BHATT M G Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee, who is a qualified architect and civil engineer, was partner in a partnership firm called M/s. Kore and Bhatt, Civil Engineers and Surveyors. Apart from the assessee, there were two other partners in the firm, namely, Shri V. M. Bhatt, the son of the assessee, and one Shri R. M. Vadhelwalla. The assessee's share in the partnership firm was 33 1/2%, that of Shri V. M. Bhatt 15% and that of Shri Vadhelwalla 49 1/2%. The assessment year in question is 1962 -63. During that year, according to the assessee, he had entered into an agreement with one Shri K. G. Kapadia, who was already an employee of the firm on a salary of Rs. 500 per month, by which Shri Kapadia was to attend to the duties, which the assessee was supposed to perform, as directed by the assessee and the assessee was to share with Shri Kapadia the profits, which he would earn from the partnership firm, to the extent of 11%. The agreement in pursuance of which Shri Kapadia was to work is filed with the statement of the case as annexure B, which provides that in consideration of Shri Kapadia agreeing to help the assessee in attending to his business in the conduct of the business of the firm of M/s. Kore and Bhatt, the assessee shall pay from the said firm 11% of his share of profit to the party of the other part by way of annual remuneration and the assessee will retain the balance of 24.5% to himself. A further provision made was that the amount to be received by Shri Kapadia was to be reduced by the amount of remuneration which he would receive by way of salary from the firm of Messrs. Kore and Bhatt. In the assessment proceedings for the assessment year in question, the share of the assessee in the books of the firm worked out to Rs. 90,738 and the assessee claimed that out of this amount he had paid a sum of Rs. 22,116 to Shri Kapadia and he, therefore, claimed a deduction of that amount for the purposes of the assessment. The ITO took the view that the amount paid to Shri Kapadia was only an appropriation of the profits and was, therefore, not allowable and he brought to tax the entire income of Rs. 90,738 in the hands of the assessee.

(2.) IN appeal by the assessee, the AAC allowed the appeal and the revenue appealed against the AAC's order to the Tribunal. The Tribunal took the view that there was no agreement between the partners of the firm as such that any remuneration or share of profit should be paid to Kapadia for the work which he was supposed to do for the assessee. On the basis of a letter, which was addressed on behalf of the assessee by his chartered accountants to the ITO dated November 23, 1962, the Tribunal found that the assessee's inability to attend to the work appeared to have started only from 1959. The letter which is also annexed to the statement of the case as annexure G, shows that according to the assessee, in the year 1959, he had been warned by Dr. Shantilal Shah that his heart was not functioning property after his return from pilgrimage to Badri, Kedarnath and that if he continued to work as he used to do, he might get a stroke of paralysis. Therefore, according to the assessee, he had been working less 'and has been passing about six months in a year in quiet places in hill stations or sanatoriums'. This letter further states that if the assessee had not got this work done through Shri Kapadia, the only other possible alternative before his would have been either to part with his share of profits to the other partners or to allow the affairs of the partnership to suffer. The Tribunal, while framing the question which arose in the case which required to be determined, observed :

(3.) ON these facts, the question which has been referred to this court, at the instance of the assessee, is as follows :