T.D Sugla, J.:— The Tribunal has referred to this court the following question of law under section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,29,053 collected by the assessee-firm and paid by it to the estate of the deceased partners during the year of account ended March 31, 1969, in terms of the partnership deeds dated March 20, 1968, March 17, 1969, and July 10, 1969, constituted the income of the present firm for the assessment year 1969-70?”

2. The reference is at the instance of the Department. The assessee is a reputed firm of solicitors. Its accounts are maintained on the cash basis. The deed of partnership involved in this reference is of September 1, 1967, which was effective from April 1, 1967. Clause 11 of the said deed provided that the partnership was not to be dissolved but to be continued in the event of the retirement, insolvency or death of any partner. Clause 16 of the deed provided that, in the event of the retirement or death of any partner, the retiring partner or the estate of the deceased partner, as the case may be, was to be entitled to the share of profits of the firm for all the work done by the firm up to the date of his retirement or death, as the case may be. It also provided for the manner of computation of the share of profit for the work done by the firm up to the date of retirement or death and for the manner of payment of such a share or shares, i.e, at a time or by instalments.

3. One of the partners, N.K Petigara, died on December 31, 1967. A new partnership deed was thereafter drawn up on March 20, 1968, which was effective from January 1, 1968. Clauses 3 and 4 of this deed reiterated what was provided for in clause 16 of the deed of partnership dated September 1, 1967, which was operative when late N.K Petigara was a partner. Clause 6 of the deed dated March 20, 1968, further provided that all other terms and conditions of the partnership agreement dated September 1, 1967, would remain in full with force and effect.

4. Another partner by name S.S Khambata died on February 5, 1969. A new deed of partnership was thereafter drawn up on March 17, 1969, which was effective from February 6, 1969. Clauses 3, 4 and 6 of this deed of partnership were similar to clauses 3, 4 and 6 of the partnership deed dated March 20, 1968.

5. In view of these three partnership deeds, the heirs of the aforesaid two deceased partners became entitled to the share in the profits of the firm for the work done by the firm up to the date of their respective deaths and the continuing partners were under a legal obligation to make payment of the share of the deceased partners in the profits of the firm for the work done by it up to the date of their deaths to their legal heirs.

6. The assessee filed its return of income for the assessment year 1969-70 declaring a total income of Rs. 10,49,186. This included the sum of Rs. 2,29,053 which was received by it on behalf of the deceased partners and which it was under a legal obligation to pay to the heirs of the two deceased partners. Subsequently, a claim was made that this sum should not be treated as the income of the assessee-firm as it never belonged to it. The Income-tax Officer rejected the claim and completed the assessment treating the aforesaid amount as the assessee's income for the year. The Appellate Assistant Commissioner accepted the claim and directed the Income-tax Officer to exclude the aforesaid sum of Rs. 2,29,053 from the total income.

7. The Department filed an appeal against the order of the Appellate Assistant Commissioner. By its order dated November 28, 1974, the Tribunal upheld the order of the Appellate Assistant Commissioner. The Tribunal has given categorical findings in paragraphs 8 and 9 of its order. It held that the partners of the firm constituted under the partnership deed dated September 1, 1967, doubtless earned the income arising out of the work done by them up to December 31, 1967, regardless of the question whether the payment was received before or after December 31, 1967. Similarly, the partners of the firm constituted under the partnership deed dated March 20, 1968, without doubt earned the income arising from the work done up to February 5, 1969, regardless of the question whether the actual payment was received before or after that date. This indisputable position, according to the Tribunal, was merely reaffirmed in clauses 5 and 6 of the partnership deed dated March 20, 1968, and clauses 3 and 4 of the partnership deed dated March 17, 1969. According to the Tribunal, the income earned in respect of the work done up to December 31, 1967, was the income of the partnership deed executed on September 1, 1967, and the then partners alone were entitled to share it. Similarly, the income from the work done for the period from January 1, 1968, to February 5, 1969, belonged to the firm constituted under the partnership deed dated March 20, 1968, and only the partners thereof were entitled to share the same. The successor-firms merely took upon themselves the function of collecting the outstanding fees which really belonged to the predecessor-firms merely as agents of the predecessor-firms and not in their own right. They collected the income belonging to the predecessor-firms for the sake of convenience and because a number of partners of the successor-firms were interested in the said income. The income was, thus, collected by them as agents or trustees and did not constitute their income. From these and other findings given in the aforesaid two paragraphs, the Tribunal came to the conclusion that the sum of Rs. 2,29,053 collected by the assessee-firm was not its income assessable to tax.

8. It is submitted before us by Dr. Balasubramanian, learned counsel for the Revenue, that it is a case of a firm continuing with a change in its constitution. Section 187 defines what constitutes a change in the constitution of a firm. It being a mere change in the constitution of the firm, the assessment, according to Dr. Balasubramanian, is required to be made on the firm as constituted on the date of the completion of the assessment in respect of its entire income. Merely because the legal heirs of the deceased partners were to be paid certain amounts from year to year computed on the basis of the work done by the successor-firms for the period in which they were partners, it does not follow that any income accrued to them as distinct from its accrual to the firm. A contract, he stated, cannot alter the statutory concept of accrual or receipt of income. By merely providing in the partnership deeds that the retired or deceased partners shall be entitled to a share in the income for the work done up to the date of their being partners in the firm does not mean that the amounts so received do not represent the income of the assessee-firm. Placing reliance on the provisions of section 176(4) of the Act, Dr. Balasubramanian stated that if, in the case of discontinuance of a business or profession, a person who was in receipt of income was assessable, there was all the more reason that it would be so in the case of a continuing firm.

