TaxTMI 
TaxTMI 
2015 (11) TMI 997
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....hts did not fall within the block of intangible assets. 3. The Ld. CIT(A) failed to appreciate that tenancy rights were a form of licence. As regard addition of payment to Retired Partner 4. The Ld. CIT(A) erred in confirming addition of payment made to a retired partner of Rs. 3,68,45,176/- in terms of the partnership deed. 5. The Ld. CIT(A) failed to appreciate that such payment was diverted by overriding title. 6. The Ld. CIT(A) was wrong in holding that such payment made to persons other than working partner is not eligible for deduction from income of the firm. 7. The Ld. CIT(A) erred in holding that payment made to person other than working partners and were ion the nature of incentive, and that this was not an example of diversion of income by overriding title. As regards disallowance u/s 14A 8. The Ld. CIT(A) erred in upholding disallowance of Rs. 1,21,915 under section 14A read with rule 8D. 9. The Ld. CIT(A) failed to appreciate that no expenditure had been incurred to earn the relevant exempt income and that therefore no disallowance was warranted. 10. Appellants pray that the order of the Ld. ....
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.... The said partnership firm had agreed to create a sub-tenancy in favour of Mahernosh Humranwala, which could not be completed, since the landlord was not agreeing to the transfer. 5. Apropos Ground nos. 1 to 3, the assessee had claimed depreciation of Rs. 20,38,268/- on the block of tangible assets. Written submissions dated 18.08.2009 were filed before the AO. The AO examined the submissions of the assessee and referred to the provisions of section 2(11)(b) of the Income Tax Act, which deals with intangible assets. The AO also noted that this was a recurring issue, regarding which, the assessee's appeal for the assessment years 2003-04 and 2004-05 had been dismissed by the ld. CIT(A). The AO, thus, disallowed the claim of depreciation on tenancy rights. 6. Before the Ld. CIT(A), the assessee submitted that though tenancy rights are not expressly covered in the definition of 'block of assets' as an intangible asset, it is a business or commercial right similar in nature to an intangible asset and it is, therefore, covered by the provisions of section 2(11)(b) of the Act. The assessee contended that tenancy rights are intangible assets within the meaning of section 32 of the A....
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.... the decision of the Tribunal rendered in assessee's own case for assessment years 2003-04 & 2004-05 vide its order dated 29th Oct., 2009 passed in ITA Nos. 355 & 356/Mum/2008 wherein the orders of the learned CIT(Appeals) confirming the disallowance made by the AO on account of assessee's claim for depreciation on tenancy rights was upheld by the Tribunal. As the issue involved in the years under consideration as well as all the material facts relevant thereto are admittedly similar to assessment years 2003-04 and 2004-05, we respectfully follow the order of the Tribunal for assessment years 2003-04 and 2004-05 (supra) and uphold the impugned orders of the learned CIT(Appeals) confirming the disallowance made by the AO on account of depreciation claimed by the assessee on tenancy rights." 11. Accordingly Ground nos. 1 to 3 are rejected. 12. Coming to Ground nos. 4 to 7, the AO made addition of Rs. 3,69,45,176/-, being payment made to a retired partner. The facts as per record are that on verification of the assessee's Income and Expenditure account, the AO found the assessee having debited an amount of Rs. 3,69,45,176/-, being contractual payment made to a retired partner, n....
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.... title and such payments are to be excluded from the income of the firm and that where there is a legal obligation in terms of the deed of retirement to pay erstwhile partners in respect of fees realized after their retirement, it is a case of the source of income being subjected to an obligation and payment of such fees to the retiring partners is not assessable as income of the firm. It was further pointed out that the ratio of the decision of the Mumbai Bench of the Tribunal in the case of "S.B. Billimoria & Co. vs. ACIT", 317 ITR (AT) 203 did not apply to the facts of the assessee's case and in that case, the decision of the Tribunal was based on the findings that the dates of retirement of the partners stood already fixed in the partnership deed and it was, therefore, a pre-determined event and that the amounts payable to the retiring partners were a percentage of the firm's profits for the subsequent year and they were, therefore, to be paid from the subsequent profits of the firm, if any; and that the amount payable on retirement was, thus, not fixed on retirement in that case, whereas in the case of the present assessee, the amount stood determined at the time of retirement....
