Case Law Details

Case Name : M/s. J.C. Bhalla & Co. Vs Addl. CIT (ITAT Delhi)
Appeal Number : ITA No. 1921/Del/2015
Date of Judgement/Order : 29/03/2019
Related Assessment Year : 2011-12
Courts : All ITAT (6079) ITAT Delhi (1377)

M/s. J.C. Bhalla & Co. Vs Addl. CIT (ITAT Delhi)

Conclusion: Assessee-firm was entitled to claim deduction claim under Section 54EC as assessee had made an investment in the specified bonds and capital gain had arisen to the assessee from transfer of client relationship and goodwill which was long-term capital asset under section 2(14) chargeable to tax under the head capital gain and the cost of acquisition of the same was nil.

Held: Assessee- firm of chartered accountancy having a standing of almost 60 years, discontinued its business of internal audit and risk consulting practice by transferring it to an international firm Protivity.  The buyer agreed to purchase the specified assets in terms of the above agreement and the assessee firm had agreed to transfer all rights/ interest entitled in the specified assets. Assessee firm was owner of the purchased asset‟ which means collectively “client relationships and goodwill” agreed to sale, transfer aside and convey to the purchaser all the purchased assets. Purchase price of INR 29 Lacs for client relationship and goodwill to be paid subject to the terms of the agreement. During the year under consideration,AO denied the claim of long-term capital gain by assessee in respect of ‘client relationship’ and ‘Goodwill’ in respect of Internal Audit and Risk Consultancy practice and also denied the amount received against that was a capital gain entitled to the deduction under section 54EC. It was held this agreement itself showed that before buying the IARC practice of assessee, the buyer had made a complete due diligence of the practice hand and had purchased the ongoing contracts along with the client relationship for INR 2,900,000. Thus, client list, contracts were property of the assessee firm which was connected with the profession of assessee it fell into the definition of capital asset according to section 2 (14). It could not be said that the above sum received by assessee was a capital receipt which was not chargeable to tax. It could not be considered as a noncompete fees because in the agreement through which the assessee had received INR 29 Lacs did not talk about the noncompete conditions. For the same, assessee had entered into another agreement for which INR 1,600,000 had been paid by the buyer to assessee, which had been offered by them as a noncompete fees as business income. The above client list and contract relationship was built by assessee over past 30 years it could also not be held to be a short-term capital asset. According to the provisions of section 55 (2) (a) (ii) the cost of the acquisition of these essential be taken to be nil. Therefore INR 2,900,000 on by the assess was chargeable to tax under the head capital gain and the cost of acquisition being nil. As the assessee had made an investment in the specified bonds and capital gain had arisen to the assessee from transfer of a long-term capital asset, assessee was also eligible for exemption under section 54EC.

FULL TEXT OF THE ITAT JUDGEMENT

1. This is an appeal filed by the assessee against the order of the ld CIT(A)-XX, New Delhi dated 10.02.2015 for the Assessment Year 2011-12 raising following grounds of appeal :-

“1) That on the facts and in circumstances of the appellant firm, die learned CIT(Appeals) has erred both on facts and in law in confirming the action of the learned Assessing Officer in treating tire capital receipt of Rs. 29,00,000 on account of sterilization of income stream of internal Audit and Risk Consultancy practice as business income.

1.1) Without prejudice alternatively the learned CIT(Appeals) has erred both on facts and in law in confirming the action of the learned Assessing officer in not allowing the claim of the appellant that it has sold a long term capital asset namely ‘client relationship and ‘Goodwill’ in respect of Internal Audit and Risk Consultancy practice and the amount received against that was a capital gain entitled to deduction u/s 54EC of the Act.

2) That on the facts and in the circumstances of the appellant firm the learned CIT(Appeals) has erred both on facts and in law in confirming the action of the learned assessing officer in disallowing Rs. 49,72,773 out of Bonus of Rs. 67,87,318 which has been paid to partners of the Firm in accordance with the agreements of partnership and as per section 40(b) of the Act.”

