If third person entitled to receive under obligation from assessee cannot be consider as diversion of income

Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
Facts, in brief, as per relevant orders are that return declaring income of ``1,19,38,802/- filed on 28.10.2005 by the assessee, a partnership firm carrying on the profession of Ophthalmology surgeons, was processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act). During the course of assessment proceedings for the AY 2007-08, the Assessing Officer[AO in short] noticed that Mrs. Mehru Minoo Shroff w/o Late Dr. M.S. Shroff , deceased partner of the firm, continued to receive 2% of the gross receipts subject to a maximum of ``3 lacs in terms of deed of partnership dated 1.4.2003. According to the AO, this was merely an arrangement to reduce the tax liability of the firm and therefore, the amount of ``3 lacs paid to Ms. Mehru Minoo Shroff was disallowed in the AY 2007-08. In the light of his findings in the AY 2007-08, the AO reopened the assessment for the year under consideration u/s 147 of the Act, after recording reasons in writing, with the service of a notice u/s 148 of the Act issued on 30.03.2010. In response, the assessee submitted that return filed on 28th October, 2005 may be treated as return in response to notice u/s 148 of the Act. During the course of reassessment proceedings, the AO referred to clause 13 of partnership deed dated 01.04.2003, stipulating that in the event of death of the partner wife of the partner or his legal heirs in the event wife is not surviving, shall be entitled to receive 2% of the gross receipts every year for a period of 10 years from the date of death subject to a maximum of `3 lacs in case of first partner viz. Dr. M.S Shroff and `6 lacs in the case of remaining two partners.. Dr. M.S. Shroff died on 15.03.2004. Consequently, partnership was reconstituted in terms of partnership deed executed on 15.3.2004 . The clause 13 was also modified. To a query by the AO during the course of reassessment proceedings, the assessee replied that amount payable to Mrs. Mehru Minoo Shroff was a first charge on the receipts of the firm, being diversion of income by an overriding title. However, the AO did not accept the submissions of the assessee and disallowed an amount of ``3 lacs.

Citation :
Shroff Eye Centre, A-9, Kai lash Colony, New Delhi-48 (Appellant) Vs. Assistant CIT, Ci rcle-37(1), Room no. 401,4th f loor, N Block, Vikas Bhawan, New Delhi [PAN AABFS 6789 D ] (Respondent)