Payment made to retiring partners & its deduction on the ground that its diversion of income by overriding title-

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M/S Deolite Haskins & Sells, … vs Acit Non Corp Circle 1 (1) Formerly … on 6 December, 2018

Cross Objector) अपीलाथ क ओर से/ Appellant by : Mr.AR.V.Sreenivasan,JCIT,D.R यथ क ओर से /Respondent by : Mr.S.P.Chidambaram,Advocate सन ु वाई क तार ख/Date of Hearing : 06-12-2018 घोषणा क तार ख /Date of Pronouncement : 06-12-2018 आदे श / O R D E R PER JOGINDER SINGH, VICE PRESIDENT:

These three appeals filed by the Revenue are against the common order of the Commissioner of Income-tax (Appeals)-

2, Chennai dated 31.07.2017 for assessment years 2010-11, :- 2 -: ITA Nos.2578 to 2580/chny/2017 C.O.Nos.47to 49/Chny/2018 M/s.Deloittee Haskins & Sells 2013-14, 2014-15 and correspondingly, the assessee filed Cross Objections challenging the reopening of assessments for assessment year 2010-11 & common ground with respect to the addition of payment to retired partners u/s.37(1) of the Income Tax Act,1961 (herein after in short ‘the Act’).

2. During hearing the ld.D.R Shri AR.V.Srinivasan ( with respect to Ground No.2) defended the addition made by the ld.

Assessing Officer whereas Shri S.P.Chidambaram ld.Counsel for the assessee defended the impugned order and consequent relief granted to the assessee on merits. The ld.Counsel for the assessee contended that the issue in hand is covered in favour of the assessee by the decisions of the Tribunal in the assessee’s own cases vide order dated 08.02.2018 in ITA No.1517/Chny/2017 for assessment year 2012-13 & dated 25.11.2016 in ITA No.2077/Mds./2016 for assessment year 2011-12.

3. We have considered the rival submissions and perused the material available on record. Before adverting further, we are reproducing hereunder the aforesaid order of the Tribunal dated :- 3 -: ITA Nos.2578 to 2580/chny/2017 C.O.Nos.47to 49/Chny/2018 M/s.Deloittee Haskins & Sells 08.02.2018 for assessment year 2012-13 for ready reference and analysis.

“1. This appeal by the Revenue and the Cross objection by the assessee arise out of the order of the Learned Commissioner of Income Tax(Appeals)-2, Chennai [in short the ld CIT(A)] in Appeal No.71/CIT(A)-2/2015-16 dated 28.03.2017 against the order passed by the ACIT, Non-Corporate Circle-1, Chennai [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 31.03.2015 for the Assessment Year 2012-13.

2. The only issue to be decided in the appeal of the revenue is as to whether the ld CITA was justified in deleting the disallowance made in respect of payment of Rs 1,58,56,741/- made to retired partners in the facts and circumstances of the case.

3. The brief facts of this issue is that the assessee is a firm of chartered accountants and had filed its return of income for the Asst Year 2012-13 on 28.9.2012 declaring total income of Rs 10,70,28,740/-. Later the assessee filed a revised return of income on 31.3.2014 declaring total income of Rs 10,70,28,740/- i.e same as original return and claimed TDS credit of Rs 12,65,52,009/- as against the original TDS credit of Rs 10,16,17,748/- and claimed consequential refund thereon of Rs 9,34,80,130/- in the revised return. In the course of assessment proceedings, the ld AO sought to disallow the payment to retired partners in the sum of Rs 1,58,56,741/- among other disallowances. The assessee explained that during the Asst Year 2012-13, professional fees of RS 1,58,56,741/- were diverted by overriding title to the ex-partners or spouses of deceased partners (herein referred to as ‘retired partners’) as per partnership deed.

The above amount of Rs 1,58,56,741/- was reduced from the gross professional fees of Rs 140,42,63,926/- credited to the profit and loss account. The assessee vide reply letter dated 12.3.2015 explained the transaction elaborately and justified its claim of deduction u/s 37(1) of the Act. The ld AO however examined the details and explanations filed by the assessee and held that the payment is an application of icnome and accordingly brought the same to tax. The ld AO also rejected the alternate claim of the assessee holding that the payment made to the retired partners is not expenditure to carry on the business but it was a gratuitous payment. Before the ld CITA, the assessee submitted that though the very same issue was decided against the assessee by his predecessor ld CITA, the assessee had ultimately succeeded the said issue before this tribunal for the Asst Year 2011-12 in ITA No. 2077/Mds/2016 and ITA No. 2079/Mds/2016 dated 25.11.2016. The ld CITA respectfully following this tribunal decision in assessee’s own case for the Asst Year 2011-12 supra, deleted the addition made by the ld AO. Aggrieved, the revenue is in appeal before us on the following grounds:-

1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case.

2. The Ld. CIT(A) erred in deleting the disallowances made in respect of payment of Rs. 1,58,56,741/- made to retired partners claimed by the assessee on account of diversion of income by over-riding title.

2.1. The Ld. CIT(A) erred in deleting the disallowance without appreciating the fact that the provisions of Sec. 40(ba), clauses(i) & (ii) of 40(b) allow deduction of expenditure only if remuneration is payable to any partner of the firm and not a retired partner.

2.2. The Ld. CIT(A) failed to appreciate that the payments made to retired partners are not diversion of income on account of over- riding title but mere application of income on account of self imposed obligations.

2.3 The Ld. CIT(A) failed to appreciate that the doctrine of diversion of income by reason of overriding title applies only in cases where the income never reaches the assessee as his income. Whereas in the instant case the assessee had received the income and diverted it and therefore it was mere application of income.