2. The appellant assessee is a partnership firm carrying on the profession of chartered accountancy. It filed its return of income on 29/9/2011 declaring total income of INR 34011290/– wherein the long-term capital gain of INR 29 Lacs was claimed exempt u/s 54EC of The Income Tax Act [the Act]. The learned assessing officer passed an order u/s 143 (3) of the Act on 28/2/2014 determining total income of the assessee at INR 38986560 wherein he made the two additions/ disallowances to the returned income. Firstly the assessee has shown capital gain of INR 2,900,000 which was claimed as exempt u/s 54EC of the income tax act was made taxable and secondly disallowed bonus paid to the partners of Rs. 4972773/–. Both the issues were agitated before the learned CIT – A, where in appeal of assessee was dismissed, therefore, assessee is in appeal.

3. The first issue is with respect to chargeability of sum of INR 29 Lacs. The brief facts shows that assessee has claimed to have sold a long-term capital asset being client relationship and goodwill‟ of internal audit and risk consultancy ( IARC) practice to M/s Protivity consulting private limited ( Protivity) for a total consideration of INR 7,600,000. The assessee received out of the above INR 7,600,000/-, Rs. 29 Lacs during the relevant previous year. Balance amount of INR 4,700,000/- was received in financial year 2012 – 13. The assessee claimed the said receipt of INR 29 Lacs on sale of a long-term capital asset and claimed deduction under section 54EC of the act by way of investment in specified bond. The assessee also entered into a separate non-solicitation and non-compete agreement on 19/11/2010 whereby the assessee agreed to not to solicit and carry out competing business for a consideration of INR 1,600,000/-. This sum was disclosed by the assessee as a business income in accordance with the provisions of section 28 (va) of the act. Therefore, only dispute is that whether sum of Rs 29 lakhs received by assessee is a capital receipt or otherwise as capital gain on transfer of capital assets ( as alternatively claimed by the assessee) or Non compete fees ( as claimed by the Ld AO). If it is held that assessee has transferred a capital assets , then whether assessee should be eligible for exemption/ deduction u/s 54 EC of the act or not. To substantiate the claim, assessee submitted

a. copies of the agreements entered into by the assessee with the buyer of the practice,

b. copies of the bills.

c. Copies of Non compete agreement

The ld AO also made enquiry with the buyer M/s Protivity on the issue and obtained confirmation about the sale of practice. Assessee explained issue before the learned assessing officer that the firm is in the practice as chartered accountants and was carrying on internal audit and assurance practice as a separate business vertical. It is also carrying out other profession such as audits, consultancy etc. The internal audit practice was agreed to be sold to Protivity along with all its rights and interest in the specified practice. The assessee was carrying on this internal audit practice over a period of more than 30 years and the overall firms‟s practice and reputation was for more than 60 years. The bundle of rights in the above practice was defined as the purchase assets, which is client relationship and goodwill. Assessee sold it for payment of INR 2,900,000 as the 1st part of sale price. One of the partners of the assessee firm along with some of his working team was also to be employed by Protivity. Therefore, the claim of the assessee was that consideration received by it of Rs 29 lakhs is a „ capital receipt.‟ Alternatively it also claimed that , if it is held to be transfer of a „ capital assets‟ then exemption u/s 54EC is allowable as assessee has made requisite investments in the bonds. Assessee submitted that above sum is chargeable to tax under the head capital gain and cost of acquisition of the same u/s 55 (2) (a) of the act is nil and Total sum is a Long term capital again against which assessee is eligible for exemption u/s 54 EC of the act. The main reason for claiming that it is a capital receipt not chargeable to tax at all was that when the source of the income was terminated it becomes a capital receipt. The assessee states that when it is sources of income that is its internal audit practice, is terminated to another party and it enters into a non compete agreement to not to do the similar business for a certain number of years, the resultant consideration received for the same so far as it relates to other than noncompete fees is a capital receipt. The learned AO made enquiry with the Protivity and found that the bills and invoices as well as the client list consisted not only of the erstwhile clients of the assessee and it was that it was not serving all the old clients of that firm. He also found that only one of the partners retired from the firm and joined Protivity as employee but staff of IARC practice has not moved with him to Protivity. Therefore, the learned assessing officer was of the opinion that there was no evidence to suggest that internal audit practice carried out by the buyer was enjoying the goodwill acquired over the year by the assessee firm. He was also of the view that it cannot be said that Protivity bought the practice of the assessee as it did not get all the clients of the assessee firm nor the assessee requested its clients to move over to that particular entity. The buyer also did not use any of the brand name or trade name of the appellant assessee, if any. The learned AO was also of the view that assessee did nothing to ensure that all its internal audit clients migrate to the buyer post agreement and nothing was done by the purchaser to retain such clients by suitably publicizing the deal of purchase of the internal audit practice of the assessee. Therefore, he held that what client relationship was actually transferred was not clear. The learned AO was further of the view that as the entire internal audit team of the assessee did not shift to the new buyer but only a partner, therefore, it cannot be said that a vertical was actually transferred by the assessee firm. The learned AO therefore was of the view that a sum of INR 7,600,000 received by the assessee was paid to the assessee to make itself absent from the field of internal audit practice. Ld AO also rejected reliance placed by assessee on the decision of Honourable Delhi high court in ACIT Vs KHANNA & ANNADHANAM 2013-TIOL-163-HC-DELwas also not accepted by the AO in stating that it is distinguishable on facts. Therefore he held that the claim of the assessee of the sale of the client relationship and goodwill of the internal audit practice is a noncompete fee received for not to carry out a specific business activity and is chargeable to tax under section 28 (va) of the act. As he has taxed above sum as business income, there was no question of granting deduction u/s 54EC of the Act.

