Payment to retired partner amounts to diversion of income at source by overriding title

Deloitte Haskins & Sells Vs ACIT (ITAT Delhi)

Held that deduction from income claimed for payment made to a retired partners allowable as it amount to a diversion of income at source by overriding title.

Facts-

Assessee’s claim of deduction amounting to Rs.1,37,75,514/- paid to retired partners, claimed on the ground that the amount represented diversion by overriding title, was rejected by the Assessing officer; and the amount was added to assessee’s income. Aggrieved, the assessee filed appeal in the office of Ld. CIT(A). CIT(A) confirmed the addition. Being aggrieved, the present appeal is filed.

Conclusion-

Partnership firm envisaged payment to an outgoing partner on the basis that the partner would have rendered service during his tenure as a partner of the firm but could not enjoy the fruits thereof on account of the fact that the work having remained incomplete, the concerned client had not been billed for the work already done. The Hon’ble Bombay High Court held that in similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title.

Held that the issue is squarely covered in favour of the assessee and against Revenue in aforesaid order dated 15/01/2021 of Co­ordinate Bench of ITAT, Delhi in assessee’s own case in ITA No.3715 and 3716/Del/2017 for Asst. Year 2011-12.

FULL TEXT OF THE ORDER OF ITAT DELHI

(A) This appeal by Assessee is filed against the order of Learned Commissioner of Income Tax (Appeals)-20, New Delhi [“Ld. CIT(A)”, for short], dated 30/01/2018 for Assessment Year 2009-10. Grounds taken in this appeal are as under:

“The appellant objects to the order dated 30 January 2019 passed by the Commissioner of Income Tax (Appeals)-20, New Delhi (‘learned CIT(A)’), under section 250(6) of the Income Tax Act, 1961 (‘the Act’) for the AY 2009-10, on the following among other grounds:

1. Validity of re-assessment order passed under section 147 read with section 143(3) of the Act

1.1 The reassessment order dated 31 December 2016 passed under section 147 read with section 143(3) of the Act, is ultra vires and bad in law and ought to be quashed.

1.2 The learned CIT(A) erred in upholding validity of re-assessment proceedings initiated by the Assessing Officer.

1.3 The learned CIT(A) ought to have appreciated that all the material facts were disclosed by the appellant in the course of assessment proceedings and hence, initiation of re-assessment proceedings after the expiry of 4 years from the end of the AY 2009-10, on the same set of facts, is not in accordance with the provisions of law.

Barred by limitation

1.4 The learned CIT(A) erred in observing that the Assessing Officer has issued notice under section 148 of the Act within the time frame.

1.5 The learned CIT(A) erred in observing that the appellant is not entitled to question the jurisdiction moreover because the appellant had filed return in response to such notice.

1.6 The learned C1T(A) ought to have appreciated that the reassessment order is barred by limitation in terms of section 149 of the Act as the reasons recorded for initiating the reassessment proceedings were communicated to the appellant after expiry of 6 years from the end of the AY 2009-10.

Initiating re-assessment proceedings

1.7 The learned CIT(A) ought to have quashed the re-assessment order as the learned Assessing Officer had initiated the proceedings under section 147 / 148 of the Act without satisfying the relevant conditions provided in the law.

Change of opinion

1.8 The learned CIT(A) ought to have appreciated that the initiation of reassessment proceedings was on the basis of mere change of opinion without any new tangible material/ information coming to the possession of the learned Assessing Officer subsequent to completion of assessment under section 143(3) of the Act and hence such proceedings ought to be quashed.

Audit Objection

1.9 The learned CIT(A) ought to have appreciated that the Assessing Officer reopened the assessment merely on the basis of audit objection. Re-assessment order ought to be quashed as bad in law

1.10 The learned CIT(A) erred in not considering the Hon’ble Delhi High Court order dated 13 July 2018 in the appellant’s own case, wherein on similar facts, the Hon’ble court has quashed the re-assessment proceedings for the AY 2010-11.

2. Disallowance of payment to Retired Partners Rs. 1,37,75,514

2.1 The learned CIT(A) erred in confirming the addition of Rs. 1,37,75,514 made by the Assessing Officer, being professional fees diverted by overriding title to retired partners in terms of the Partnership Deed.