3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) may be set aside and that of the AO restored.

4. The ld DR argued that this tribunal while deleting the addition made for Asst Year 2011-12 had placed reliance on the co- ordinate bench decision of Mumbai Tribunal in the case of C.C.Chokshi & Co. vs JCIT in ITA Nos. 492 to 495/Mum/2003 for the Asst Years 1995-96 to 1997-98 , wherein on identical facts, it was held that the payment is by overriding title but not an application of income. The ld DR argued that this decision has been distinguished by yet another decision of Mumbai Tribunal in the case of S.B.Billimoria & Co. vs ACIT reported in (2010) 125 ITD 122 (Mum) dated 19.12.2008. Accordingly he pleaded that the latest decision of Mumbai Tribunal dated 19.12.2008 would hold the field as on date and prayed for restoration of the order of the ld AO in this regard.

5. In response to this, the ld AR submitted that the decision of Mumbai Tribunal in the case of C.C.Chokshi & Co in ITA Nos. 492 to 495/Mum/2003 dated 24.2.2006 had been approved by the Hon’ble Bombay High Court and placed the copy of the said order before us. Accordingly, he argued that the issue under consideration has been settled in favour of the assessee by the decisions of Hon’ble Bombay High Court in the following cases :-

a) CCIT vs C.C.Chokshi & Co. in ITA No. 209 of 2008 and 193 of 2008 dated 25.7.2008 :- 6 -: ITA Nos.2578 to 2580/chny/2017 C.O.Nos.47to 49/Chny/2018 M/s.Deloittee Haskins & Sells

b) ACIT Vs A.F.Ferguuson & Co. in ITA No. 87 of 2011 dated 21.7.2011

6. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find that this tribunal had placed reliance on the decision of Mumbai Tribunal in the case of C.C.Chokshi & Co., which was later approved by the Hon’ble Bombay High Court vide order dated 25.7.2008. Further we find that the Hon’ble Bombay High Court in the case of A.F.Ferguson & Co supra had dismissed department’s appeal by answering first substantial question of law with reference to allowability of payments made to retired partners on account of overriding title on the profits, in favour of the assessee. We find that the Mumbai Tribunal in the case of S.B.Billimoria & Co supra held that the principles laid down in C.C.Chokshi & Co., case was not applicable because of the reason that the covenants in the partnership agreement in S.B.Billimoria’s case allowed the parterns to carry on the business subject to approval of majority of partners as per Para 20 of the said decision, whereas, in C.C.Chokshi & Co. case, it was not possible and there is no such enabling covenant which allows the remaining partners to carry on business without making payment to retired partners. These two clinching distinguishing features advances the case of the assessee. We find from the perusal of the partnership agreement of the assessee herein, the continuing partners cannot carry on business without making the payment to retired partners. Similarly there is no clause in the partnership agreement of the assessee which enables the continuing partners to carry on the business with majority partners consent. Hence it :- 7 -: ITA Nos.2578 to 2580/chny/2017 C.O.Nos.47to 49/Chny/2018 M/s.Deloittee Haskins & Sells could be safely concluded that the decision of S.B.Billimoria is factually distinguishable. We hold that the issue under dispute is now settled by the two decisions of Hon’ble Bombay High Court supra and respectfully following the same, we do not find any infirmity in the order of the ld CITA in this regard. Accordingly, the grounds raised by the revenue are dismissed.”

3.1 We find that on identical issue /facts with respect to payment made to retired partners that too in the case of the assessee the Tribunal considered the factual matrix and considered the decision of the Tribunal on identical facts / issue for ay 2011-12, wherein the payment of expenditure allowable u/s.37(1) of the Act has been considered. The Tribunal also considered the partnership deed wherein identical reference has been made in various clauses with respect to determination and the payments to retiring partners or the spouse /nominees of the deceased partners and thereafter reached to the particular conclusion considering the another decision from the Mumbai Bench in the case of M/s.C.C.Chokshi & Co., Vs JCIT in ITA Nos.

492 to 495/Mum/2003. The Tribunal also reproduced the relevant portion of the order in the case of M/s.C.C.Chokshi & Co., and considered various decisions including from Hon’ble Bombay High Court. No contrary decision was brought to our notice on identical :- 8 -: ITA Nos.2578 to 2580/chny/2017 C.O.Nos.47to 49/Chny/2018 M/s.Deloittee Haskins & Sells facts. Thus, respectfully following the decisions of the Co-ordinate Bench including decisions cited therein. Thus, this ground of the Revenue is without any merits, consequently dismissed.

4. So far as Ground No.1 with respect to deleting the addition of `.5.97 lakhs towards advances received from clients is concerned, at the outset the ld.Counsel for the assessee claimed that this issue is also covered in favour of the assessee in its case for ay 2011-12 vide order dated 25.11.2016. The ld.DR though defended the addition made by the ld. Assessing Officer but did not controvert the factual matrix that this issue is also covered in favour of the assessee.

4.1 We have considered the rival submissions and perused the material available on record. In view of the above arguments, we are reproducing hereunder the aforesaid order of the Tribunal dated 25.11.2016:-

“These cross appeals by the Revenue and the assessee are directed against the order of the’ Commissioner of Income-tax (Appeals)-2, Chennal, dated 4.3.2016 for assessment year 2011-12.

2. First we take up assessee’s appeal I.T.A.No.2079/Mds/2016.

3. Ground No. 1 and 7 are general in nature requiring no specific adjudication.

4. Ground No.2.0 to 2.6 are related to the disallowance of pension paid to the retired partners.

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