4. On appeal before the learned CIT – A, assessee reiterated the same facts and arguments. He held that the claim of the assessee that the goodwill has been sold is not apparent from the facts. He held that the invoices and bills do not show the name of the assessee appearing and thus the fact did not show that the brand name of the appellant was being used. He further stated that there is no evidence to show that the internal audit practice of the appellant has been transferred in entirety to the buyer. However, he stated that, the goodwill exist with client relationship or the name of the appellant as reputation in connection of the business. He also noted that the appellant has no doubt stopped the practice in the respect of internal audit after entering into impugned agreement with the buyer, however, the above fact do not show that any of the asset i.e. goodwill has been transferred. Thus he held that the sum received of INR 29 ,00,000 by the assessee is a noncompete fee which is taxable u/s 28 (va) of the act. He further relied on the series of decisions and rejected the several decisions relied upon by the assessee. He therefore rejected the claim of the assessee to treat sale of goodwill and he treated the receipt as a noncompete fee and made a taxable u/s 28 (va) of the act. He further did not grant benefit of deduction under section 54EC also as there was no capital gain but business income.

5. Assessee aggrieved with the order of the lower authorities challenged this issue as per ground number 1 of this appeal. The learned authorised representative referred to the facts of the case. He referred to the agreement dated 3/11/2010 entered into for purchase and sale of assets placed at page number 27 – 97 of the paper book. He submitted that assessee firm was carrying on the profession of the chartered accountancy for last almost 60 years, sold their internal Audit practice to an international leading firm Protivity. As per agreement, client contracts, client relationship was transferred along with the partner and his team of the firm, who was handling the internal audit practice to the above buyer for INR 2,900,000/- to be payable towards purchase price of goodwill and client relationship. He referred to the various clauses of the agreement and submitted that there were several condition precedents, which shows that the assessee has sold the internal audit practice along with the client list and client relationship to the buyer. He further submitted that assessee entered into a further agreement for non-solicitation and non-compete agreement with the above buyer along with its partners. The buyer also paid a sum of INR 1,600,000/- for that which is offered for taxation u/s 28 (va) of the act and is not in dispute. He further referred to page number 107 of the paper book which is a confirmation from Buyer vide letter dated 12/02/2014 that they have acquired the internal audit practice of the assessee firm for a sum of INR 2,900,000/-. He submitted that the complete evidences were placed before the lower authorities, which even included the confirmation from the buyer. He also referred to the agreement clauses, which shows that what is purchased assets‟ defined in agreement as client relationship and goodwill only. With respect to the transfer of the client relationship, he stated that as per the letter dated 29/1/2014, assessee submitted before the AO details of the clients, which were acquired by the buyer, and confirmation of the buyer with respect to those clients. However, on observation of ld AO that that all the clients of the assessee were not served by the buyer and not all the clients of the assessee prior to the acquisition by the buyer remained with the buyer, he submitted that at the time of acquisition assessee transferred all client relationship and therefore later on it is for the clients and the new buyer to continue that relationship. He submitted that assessee did not carry on internal audit practice with those clients and it is purely a business call for both the sides on which assessee does not have any control. On the finding of ld AO about transfer of the employees, he submitted that learned CIT appeal has noted that the internal audit vertical employees of the assessee joined the buyer, hence finding of ld AO was held to be erroneous by ld CIT (A) therefore this argument of the AO does not survive. He further stated that for not competing with the similar business of the buyer, assessee was further paid a sum of INR 1,600,000, which was offered as a non compete fees, and there is no dispute on the same. Therefore there is evidence based on which lower authorities held that this sum of Rs 29 Lakhs is also a non compete fees. Therefore, he stated that above sum received by the assessee is a capital receipt. Even otherwise he stated that even if it is taxable as a capital gain the provisions of section 55 (2) (a) of the act applies and the cost of acquisition of the same is nil but the assessee is entitled to deduction under section 54EC of the act. He further relied on the decision of the honourable Delhi High Court in 351 ITR 110 mainly. Therefore he stated that any sum received by the assessee in consequence of impairment of profit earning apparatus is in the nature of capital receipt and not taxable as the capital gain or business profit. Even otherwise, he submitted that if the client relationship and the goodwill are held to be a capital asset transfer of which is chargeable to tax as capital gain, then assessee is entitled to deduction under section 54EC of the act.

6. The learned departmental representative extensively referred to the orders of the lower authorities and submitted that sum of INR 2,900,000 received by the assessee is chargeable to tax as non compete fees only. He stated that the finding of the learned AO and the learned CIT – A clearly demonstrates that assessee has not completely hived of its internal audit business as many of the clients of the assessee firm did not go with the buyer and even buyer did not serve many of the existing clients of the internal audit business of the assessee firm.

7. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the relevant judicial precedents placed before us. The undisputed facts of the case is that assessee is a form of chartered accountant carrying on the profession of chartered accountancy having a standing of almost 60 years, discontinued its business of internal audit by transferring it to an international firm Protivity by agreement dated 3/11/2010 titled as agreement for the purchase and sale of assets. According to the agreement, it is agreed by the parties that the assessee is engaged in the business of providing services related to internal audit and risk consulting practice. The buyer agreed to purchase the specified assets in terms of the above agreement and the assessee firm has agreed to transfer all rights/ interest entitled in the specified assets. As per article 2 of the agreement it is further stated that the assessee firm is owner of the purchased asset‟ agrees to sale, transfer aside and convey to the purchaser all the purchased assets. The purchased assets have also been defined in article 1 of the agreement, which means collectively “client relationships and goodwill.” The client relationships’ are also defined in the article 1 meaning the relationships, trade connections, referrals and future opportunities cultivated over the years in relation to the IARC practice including client contacts and/or contracts entered into with any other person in relation to the IARC practice and includes all rights, title and interest in the same together with the right to represent to 3rd parties that the purchaser is the owner of the aforesaid. The client contracts’ have also been defined in the article 1 meaning that the contracts or agreements or engagement letters of confirmation executive or issued novated by the clients which as on the completion date shall already reflect the engagement of the identified person of the purchaser by such clients to the satisfaction of the purchaser for availing of services by clients in relation to IARC practice and shall include any prior/ in future relationships with such clients. In the same article 1 goodwill’ has also been defined meaning that the goodwill pertaining to the IARC practice which translates to a self generated asset comprising of client relationship and reputation generated and includes the right, title and interest with respect to business relating to IARC practice together with the right to represent to 3rd parties and that the purchaser is the owner of the aforesaid. Annexure B of the agreement shows list of IARC client and relationships of the company. Annexure C to the agreement shows the purchase price of INR 29 Lacs for client relationship and goodwill to be paid subject to the terms of the agreement. Further INR 4,700,000, which is to be paid in the 2nd part of the purchase price, which is not pertaining to this year’s release of one of the partner from partnership and his continuous employment with the buyer. Further scheduled 2 – 2 – 1 (a) shows the list of contracts in relation to the client relationship that are under negotiation as per the formats provided by the purchaser is an effective date and list of existing contracts with the respect to client relationships that do not contain standard clauses are set out in the formats provided by the purchaser. This agreement itself shows that before buying the IARC practice of the assessee the buyer has made a complete due diligence of the practice hand has purchased the ongoing contracts along with the client relationship for INR 2,900,000. As according to us the client list, contracts are property of the assessee firm which is connected with the profession of the assessee it falls into the definition of capital asset according to section 2 (14) of the act. Therefore according to us the assessee has transferred it capital assets as defined under section 2 (14) of the income tax act it cannot be said that the above sum received by the assessee is a capital receipt which is not chargeable to tax. According to us, the assessee has transferred capital asset, therefore, it is chargeable to tax under the head capital gain. It can also not be considered as a noncompete fees because in the agreement through which the assessee has received INR 29 Lacs does not talk about the noncompete conditions. For the same the assessee has entered into another agreement for which INR 1,600,000 have been paid by the buyer to the assessee, which has been offered by them as a noncompete fees as business income. Further, as the above client list and contract relationship is been built by the assessee over past 30 years it can also not be