2015 (7) TMI 980 - AT - Income Tax

Diversion of income by overriding title - payment to expartners or spouses of deceased partners - CIT(A) deleted addition - whether the aforesaid payment is nothing but diversion of income by overriding title? - plea of the assessee was that, the amount was a prior and overriding charge on the receipts of the firm in terms of the partnership deed and the actual income can be arrived at only after reducing the impugned payments from the gross receipts of the year - Held that - Similar dispute for assessment years 2000-01, 2001-02 and 2003-04 was decided by the Tribunal in favour of the assessee. The CIT(A) noted that there was no material change in the relevant clause of the partnership deed when compared to year which were before the Tribunal. Therefore, following the precedents, he correctly allowed the claim of the assessee that the impugned payment to retired partners or spouses of the deceased partners under the terms of the partnership deed is diverted by overriding title.- Decided against revenue. Disallowance under section 14A - interest expenditure incurred for earning dividend income from the preference shares - Held that - he ultimate conclusion of the CIT(A) in directing the Assessing Officer to recompute the disallowance u/s 14A of the Act in accordance with the decision of the Hon ble High Court in the case of Godrej & Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT ) is hereby affirmed - Decided against assessee.

Summary

Issues:
1. Disallowance of payment to ex-partners or spouses of deceased partners as diversion of income by overriding title.
2. Disallowance of interest and expenses incurred for earning exempt income under section 14A of the Income Tax Act.

Issue 1: Disallowance of payment to ex-partners or spouses of deceased partners:
The case involved cross-appeals challenging the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of payment made to ex-partners or spouses of deceased partners by a partnership firm of chartered accountants. The Assessing Officer disallowed the payment, considering it as diversion of income by overriding title. The firm contended that the payment was a prior charge on receipts as per the partnership deed and alternatively argued it was a legitimate business expenditure under section 37(1) of the Act. The CIT(A) allowed the claim based on precedents and upheld by the ITAT Mumbai, leading to the Revenue's appeal being dismissed.

Issue 2: Disallowance of interest and expenses under section 14A:
The second issue revolved around disallowance of interest and expenses incurred for earning exempt income under section 14A of the Act. The Assessing Officer disallowed a specific sum as expenditure related to exempt income, which the CIT(A) upheld but directed to recompute based on a Bombay High Court decision. The ITAT affirmed the direction to recompute the disallowance in line with the High Court judgment, dismissing the assessee's appeal on this matter.

The judgment highlighted the importance of partnership deed clauses, the treatment of business expenditures, and the application of precedents and higher court decisions in tax assessments. The ITAT Mumbai's decision emphasized adherence to legal principles and authoritative judgments in resolving tax disputes, ensuring consistency and fairness in tax assessments.