2015 (11) TMI 997 - AT - Income Tax

Disallowance of depreciation on tenancy rights - Held that - Since the Tribunal has consistently decided this issue against the assessee over the years and none of the orders of the Tribunal has been shown to have been either reversed or stayed on appeal, respectfully following the said earlier Tribunal orders, this issue is decided against the assessee for the year under consideration confirming the disallowance made by the AO on account of assessee s claim for depreciation on tenancy rights - Decided against assessee. Addition of payment (remuneration) made to a retired partner - assessee contended that 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 wide sweeping, but wrong observation. - Held that - Apropos the applicability or otherwise of section 40(b) of the Act to the facts of the year under consideration, it cannot be disputed that the amount in question is not at all income of the firm, having been diverted by the overriding title of the charge stipulated by the relevant clauses of the partnership deed. - Decided in favor of assessee. Disallowance made u/s 14A read with Rule 8D - Held that - The assessee s argument of non-applicability of Rule 8D of the Rules to the year under consideration notwithstanding, it cannot be gain-said that the AO has reasonably calculated the disallowance. Finding no error therein, the action of the ld. CIT(A) in confirming this disallowance is upheld.- Decided against assessee. Addition being payment made to the legal heirs of a deceased partner, Sh. Anand Bhatt - Held that - In the present case, the partnership deed nowhere stipulated that the amount to be paid was to be paid by way of the price of the share of the outgoing partner in the partnership. This is the material point of difference between the facts herein and those attending V.G. Bhuta (1993 (3) TMI 79 - BOMBAY High Court). The Ld. CIT(A) correctly confirmed the addition. - Decided against assessee.

Summary

Issues Involved:

1. Disallowance of depreciation on tenancy rights.
2. Addition of payment to retired partner.
3. Disallowance under section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Tenancy Rights:

The assessee claimed depreciation on tenancy rights, arguing that tenancy rights are intangible assets under section 2(11)(b) of the Income Tax Act. The Assessing Officer (AO) disallowed this claim, referencing previous decisions against the assessee for earlier assessment years. The CIT(A) upheld this disallowance, noting that tenancy rights do not fall within the block of intangible assets. The Tribunal, following its consistent decisions in the assessee's own cases for previous years, decided against the assessee, stating that the issue had been consistently decided in favor of the Department and none of the Tribunal's orders had been reversed or stayed on appeal.

2. Addition of Payment to Retired Partner:

For the assessment years 2007-08 and 2009-10, the assessee made significant payments to retired partners, which were disallowed by the AO. The AO argued that under section 40(b) of the Income Tax Act, only working partners are entitled to receive remuneration and interest, and payments to retired partners were not within the scope of the Act. The CIT(A) confirmed this disallowance, stating that the payments were planned incentives and not examples of diversion of income by overriding title.

The Tribunal, however, found that the payments were contractual obligations as per the partnership deed and constituted a diversion of income by overriding title. The Tribunal noted that the payments were not gratuitous but were obligations created by the partnership deed, and the amounts were determined at the time of retirement. The Tribunal distinguished this case from other cases cited by the AO, such as "V.G. Bhuta" and "S.B. Billimoria & Co.," where the facts were different. The Tribunal concluded that the payments to retired partners were not includible in the income of the firm and allowed the assessee's claim.

3. Disallowance under Section 14A:

The AO made a disallowance under section 14A read with Rule 8D for expenses incurred to earn exempt income. The assessee argued that no expenditure was incurred to earn the exempt income and that Rule 8D was not applicable for the assessment year 2007-08. The CIT(A) upheld the disallowance, and the Tribunal also found no error in the AO's calculation and confirmed the disallowance, rejecting the assessee's grounds on this issue.

Conclusion:

The Tribunal partly allowed the appeals for the assessment years 2007-08 and 2009-10. The disallowance of depreciation on tenancy rights was upheld, while the addition of payments to retired partners was set aside, recognizing it as a diversion of income by overriding title. The disallowance under section 14A was confirmed.