9. Shri Pardiwala, learned counsel for the assessee, on the other hand, referred to the findings given by the Tribunal in paragraphs 8 and 9 of its order. We stated that the question involved herein was squarely covered by the Calcutta High Court's decision in the case of CIT v. G. Basu and Co. [1990] 182 ITR 472 and the Madras High Court decision in the case of V.M.V Devarajulu Chetty and Co. v. CIT [1950] 18 ITR 357. He also placed reliance on our court's judgment in the case of CIT v. Crawford Bayley and Co. [1977] 106 ITR 884. He emphasised that the amounts in question were never received by the assessee-firm as, its income. In any event, they were diverted at source by an overriding title so much so that this amount could not be taxed as the assessee's income. In reply, Dr. Balasubramanian pointed out that these decisions are distinguishable inasmuch as the concept of change in the constitution of a firm was not noticed in those decisions. As regards the Madras decision, he stated that the concept of change in the constitution was not obtaining at the relevant time.

10. We have already referred to the Tribunal's findings in detail in the third paragraph of the judgment. We are in agreement with the Tribunal that in view of clauses 11 and 16 of the deed of partnership dated September 1, 1967, to which both late Shri N.K Petigara and Shri Khambata were parties and in view of clauses 3, 4 and 6 of the two partnership deeds dated March 20, 1968, and March 17, 1969, the assessee-firm was under a legal obligation to pay the share of the deceased partners in the income of the firm for the work done by the firm up to the date of the death of the aforesaid two partners to their legal heirs. As held by the Tribunal, these amounts were collected by the assessee-firm merely as agents of the predecessor-firms and not in their own right. They collected the income belonging to the predecessor-firms for the sake of convenience and as, except for these two partners, all the other partners were common. They included the amount receivable on behalf of the continuing partners in the income of the firm.

11. We have no difficulty in holding that in the facts of the case, the Calcutta High Court decision in CIT v. G. Basu and Co. [1990] 182 ITR 472 is squarely applicable. In the Calcutta case, two firms were carrying on practice as chartered accountants. They were facing certain troubles on account of disputes and differences among the partners. The dispute was referred to an arbitrator for settlement. Pursuant to the award of the arbitrator and in consequence of the deed of retirement, three partners of one of the firms retired in December, 1969. As per the terms of the deed of retirement, certain specific items of outstanding fees were directly assigned to the retiring partners. The question arose whether those outstanding fees which were directly assigned to the retiring partners represented the income of the firm. Observing that there was a legal obligation in terms of the deed of retirement to pay in a particular manner the erstwhile partners in respect of realisation of fees after their retirement, it was held to be an instance of the source of income being subject to an obligation. The outstanding fees paid to the retiring partners as per the terms of the deed of retirement were held not assessable as the income of the firm. Incidentally, the Calcutta High Court had, in this regard, referred to and relied upon the Supreme Court decision in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 and the Madras High Court decision in the case of Devarajulu Chetty (V.N.V) and Co. v. CIT [1950] 18 ITR 357.

12. September 20, 1990: In the present case, the assessee-firm was under a legal obligation in terms of the deed of partnership dated September 1, 1967, and the clauses in the two subsequent partnership deeds to pay outstanding fees for the work done up to and during the period when the deceased partners were partners. This was also an instance of the source of income being subject to an obligation. We are in agreement with the Calcutta decision and hold that the amounts so paid by the assessee-firm to the heirs of the deceased partners cannot be assessed as the income of the firm.

13. In Devarajulu Chetty (V.N.V) and Co. v. CIT [1950] 18 ITR 357 (Mad), the facts were slightly different though the principle involved was the same. A firm of five partners started a wholesale business in piece-goods in September 1940. In October 1942, two of the five partners retired from the firm whereafter the three surviving partners continued the business under the same name and style. Each of the two outgoing partners was paid a certain amount for his share of the assets and profit of the old firm up to the date of dissolution. In respect of certain forward contracts for the purchase of piece-goods from abroad that had already been entered into by the old firm but the deliveries under which had not been effected, the stipulation, as a result of arbitration, was that the new firm would pay the two old partners a sum of Rs. 18,911 in respect of their interest in the goods and their share of profits to be realised on the sale of the goods. Here again, the Madras High Court held that the payment was by the new firm under a legal obligation and was not in truth the income of the new firm.

14. In a slightly different context, this question came up before our court in the case of CIT v. Crawford Bayley and Co. [1977] 106 ITR 884. In that case, one of the partners had died. The partnership deed under which the business was carried on when he was also a partner contained a stipulation that the widows of the deceased partners would be made some payments monthly. After his death, payments were made to his widow. A question arose whether the payments so made to the widow of the late partner represented the income of the new firm. Our court held, relying upon the Supreme Court decision in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, that the true test for the application of the rule of diversion of income by an overriding charge was whether ihe amount sought to be deducted, in truth, never reached the assessee as income. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of his income. Where as a result of an obligation, income is diverted before it reaches the assessee, it is deductible. As stated by us earlier, in the present case also, the amount of Rs. 2,29,053, the assessee-firm paid to the heirs of late Shri Petigara and late Shri Khambata under a legal obligation and the amount was never received by or reached the assessee-firm as its income. Accordingly, we answer the question referred to us in the negative and in favour of the assessee.

15. No order as to costs.