2.2 The learned CIT(A) erred in not appreciating the facts in right perspective and also erred in following the Commissioner of Income Tax (Appeals) order dated 30 March 2017 for the AY 2011-12.

2.3 The learned CIT(A) ought to have appreciated that as per clause lO.m read with clause 10.m of the Partnership Deed, the said amount was not income of the appellant firm as it was diverted by overriding title.

2.4 The learned CIT(A) erred in confirming the Assessing Officer’s observation that the payment to retired partners is application of income without considering the fact that there is a prior charge on the income by way of superior title and therefore it is not an income of the appellant.

2.5 Without prejudice to the above, the learned CIT(A) erred in confirming the Assessing Officer’s observation that the payment to retired partners is not allowable as deduction under section 37(1) of the Act.

2.6 The learned CIT(A) erred in confirming the Assessing Officer’s observation that the payment to retired partners has to be disallowed under section 40(a)(ia) of the Act as no tax is deducted. The learned CIT(A) ought to have appreciated that no tax was required to be deducted at source from such payment.

2.7 The learned CIT(A) erred in confirming the Assessing Officer’s observation that the payment to retired partners is in the nature of remuneration to working partners.

2.8 The learned CIT(A) erred in confirming the action of the Assessing Officer in applying the provisions of section 40(b) of the Act in respect of payment to retired partners.

2.9 The learned CIT(A) erred in confirming the Assessing Officer’s observation that the payment to retired partner is similar to pension payment to exemployees.

2.10 The learned CIT(A) erred in not appreciating the fact that the amount of Rs. 1,37,75,514 is included in the income of the retired partners and offered to tax in their return of income.

Each one of the above grounds of appeal is without prejudice to the other.

That the appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.”

(B) In this case, assessment order dated 31/12/2016 was passed by Assessing Officer u/s 147/143(3) of Income Tax Act, wherein the assessee’s claim of deduction amounting to Rs.1,37,75,514/- paid to retired partners, claimed on the ground that the amount represented diversion by overriding title, was rejected by the Assessing officer; and the amount was added to assessee’s income.

(B.1) Aggrieved, the assessee filed appeal in the office of Ld. CIT(A). Ld. CIT(A) noted that the facts and circumstances were identical to the facts and circumstances of Asst. Year 2011-12 in assessee’s own case; and following the order of Ld. CIT(A) in Asst. Year 2011-12, confirmed the aforesaid addition of Rs.1.37,75,514/.

The relevant portion of the order of the Ld. CIT(A) is reproduced as under:

“6.2.2 During the course of appellate proceedings, the Ld. ARs have also accepted this fact that the facts and circumstances of this case are identical to the facts and circumstances of the case of Asst. Year 2011-12. The appellant has admitted that the facts in respect to payment to retired are same except the quantum of amount paid to the retired partners each year. As the facts and circumstances of the payment made to the retiring partners are identical in this year also; following the order of CIT(A) in A.Y.2011-12, the disallowance of Rs.1,37,75,514/- made by the Assessing Officer is confirmed.”

(C) In the course of appellate proceedings in Income Tax Appellate Tribunal, a paper book containing the following particulars were filed from the assessee’s side.

(C.1) At the time of hearing before us, representatives of both sides, the Ld. Counsel for assessee and Ld. Sr. DR for Revenue were in agreement; that on merits, the issue regarding the assessee’s claim pertaining to aforesaid amount of Rs.1,37,75,514/- was squarely covered in favour of the assessee against Revenue by the order of Co-ordinate Bench of Income Tax Appellate Tribunal, Delhi dated 15/01/2021 in assessee’s own case in ITA No.3715/Del/2017 for Asst. Year 2011-12. Representatives of both sides were also in agreement before us at the time of hearing that the issue in the present appeal before us is identical to issue in Asst. Year 2011-12, and that the facts and circumstances in both the years, i.e. Asst. Year 2011-12 and 2009-10 are similar. The relevant portion of the aforesaid order dated 15/01/2021 of Co­ordinate Bench of ITAT, Delhi is reproduced as under:

