2018 (2) TMI 1805 - AT - Income Tax

Tribunal rules in favor of assessee on payment to retired partners & TDS interest

The tribunal dismissed the Revenue's appeal and allowed the cross objections of the assessee. The disallowance of payment made to retired partners and ... Disallowance in respect of payment made to retired partners - overriding title to the ex-partners or spouses of deceased partners (herein referred to as ‘retired partners’) as per partnership deed - Held that:- 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 could be safely concluded that the decision of S.B.Billimoria [2008 (12) TMI 671 - ITAT MUMBAI] is factually distinguishable. Case of CCIT vs C.C.Chokshi & Co.[2008 (7) TMI 1055 - BOMBAY HIGH COURT] to be followed. No infirmity in the order of the CIT-A in this regard. Accordingly, the grounds raised by the revenue are dismissed. Disallowance of interest on TDS - belated payment of TDS - Held that:- Assessee had merely made belated payment of TDS belonging to the payees and not the assessee. Hence the said interest which was paid for delayed remittance of TDS is only compensatory in nature. The decision relied upon by the ld CITA was in the context of payment of interest on payment of direct taxes and since the direct tax payment is not an allowable expenditure, the interest paid thereon is also not an allowable deduction. But the assessee had only made payment of professional fees to third parties on which tax has been deducted at source and remittance was made belatedly to the account of the central government. Hence the TDS does not belong to the assessee and instead it belongs to the payee. Hence the said TDS / tax belongs to the payee. The assessee had merely made compensatory payment of interest on delayed remittance of TDS which is squarely an allowable deduction in the computation of income of the assessee firm. Issues:1. Disallowance of payment made to retired partners2. Disallowance of interest on TDSIssue 1: Disallowance of payment made to retired partnersThe appeal by the Revenue and the Cross objection by the assessee arose from the order of the Learned Commissioner of Income Tax(Appeals) in Appeal No.71/CIT(A)-2/2015-16. The main issue was whether the disallowance of payment made to retired partners amounting to Rs. 1,58,56,741 was justified. The assessee, a firm of chartered accountants, claimed that the payment was diverted to retired partners as per the partnership deed. The Assessing Officer (AO) held that the payment was an application of income and brought it to tax. However, the ld CITA, following a tribunal decision in the assessee's favor for a previous year, deleted the addition made by the AO. The Revenue contended that the payment to retired partners was not allowable under the Income Tax Act. The tribunal found that the issue was settled by decisions of the Hon'ble Bombay High Court and dismissed the Revenue's grounds.Issue 2: Disallowance of interest on TDSThe second issue involved the disallowance of interest on TDS amounting to Rs. 1,18,902. The AO disallowed this amount, considering it not an allowable deduction. The assessee argued that the interest was compensatory in nature as it arose due to a delay in remitting TDS belonging to the payees, not the assessee. The ld CITA upheld the AO's decision, stating that the interest on delayed remittance of TDS was not an allowable deduction. However, the tribunal found that the interest paid for delayed remittance of TDS was compensatory in nature and hence an allowable deduction. The tribunal allowed the grounds raised by the assessee in its cross objections.In conclusion, the appeal of the Revenue was dismissed, and the cross objections of the assessee were allowed. The tribunal's decision highlighted the distinction between the application of income and compensatory nature of payments, ultimately upholding the assessee's position on both issues.