held to be a short-term capital asset but they are a long-term capital asset. Now the 2nd question arises about the cost of acquisition of these assets. The assessee has not purchased the reassessment are self-acquired therefore according to the provisions of section 55 (2) (a) (ii) the cost of the acquisition of these essential be taken to be nil. Therefore INR 2,900,000 on by the assess is chargeable to tax under the head capital gain and the cost of acquisition being nil. Therefore, INR 2,900,000 cannot be taxed as noncompete fees and also cannot be considered as capital receipt but is chargeable to tax under the head capital gains. As the assessee has made an investment in the specified bonds and capital gain has arisen to the assessee from transfer of a long-term capital asset, assessee is also eligible for exemption under that section. In view of this ground number 1 of the appeal of the assessee is partly allowed.

8. The second issue in the appeal is with respect to the disallowance of Rs. 4972773/- as bonus paid to the partners. The brief fact shows that the firm was carrying on the profession of the chartered accountancy in terms of the partnership deed dated 29/9/2006 and 19/11/2010 read with the supplementary deed dated 18/11/2010 and 31/3/2010. On 18/11/2010 one the partners of the firm retired to take up employment with the Protivity and the supplementary deed dated 18/11/2010 was to sanction bonus to all the existing seven partners before a new partner could be entered. Subsequently, a supplementary partnership deed dated 31/3/2011 was entered into an additional bonus for remaining six partners was sanctioned. The learned assessing officer referred to para number 13 (C) of the partnership deed dated 29/9/2006 and stated that the partners may be entitled to be paid bonus and commission on net profits of the firm after charging the above salary and bonus so however that the payment of bonus and commission sell be at the absolute discretion of the partners and will be paid with the concurrence of all the partners and paid to all 3 or any of the working partners as decided by the partners. Subsequently on 18/11/2010 and 31/3/2011, the assessee resolves to sanction bonus to all the partners. As per partnership deed dated 18/11/2010 the bonus of INR 5 322484 was sanctioned and as per the partnership deed dated 31/3/2011 Rs. 1464834/– was authorised. Therefore the total bonus payment authorised by the assessee was of INR 6787318/-. The above bonus payment was authorised in the partnership deed. The learned AO noted that the honourable Delhi High Court in Sood Bridge associates vs CIT has held that for allowability of remuneration to the partners the partnership deed must quantify or provide the manner of computing the remuneration payable to the partners and it should not be left to the discretion of the partners to be decided based on further negotiation letter on. The AO further held that that the clause 13 ( C ) of the partnership deed dated 29/9/2006 did not specify the amount of bonus payable not prescribe any manner of computation for the same, hence, according to him the above bonus is not allowable to the assessee. He further stated that though the assessee firm appears to agree with this proposition and it executed two more supplementary partnership deed dated 18/11/2010 and 31/3/2011, which quantified the said bonus. Therefore, he held that no bonus paid to the partners during the relevant previous year could be allowed based on the partnership deed dated 29/9/2006. Thereafter, he referred to the provisions of section 40 (b) of the income tax act and noted that the partnership deed can only sanction payment of bonus with prospectively and not retrospectively, the payment can only be to a partner and not to someone who has retired as a partner, the supplementary partnership deeds can only sanction payment of bonus subsequent to that. He further held that the payment made in accordance with the supplementary partnership deed executive on the last day of the financial year cannot be allowed for the financial year as it would amount to sanctioning the bonus with retrospective effect. He further held that Shri Akshay Bhalla retired from the firm with effect from 18/11/2010 and bonus sanctioned to him by partnership deed dated 18/11/2010 cannot be allowed under the income tax act. Therefore out of the total bonus paid of INR 6 787318/– for the full year he computed the allowable bonus for 4 months and 12 days out of 12 months and stated that only INR 1814544/– is allowable to the assessee. Consequently, he disallowed INR 4972773 as excess bonus paid during the year.