“7.2 As far as the issue of disallowance of payment to Retired partners in Assessment Year 2011-12 is concerned, it is seen that this issue is also settled in favour of the assessee by numerous judgments of the Hon’ble High Courts as well as the Co-ordinate Benches of the Tribunal. We find that an identical issue had come up before the ITAT Chennai bench in the case of a related concern of the assessee in assessment year 2011 – 12 and the ITAT Chennai bench in ITA No. 2077/MDS/2016, vide order dated 25/11 /2018, after relying on an order of ITAT Mumbai Bench in the case of CC Chokshi & Co. for assessment years 2000-01 and 2001-02 had held the issue in favour of the assessee. The Honhle High Court of Bombay in the case of DCIT versus Wadia Ghandy & Company, vide judgment dated 12/02/2019, also upheld an identical order of ITAT Mumbai and noted that payment to the partner would amount to diversion of income at source by overriding title. The court went on to observe that it was not necessary to refer to long line of decisions where a similar view in similar circumstances had been taken. The undisputed facts are that the partnership firm envisaged payment to a outgoing partner on the basis that the partner would have rendered service during his tenure as a partner of the firm but could not enjoy the fruits thereof on account of the fact that the work having remained incomplete, the concerned client had not been billed for the work already done. The Hon’ble Bombay High Court held that in similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title. The Ld. senior departmental representative could not point out any judgment to the contrary on this issue as well and, therefore, in view of the ratio of the decisions as aforesaid and as relied upon by the Ld. Authorized Representative, on identical facts, respectfully following the above cited judicial precedents, we allow ground No.3 of the assessee’s appeal in Assessment Year 2011-12 and direct the Assessing Officer to delete the disallowance.”

However, the Ld. Sr. DR relied upon the order of the Assessing Officer.

(D) We have heard the representatives of both sides on merits of the aforesaid addition of Rs.1,37,75,514/-. We have perused the materials on record. There is no material dispute on facts regarding the merits of the aforesaid addition of Rs.1,37,75,514/-. Representatives of both sides were in agreement at the time of hearing before us that the issue in the present appeal before us for Asst. Year 2009-10 is identical to the issue in Asst. Year 2011-12.

Representatives of both sides were also in agreement at the time of hearing before us that the facts and circumstances for Asst. Year 2009-10, to which the present appeal before us pertains, are similar to the facts and circumstances of Asst. Year 2011-12 to which aforesaid order dated 15/01/2021 of Co-ordinate Bench of ITAT, Delhi pertains. Representatives of both sides were also in agreement at the time of hearing before us that as far as the merits of the addition of the aforesaid amount of Rs.1,37,75,514/- is concerned, the issue is squarely covered in favour of the assessee and against Revenue in aforesaid order dated 15/01/2021 of Co­ordinate Bench of ITAT, Delhi in assessee’s own case in ITA No.3715 and 3716/Del/2017 for Asst. Year 2011-12. Neither side has brought any distinguishing facts and circumstances or legal submissions for our consideration to persuade us to take a view different from the view taken by Co-ordinate Bench of ITAT, Delhi in aforesaid order dated 15/01/2021. In view of the foregoing; and respectfully following the aforesaid order dated 15/01/2021 Co­ordinate Bench of ITAT, Delhi; we decide the issue regarding merits of the aforesaid addition of Rs.1,37,75,514/- in favour of the assessee and against Revenue, in Asst. Year 2009-10 also, to which the present appeal before us pertains; and we direct the Assessing Officer to delete the aforesaid addition of Rs.1,37,75,514/-. Accordingly, grounds of appeal along with sub-grounds 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10 are treated for statistical purposes, as allowed.

(E) In view of our decision contained in foregoing paragraph (D) of this order; ground no.1 of appeal and sub-grounds 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 1.9 and 1.10 have become infrcutuous and need not be decided. Therefore, we treat ground no.1 and sub-grounds 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 1.9 and 1.10 as having become infructuous, and we decline to decide the same.

(F) For statistical purposes, this appeal is partly allowed.

This order was already pronounced orally on 2nd August, 2022 in Open Court, in the presence of representatives of both sides. Now, this order in writing is signed today on 04/08/2022.