TaxTMI 
TaxTMI 
2016 (11) TMI 1592
X X X X Extracts X X X X
X X X X Extracts X X X X
....ipts with a note that the payment was made towards the retired partners as pension on account of overriding title in the partnership deed. The Assessing Officer called for the details and examined the same and held that the payment is an application of income and brought to tax. The assessee during the assessment proceedings alternately claimed that the payment made to the retired partners as an expenditure allowable u/s 37(1) of the Act. The Assessing Officer rejected the alternate claim of the assessee also holding that the payment made to the retired partners is not expenditure to carry on the business but it was a gratuitous payment. 6. Aggrieved by the order of the Assessing Officer, the assessee went on appeal before the CIT(A). The ld. The CIT(A) confirmed the addition made by the Assessing Officer both on diversion of income by overriding title as well as the revenue expenditure u/s 37(1) of the Act. Therefore, the assessee is in appeal before the Tribunal. 7. On behalf of the assessee, Senior Counsel, Shri Percy J. Pardiwala appeared and presented the case. In his argument, the Senior Counsel stated that the assessee is a firm of Chartered Accountants rendering audit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....retirement or death, as the case may be. It is clarified that the Partner or regal representatives, as the case may be, shall be entitled to the proportionate monthly remuneration under clause 9.a to the extent not drawn by the Partner up to the date of retirement, or death as the-case may be. Right to receive payments on retirement or death m. In addition to the amounts, if any, payable, as provided in the preceding clauses 10.k and 10.1 above, * a retired/retiring Partner of the Firm who became a Partner in the Firm or Participating Firms on or before 31 March 2010 or the spouse or nominee of such eceased Partner; or * a retired/ retiring Partner of the Legacy Firm in respect of which the liability thereof has been taken over by this Firm or the spouse or nominee of such deceased Partner; as the case may be, shall be entitled to receive further sums determined on the basis specified in clause 10.n in respect of the following: i. amounts bills, but not received, work completed, but not billed, and work partly completed and not billed as at the date of death or retirement, as the case may be, having regard to the fact that the Partnership follows the cash sy....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the date of retirement. If the Partner retires in between the end of two accounting years than the average annual Amount Received in the Previous Year shall be computed with reference to completed financial years before the date of retirement as a Partner. The absolute amount referred to above will be indexed as per the Cost Inflation Index specified in section 48 of the Income Tax Act, 1961 or will be increased every year at the simple rate of 5% per annum, whichever is higher. The payments will be made on a monthly basis. The payments under this clause will restricted to Rs. 60 lakhs per annum and this limit will be indexed as er the Cost Inflation Index specified in section 48 of the Income Tax Act, 1961 and the base year for the indexation being 2007-08 or increased every year at the simple rate of 5% per annum, whichever is higher. Payments as per this clause shall be made in case any Partner retires on becoming permanently incapacitated from continuing as Partner or dies. In such case the Qualifying Period will not be considered. In case of death of a Partner or retirement of a Partner due to incapacity before completion of three years as a Partner, then the average annu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the continuing partners. In view of the prior charge arising from the provisions of the partnership deed, the same is payable to the retired partners and therefore, it is not income of the assessee-firm. The nature of application is such that the same payable to the retired partners cannot be said to be part of the assessee's income. He argued that the sums paid to the retiring partners was related to the work carried on by the partners during their service but the bills not raised, work completed but bills not raised and work partly completed and not billed etc. The assessee-firm is carrying on the business in the name of Deloitte Haskins & Sells. In nutshell, it is a consideration to the retired partners to continue the same business in the same line with the new partners and to retain the retired partners to support competitiveness on their own and not to join a new firm which is a threat to the existing firm and to settle the pending bills relating to the income earned by them as a partner during their tenure in the partnership-firm. Further the Senior Counsel further submitted that the method and manner of payment is determined as per clause 10(m) of the partnership deed wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable" This proposition still holds good even today. Let us now see whether the facts in the case satisfies the test laid down by the Hon'ble Supreme Court" 9. For proper appropriation. Clause 22 of the Partnership deed of the assessee-firm is reproduced hereunder: 22 it is agreed that in addition to the amounts, it any, payable as provided in the preceding clause, namely clause 21, a retiring partner or the legal representative of a deceased partner as the case may be, shall be entitled to receive the further sum speared in clause 23, in respect of the following:- (a) (i) amoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... likely to be reflected in the receipt of the firm for a reasonable number of years immediately following the retirement/death of the partner and also for restricting themselves from engaging in any gainful occupation or in the practice of the profession of accountancy in India after such retirement which is in competition with that of the assessee. Thus, it is clear that the amounts to be paid under Clause 22 are in lieu 0 their services rendered already to the firm and for restraining themselves to carry on any competing profession. Thus, what is being paid is expenditure necessary for earning the income. 12. It is therefore clear that the assessee is obliged to pay the amount computed under clause 23 before distribution of the same under Clause 28 of the partnership-Deed and it cannot be said to be an application of the income by the assessee firm. As under this obligation the income is diverted before it reaches the assessee it is deductible. The assessee is in fact in the position of a collector of income on behalf of the persons to whom it is payable and is only paying the amount subsequently. The decisions relied upon by the learned DR are not applicable to the fact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sis of clause 10(n) in respect of the amounts billed but not received etc. The payment is made to the retiring partner as consideration for permitting the continuing partners the use of the firm name to carry on the profession, alongwtih the clientele ad the attendant rights of the firm. The contribution made by the surviving partner, during his association with the firm, in increasing the future income earned as discussed in clause 10 of the partnership deed. The determination of the payment is calculated as per clause 10(n) of the partnership deed. The clauses of the partnership deed are identical to that of the decision of the ITAT Mumbai Bench in the case of M/s C.C. Chokshi & Co. (supra). 15. The ld. DR's contention is that the payment to retired partners is an 'application of income'. When the partnership deed specifies that the payment made to the retiring partner is with regard to the work done by them during the tenure as a partner and towards the settlement of their income for the work done and to allow the partnership firm to continue its business, the payment cannot be held as an application of income or gratuitous payment. We therefore respectfully following the dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Kumar Goel, 197 taxman 375(Delhi). 25. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us. 26. The ld. DR argued that the assessee-firm is following the cash system of accounting and all the receipts represent income and not offering the income on receipt basis leads to difference of income recognition and contradictory stand to the principles of accounting. Further, the ld. DR also argued that the assessee was accounting the expenditure on cash basis, which resulted in mismatch frequently. 27. On the other hand, the ld. AR submitted that the assessee has disclosed advances of Rs. 64,39,989/- at the end of financial year 2010-11. The said advances represented advances received from clients on account of professional fees. The assessee is following cash system of accounting and the bills are raised as and when the services are rendered. No professional charges are received in advance, therefore, the same cannot take the character of income unless the invoices are raised and services are rendered. In exceptional cases, the assessee-firm received advances from clients before rendering such services. Such advances are kept in advance account. The advance rec....