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.... under consideration. In view of the amendment w.e.f. 01/04/1993 only the working partners of the firm are entitled to receive remuneration and interest from the registered firm for the services rendered by them during the relevant previous year. It has been held in Padmasundra Rao v. State of TN 255 ITR 147 (SC); CIT v. Ram Narain 227 ITR 401; Govt. of India v. Jagadish 221 ITR 338 Cf Vanaja v. CIT 208 ITR 161 that reliance should not be placed on a decision without discussing how the factual situation fits in with the factual situation of the decision on which reliance is placed. It has also been held in Padmasundra Rao v. State of TN that circumstantial flexibility, e.g. one additional or different fact, may make a world of difference between conclusion in two cases. On a conspectus of the factual scenario, the case of the appellant-company is distinguishable from the cases relied on by the learned A/R. Therefore, the payment made to persons other than working partner is not eligible for deduction from income of the firm. By incorporating the Clause in the partnership deed, the firm has created a liability to pay certain amounts to the retiring partners which is in conflic....
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....s per "CIT vs. Subramaniam Brothers", 236 ITR 148 (Mad), where the payment is an obligation as per the relevant clauses of the partnership deed, the amount paid is not assessable in the hands of the firm, it having been diverted by overriding title before it reached the firm; that the AO has himself observed that the payment was made for business purposes; that if it is so, it needs to be allowed subject to the limit of section 40(b) of the Act; that as per the AO, only working partners of the assessee firm are entitled to receive remunerations for the services rendered; that this is one of the basis on which the disallowance has been made; that the ld. CIT(A) has confirmed the disallowance without taking into consideration the fact that till the time of his retirement, Sh. Nihar Mody was, in fact, a working partner of the assessee firm; that the AO's observation to the effect that the clause of the partnership deed creating liability to pay certain amount to the retiring partner is "defeating the intention of the legislature" and thus, the clause supersedes the provisions of the Income-tax Act itself, is not only whimsical, but also fanciful; and that there is no basis for this wi....
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....tax-free income. The assessee did so. The AO made the disallowance, which was confirmed by the ld. CIT(A). 20. According to the assessee, Rule 8D of the Rules has been wrongly applied to the year under consideration, i.e., 2007-08. On merit, it has been contended that in earlier years, the assessee had invested an amount of Rs. 6,50,750/- in tax-free bonds of a Government company; that these bonds matured during the year under consideration and an amount of Rs. 1,00,69,821/- was invested in the month of March, 2007 in units of liquid scheme of mutual funds; that this was a temporary deployment of surplus funds till such time as the funds were required for meeting expenses; that during the year, the assessee earned interest income of Rs. 55,519/- on the tax-free bonds and Rs. 69,821/- as income on mutual fund units; that no expenditure was incurred directly for earning such income; and that alternatively, the disallowance made is excessive, considering that negligible expenses, if any at all, were incurred for earning such income. 21. The Ld. DR has relied on the impugned order. 22. We have heard the rival contentions on this issue. The assessee's argument of non-applicabil....
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....etired partners; Legal heirs of deceased partner has been made in order to compensate the outgoing partner for work done during the period of partnership which has not accrued to the firm during that period...the payment is for the value of work-in-progress as on the date of retirement or death...equivalent to 1.5 times the share of profit and remuneration earned by the partner from the firm in the year immediately preceding the date of his retirement/death. e) Firm is paying taxes on the entire fees received by it in that year and in subsequent ears, including the value of work-in-progress completed as well as on the capital gains earned by it on sale of immoveable properties...the legal heirs of deceased partner pay tax on such amounts received by them from the firm u/s 176(4) of the year of receipt. f) Legal heir of Mr. Anand Bhatt, Mrs. Meena Bhatt has paid taxes on the amounts received by her in the years in which such amounts were received by her. We enclose a copy of computation of income of Mrs. Meena Bhatt for AY 2011-12 alongwith acknowledgment of return of income....balance amount is likely to be received by her during the current financial year and the following y....
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....dichery Railway Co. Ltd. Vs. CIT AIR 1931 PC 166, 170]; that income is liable to be taxed regardless of its destination or disposal, or what happens afterwards; that no treatment meted out to an income after it has accrued or arisen can affect its liability to be taxed [MK Brothers P. Ltd, V/s CIT (1967) [63 ITR 28, 34 (All)], affirmed in (1972) [86 ITR 38 (SC)]; that in order to decide whether a particular disbursement amounts to diversion or application of income, the true test is to probe into, and decide, whether the amount sought to be deducted, in truth, did not or did reach the assessee as his own income; and that oligations there are in every case, but it is the nature of the obligation which is the decisive fact. The further observations of the AO are as follows: "Any arrangement like payment to retired/deceased partners, who are not rendering any professional services, cannot be considered as a charge against professional fees received by the assessee, or allowed as a business expenditure u/s 37(1). At the most, it is a gratuitous payment, which cannot be treated as business expenditure by any stretch of imagination. The payment made to retired/ deceased partners was n....
