deceased partner were to step into the shoes of the deceased partner. Shri Jiwat Ram Sharma died on 11th May, 1975, and the firm closed its accounts upto 10th May, 1975. On 29th May, 1975, Smt. Savitri Devi and Shri Jai Kishan sharma, wife and son of late Shri Jiwat Ram Sharma, gave a notice to retire from the firm, accounts were again closed on 31st May,. 1975. On 1st June, 1975, fresh deed of partnership was executed by the remaining partners along with Shri Jagmohan Das. The period of notice given by Smt. Savitri Devi and her son expired on 1st Sept. , 1975. Thereafter, accounts were settled and Rs. 70,000 being the capital plus interest, were paid to Smt. Savitri Devi and her son on 4th Oct. , 1975. Further, on 6th Oct. , 1975, Smt. Savitri Devi was paid Rs. 41,910 and Shri Jai kishan Sharma was paid Rs. 20,955 in addition to the capital and interest. The respondent claimed deduction of above amount of Rs. 62,865. The ITO did not accept the claim on the ground that liability should have been claimed in the asst. yr. 1976-77 as the respondent was following mercantile system of accounting. Against the assessment order, the respondent preferred an appeal before the CIT (A ). He did not accept the reasoning of the ITO for disallowing the respondents claim for deduction of Rs. 62,865. He did not agree with the ITO that the "payment made to a retiring partner over and above his capital is an admissible deduction in the hands of the firm". As such, he was of the opinion that the payment made to Smt. Savitri Devi and Jai Kishan Sharma, was not an allowable deduction either under Section 28 or Section 37 of the Act. Accordingly, he dismissed the appeal. Being aggrieved by the said order of the CIT (A), the respondent preferred a further appeal to the tribunal. The Tribunal noticed that there were no sales during the period 1st July, 1974 to 10th may, 1975, and 11th May, 1975 to 31st May, 1975. The Tribunal also observed that there were some sales during the period 1st June, 1975 to 30th June, 1975, but the same belonged to remaining partners as Smt. Savitri Devi and Shri Jai Kishan Sharma had already given a notice that their accounts be settled. The Tribunal further observed that settlement was arrived at on 4th oct. , 1975, in the accounting year relevant to the assessment year under appeal and, therefore, after receiving Rs. 62,865, these two persons executed a release deed. The Tribunal further held that the remaining partners continued to use the capital and stock-in-trade in which these two persons had an interest. The Tribunal, therefore, held that the respondent was entitled to claim deduction of Rs. 62,865. As a result, the Tribunal allowed to that extent appeal and deleted the addition of Rs. 62,865.

( 3 ) WE have heard Sri Shambhoo Chopra, the learned standing counsel for the Revenue, and Sri abhinav Upadhyaya, the learned counsel for the Respondent.

( 4 ) THE learned counsel for the Revenue submitted that Smt. Savitri Devi never opted to become a partner of the firm and Shri Jai Kishan Sharma was held to be a benamidar of late Jiwat Ram sharma. Since the respondent was following the mercantile system of acc