9. Against the above disallowance, the assessee preferred an appeal before the learned CIT – A who confirmed the disallowance holding that since in the case of the appellant the original partnership deed does not specify the manner of computation of bonus, therefore, bonus cannot be allowed under the original partnership deed. He further held that supplementary partnership deed cannot be made applicable for the period prior to the date of authorization.

10. The assessee aggrieved with the order of the lower authorities challenged the above disallowance as per ground number 2 of the appeal. The learned authorised representative contesting the above disallowance stated that the supplementary partnership deed dated 18/11/2010 and 19/11/2010 as well as 31/3/2011 completely disclosed the manner of the computation of the bonus payable to the partners. He further referred to the provisions of section 40 (b) of the act to show that if the payment is in accordance with and authorised by the partnership deed the same is required to be allowed to the assessee. He further stated that supplementary deed provided for payment of bonus for the year, therefore, there cannot be any question of paying any bonus with retrospective effect. He further stated that all the supplementary deeds were executive during the year, the profit accrued to the assessee at the end of the year and therefore the assessee was entitled to the claim of the bonus in full. He further referred to the fact that the learned assessing officer has wrongly noted partnership deed dated 18/11/2010, which is in fact partnership deed dated 29/9/2006 read with supplementary deed dated 18/11/2010. Similar error made by the learned assessing officer was also pointed out in the table produced by the assessing officer in the assessment order. He further stated that even otherwise the quantum of the payment of the bonus was decided at the end of the specific financial year and authorised by the supplementary deed. Supplementary partnership deed is part of the original partnership deed. He further stated that it is an accepted law that the profits are determined at the end of the financial year and not on daily bases. Therefore, it cannot be held that the profit accrued to the assessee prior to the close of the accounting year. He further stated that quantification of bonus cannot be made in the partnership deed itself but authority to pay bonus arises from the partnership deed. He further stated that provisions of section 40 (b) only prescribes that the payment has to be made in accordance with and authorised by the partnership deed. He further stated that the decision relied upon by the learned CIT – A of the honourable Delhi High Court clearly shows that there was no mention of any amount in the partnership deed or in the supplementary deed. He referred to the paragraph number 14 of that decision and therefore he stated that the above decision is distinguishable on the fact and therefore does not apply. He further referred to the several judicial precedent and notable amongst them was CIT vs Vaish Associates 63 taxmann.com 90 (2015) and stated that the issue is fully covered in favour of the assessee. Accordingly, he submitted that the disallowance made by the lower authorities is not in accordance with the provision of the law.

11. The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that issue is squarely covered against the assessee by the decision of the honourable Delhi High Court as stated by the learned CIT – A. He reiterated the same facts and stated that when the partnership deed which are called as a supplementary partnership deed‟ were entered later on , therefore, from that date only the bonus is allowable to the partners which the assessing officer has allowed. It was further stated that when the supplementary deeds were entered into by the assessee on subsequent date prior to that date there was no authorization of the payment of bonus. Therefore, it cannot be said that the payment of the bonus is authorised by and in accordance with the partnership deed. It was therefore submitted that the disallowance made by the learned assessing officer and confirmed by the learned CIT – A may be upheld.

12. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the judicial precedents relied upon by both the parties. Undisputedly the original partnership deed dated 29thday of September 2006, clause 13 deals with the revelation to the partners. As per clause (a), the maximum remuneration payable to the partners has been mentioned. In clause (b), fixed amount of salary is mentioned with respect to each of the partner. In clause (C), it is provided that partners may also be entitled to be paid bonus commission on net profits of the firm. Subsequently a supplementary partnership deed was entered into on 18thday of November 2010. As per this deed the clause 13 ( C ) of the original partnership deed dated 29/09/2006 was amended and it was agreed among the partners that the bonus shall be paid to the partners for the year ended 31st of March 2011. According to that against each partner of a fixed sum was mentioned. Further, on 19/11/2010 a further partnership deed was executed wherein identically in clause number 13 © there was a provision of payment of bonus to the partners. This partnership deed was necessitated when Mr. Akshay Bhalla retired from the firm. Further on 31st May of March 2011 the said clause 13 C of the partnership deed dated 19/11/2010 was amended further provide bonus to the partners at the fixed sum which is mentioned against the each of the partners. The supplementary deed stated that it is applicable for the financial year 2010 –11 only. Therefore, it is apparent that the fixed sum of bonus is mentioned against the name of the each partner. The bonus will also paid in terms of the clause of the partnership deed. Therefore, according to us, the amount of partners‟ remuneration, which includes the above bonus, is in accordance with and authorised by the partnership deeds of the assessee. Further, now the only issue that remains is whether the supplementary partnership deed entered on 31st day of March 2011 and 18th day of November 2010, the partners can be allowed the bonus prior to those dates or not, because in the original partnership deed dated 29th day of September 2006 though there was provision of payment of bonus however there was no quantification of the manner of computation of the bonus payable to the partners was mentioned. However, in the supplementary deed, the exact amount of bonus payable to the each of the partner is mentioned. On reading of the supplementary deed provided for the payment of bonus on 18th day of November 2010. Therefore, on that particular date only the bonus accrued to the partners. Similarly wide supplementary deed dated 31st day of March 2011 it was decided to pay the bonus and therefore it accrued to the partners on the same date. In both the partnership deed, which is called supplementary partnership deed, it was specifically mentioned that they apply to the financial year 2010 – 11. The profit of the partnership firm can only be computed at the end of the year when the books of accounts are drawn up and made up. Therefore, according to us, the above payment of bonus paid to the partners is in accordance with the partnership deed, authorised by it and it applies for the full year.

The decision relied upon by the revenue in 15 taxmann.com 76 (Delhi) clearly shows that in para number 9 honourable High Court recorded that clause 1 of the supplementary partnership deed dated 01/04/1992 authorizes payment of remuneration to the partners but does not quantify the same. It also did not prescribe any method or manner to calculate and compute the remuneration. In that particular case the remuneration payable was to be mutually agreed between the partners from time to time further in para number 10 on interpretation of clause 2 of the supplementary deed the honourable high courts held that conjoint reading of clause 7 of the partnership deed dated 01/05/1976 and clause 1 and 2 of the supplementary partnership deed dated 01/04/1992 conditions of section 40 (b) (v) are not satisfied. The honourable High Court held so because there was no manner of quantifying the amount payable to the partners. In the impugned case before us, the assessee has clearly mentioned the amount payable to each of the partner as bonus. Hence, the revenue‟s reliance on the above decision is misplaced. Further in another decision of the honourable Delhi High Court relied upon by the learned authorised representative in 63 taxmann.com 90 (Delhi) (2015) wherein a supplementary deed was executive on 01/08/2009 was considered to be effective from 01/04/2009 for assessment year 2009 – 10. Accordingly, the disallowance of rupees for 972773/– made by the learned AO because of bonus/remuneration paid to the partners is not sustainable. Therefore we reverse the order of the learned CIT – A and direct the AO to delete the above addition. Accordingly, ground number 2 of the appeal is allowed.

13. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open court on 29/03/2019.

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