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....gal heir of a deceased partner is as per an agreement is of no benefit to the assessee as it gives only the mode of computation of amounts to be paid. This can be a fixed amount, say Rs. 20 lacs for the next five years or even 1.5 crore paid lump sum, but after five years. It would not be open to an assessee to claim lump sum payment to be paid after five years as a charge against profits of current year. Also a certain contractual expense cannot be treated as charge on profits when it is computed with reference to an uncertain future event. The case of "CIT vs. AN Naik & others", 265 ITR 346 (Bom) deals with distribution of capital assets to retiring partners/legal heir of a deceased partner, which is treated as being eligible to capital gains in the hands of the firm. The case of "CIT vs. Mulla & Mulla & Carigie Blunt & Core" reported in 190 ITR 198 (Mom) on which the assessee has relied upon pertains to A.Y. 1969-70 much before the amendment effective from 01.04.1993. This case is illustrative of payments made of share of profits of erstwhile partners and were treated as diverted at source itself. Further, the Department had filed an appeal to the Hon'ble Supreme Court ....
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....iture is met by the assessee. It has further been contended that the ld. CIT(A) has also erred in observing that the payments made to the legal heirs of the deceased partner have nothing to do with the services rendered to the client; that in fact, the payments made are in respect of work done which has not yet reached a stage of billing; and that the payment definitely is in respect of the services rendered to the clients. It has been submitted that the ld. CIT(A) has gone wrong in observing that the expenditure is "self imposed as gratuitous". In this regard, it has been submitted that the payment is contractual and not gratuitous and can be claimed by the outgoing partner/legal heirs of the deceased partner, by way of right. It has been argued that the ld. CIT(A) has further erred in observing that the payment in question is a compensation for taking over the share of the deceased partner by the surviving partner of the assessee-firm, whereas, in fact, the outgoing partner was separately paid towards the balances in his capital account, current account, loan account, appreciation in immovable property and goodwill. It has been contended that the legal heirs of the deceased partn....
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....he Privy Council had observed that income must be deemed to have never reached with assessee, having been diverted to the maintenance - holder. The Hon'ble High Court observed that income to the extent of the decree must be taken to have been diverted to the wife and children of the assessee and it never became income in his hands. The Department carried the matter in an appeal before the Hon'ble Supreme Court. It also challenged the decision of the Hon'ble Bombay High Court in "Seth Motilal Manekchand vs. CIT" (supra) and "Prince Khanderao Gaekwar of Baroda vs. CIT" (supra). 32. Their lordships of the Hon'ble Supreme Court, after noticing numerous decisions on the issue, including those named hereinabove, observed that the true test for the application of the rule of diversion of income by way of an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. It was observed that though there are obligations in every case, the decisive test is the nature of the obligation. It was observed that 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 th....
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....n obligation imposed upon them by the testator. It was observed that it was not a case in which a portion of the income had been diverted by an overriding title from the person who would have received it otherwise. Thus, though the assessee claimed so, the rule in "Raja Bejoy Singh Dadhuria vs. CIT" (supra), i.e., where, by the obligation, income is diverted before it reaches the assessee, it is deductible, was held not to apply and the rule in the case of "P.C.Mullick and Another vs. CIT" (supra), according to which, where the income is required to be applied to discharge an obligation after such income reaches the assessee, it is not deductible, was held to be the applicable rule. 33. Now, in the present case, as per the Statement of Facts filed before the ld. CIT(A), Clause 23:1 to 23:4 of the relevant partnership deed read as follows: "23:1 The partner whose share is determined under clause 22 hereinabove is hereinafter referred to as "Such Partner". The determination under clause 22 hereinabove shall not dissolve the partnership. The determination shall be without prejudice to the remedies, if any, of the continuing partners for any breach or breaches of covenants by Suc....
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.... Schedule 1 and/or Schedule II hereto have or shall be entitled to an interest in specie in any of the said immovable properties described in Schedule 1 and/or Schedule II. It is further expressly agreed, declared and confirmed that on determination of the share of any Such partner under the provisions of clause 22, that such partner shall be only entitled to be paid such amount as may be determined under the provisions of clause 23:5 and not claim a distribution/partition of any of the said immovable properties. 23:7 Nashir, Hamid, Anand, Nihar, Ashok and Djena, as the case may be, whose share is determined on account of Resignation Retirement or Death shall also be paid by the continuing partners a sum equivalent to one and a half times the share of profits and remuneration received by him in the last accounting year immediately preceding the date of determination of his share. Provided that in the case of Nashir, Hamid and Anand, such share of profit shall not include Such partner's Special Profits referred to in clause 7.5 and provided further that in the case of Djena, the benefit under this clause 23:7, shall not be available unless Djena has completed at least 12 years as....
