VARMA & VARMA Vs. COMMR. OF INCOME TAX

JUDGEMENT

(1.) The judgment of the Court was delivered by Gopalan Nambiyar, C. J.-- The assessee is a firm of Chartered Accountants. The partnership is evidenced by document dated 17th August 1970 which took effect from 1st September 1970 Shri C. P. Parameshwara Rao one of the partners was entitled to 11 per cent share in the profits. He died on 1st November 1971. We are concerned with the accounting year which ended after his death on 31st August 1972. Clause 18 of the partnership deed provided as follows:-

(2.) The question for our consideration is whether the expenditure in question was incurred wholly and exclusively for the purpose of the business under S.37 of the Act; or whether the income having already accrued to the assessee, there was only a diversion of the said income for making the payment. In the former case, the amount would be deductible and in the latter not. An interesting account of the development of the doctrine of application of the income can be seen in the judgment in Devarajulu Chetty's case 18 ITR 357. Briefly stated, the source of the doctrine has been traced to the Pondicherri Railway Company's case ILR 1931 (54) Mad. 691 at 705 and the well known observation of Lord Macmillan therein that:

(3.) Turning to the terms of the Partnership Deed, clause 18 which we have extracted, says that the wife or the children of the deceased partner, in the contingency contemplated by the clause, shall be entitled to the gratuity at the rate of 10 per cent of the average annual share of income of the partner concerned ................... .