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....er current account after adjusting his/her share in the profits of the partnership upto the date of determination of his/her share, after deducting the tax liability payable by the firm and taking into account the drawings or withdrawals made by such partners, as entered in the current account of such partners, and the amount standing to the credit of the loan account of such partners. Under clause 23:5, the payment made represents compensation to the outgoing partner, Nihar, in respect of appreciation in the value of the immovable property held by the firm, to the extent of his share. Clause 23:6 specifically provides that on determination of the share of such partner under the provisions of clause 22, such partner shall be entitled to be paid only such amount as may be determined. Under clause 23:5, he/she shall not claim a distribution/partition of the immovable properties/assets described in Schedule-I or Schedule -II to the Partnership Deed, belonging to the firm. Clause 23:7 of the deed provides that the partner whose share is determined on account of resignation, retirement or death, shall also be paid by the continuing partners of the firm, a sum equivalent to one and a hal....
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....its and assets. 39. What is noticeable from the above is, that it is explicit from these clauses of the partnership deed, as well as those of the deed of retirement dated 30.09.2009, that the assessee firm was never obliged to apply the amount to be paid to Nihar A Mody, out of its income. Rather, the nature of the obligation is such that it cannot at all be said to be a part of the income of the firm. In fact, it is not at all a case where the income of the assessee was required to be applied to discharge an obligation after the income reached the assessee. 40. An contraire, by virtue of the obligation contained in the partnership deed, as above, the income was diverted before it reached the assessee. And clearly, as per "Sitaldas Tirathdas" (supra), such a payment is entitled to be excused, the income never having reached the assessee and even if the assessee were to collect it, it would have been so collected not as part of the assessee's income, but for and on behalf of the outgoing partner, to whom it was payable. Herein, it has been maintained by the assessee and not rebutted by either of the taxing authorities, or even by the ld. DR, that the bills were raised by the a....
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....r maintained that the payment made was in respect of the work done, which had not hitherto attained the stage of billing and that the payment was definitely with regard to the services rendered to the clients. This stand of the assessee also remains unrebutted. 45. Another observation of the ld. CIT(A) is that the expenditure in question is "self imposed as gratituitous". However, nothing has been brought on record by the ld. CIT(A) to bolster such an observation. A bare perusal of the relevant clauses of the partnership deed, as discussed in the foregoing paragraphs, lays it bare that the payment in question is a contractual payment and not at all a gratuitous one. It remains undisputed that the outgoing partner can claim the amount as a matter of right. In this regard, in " CIT vs. Crawford Bayley & Co.", 106 ITR 884 (Bom.), similar payments, as the one involved herein, were made to the widows of the deceased partners of the assessee firm. The ITO rejected the claim made of corresponding deductions, holding, inter-alia, that the widows of the deceased partners were not parties to the agreement by way of the partnership deed, and that they had no rights against the firm. The Ho....
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....take over the share of the deceased partner and to continue the businesses. The conditions contained in this clause 18 of the deed were similar to those of clause 15 of a later partnership deed drawn up, on the death of the partner. The condition of payment of amount of the share of the deceased partner in the net profits accrued due for a period of one year from the date of his death, under clause 18(c) of the erstwhile deed, was the same as that envisaged under clause 15(c) of the fresh deed. This was the amount payable to the legal heirs as the price of the share of the deceased partner. 48. It is pertinent to note that neither of the partnership deeds made it obligatory for the surviving partners to pay the amount. It was to be paid only in case they wanted to take over the share of the deceased partner and to continue the partnership business. 49. Their Lordships of the Hon'ble Bombay High Court observed that these facts clearly indicated, that what was paid under clause 18(c) of the first partnership deed and clause 15 of the second partnership deed was by way of price of the share of the deceased partner. It was held, inter-alia, that clauses 18(c) and 15 of the two pa....
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...." (supra), are not at parity with those of the present case. Herein, as noted, the amount was determined at the time of retirement. Thus, in the present case, there is no sharing of future profits. Rather, it is a case of diversion of income by overriding title. 53. Further, in "RSM & Co. vs. Addl. CIT", 125 ITD 243 (Mum), the assessee was a firm of Chartered Accountants. In terms of the partnership deed, there was obligation on the assessee-firm to pay retirement benefits to retiring partners for a period of five years. During the relevant assessment year, the assessee made certain payments to retiring partners and claimed deduction for the same. It was held that there was a diversion of income to the extent of the retirement benefits paid to the retired partners and, therefore, the amount so paid was not includible in the taxable income of the assessee. 54. In "ACIT vs. CC Chokshi & Co.", 2010 TIOL 328 (Mum), the assessee paid certain amounts to ex-partners and to the wives of deceased partners. However, these amounts were not included in the profits of the firm. Before the AO, the assessee submitted that in view of the stipulations of the partnership deed, the ex-partners ....