2016 (11) TMI 1592 - AT - Income Tax

Disallowance of pension paid to the retired partners - Expenditure allowable u/s 37(1) - addition made by both on diversion of income by overriding title as well as the revenue expenditure u/s 37(1) - Held that - 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 hold that the payment is a diversion by overriding title and cannot be included in the total income. Allowance of expenditure u/s 37(1) - As the payment made to retiring partners is diversion of income by overriding title, the ground raised by the assessee became infructuous and hence dismissed. TDS credit suffered by the assessee in connection with the professional fees received from clients - Held that - CIT(A) in her appellate order, has directed the Assessing Officer to verify the claim of the assessee vis- -vis Form 26AS and give for the correct amount of T.D.S. Giving correct amount of payment of taxes is the duty of the assessing officer. The assessee should not be made to suffer for getting the refund of taxes paid. We direct the assessing officer to allow the correct amount of TDS without any further delay. This ground is allowed for statistical purposes. Levy of interest u/s 234D - Held that - AO is directed to examine the applicability of interest u/s 234D and levy correct amount of interest. Accrual of income - Addition towards advance fee - assessee contended that the amount of advances were received from clients for the services not yet rendered, therefore, the income is not accrued and accordingly, the advance cannot partake the character of income - Held that - We agree with the submission of the assessee that the advance cannot be treated as income in the hands of the assessee unless the services are rendered by the assessee. The Assessing Officer has not made out a case that advances received in question were towards the services rendered by the assessee. The ld. DR also could not bring any evidence to controvert the submissions made by the assessee. Revenue s appeal is dismissed.

Issues Involved:
1. Disallowance of pension paid to retired partners.
2. Credit of TDS claimed by the assessee.
3. Levy of interest under Section 234D.
4. Addition towards advance fee received by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of Pension Paid to Retired Partners:
The primary issue revolves around the disallowance of pension payments made to retired partners, amounting to ?1,49,76,851/-. The Assessing Officer (AO) classified this payment as an application of income and not as an allowable expenditure under Section 37(1) of the Income Tax Act, 1961. The assessee argued that these payments were made as per the partnership deed, which created an overriding title in favor of the retired partners. The CIT(A) upheld the AO's decision, leading the assessee to appeal to the Tribunal.

The Tribunal examined the clauses of the partnership deed, which specified that payments to retired partners were for the work done during their tenure and for allowing the continuing partners to use the firm's name and clientele. The Tribunal referred to the ITAT Mumbai Bench's decision in the case of M/s C.C. Chokshi & Co., where similar payments were held to be a diversion of income by overriding title and not an application of income. The Tribunal concluded that the payments to retired partners were a diversion of income by overriding title and thus could not be included in the total income of the assessee.

2. Credit of TDS Claimed by the Assessee:
The assessee claimed a TDS credit of ?1,98,27,735/-. The CIT(A) directed the AO to verify the claim against Form 26AS and allow the correct amount of TDS. The Tribunal upheld this direction, emphasizing that the AO must ensure the correct amount of TDS is credited without delay.

3. Levy of Interest under Section 234D:
The issue of interest levy under Section 234D amounting to ?6,10,636/- was also raised. The Tribunal directed the AO to examine the applicability of interest under this section and levy the correct amount.

4. Addition Towards Advance Fee Received by the Assessee:
The Revenue's appeal contested the CIT(A)'s decision to allow the assessee's claim regarding an advance fee of ?64,39,989/-. The AO had added this amount to the income, arguing that the assessee, following the cash system of accounting, should recognize all receipts as income. The assessee contended that these were advances for services not yet rendered and thus could not be considered income until the services were performed.

The Tribunal upheld the CIT(A)'s decision, agreeing that advances received for services not yet rendered do not constitute income. The Tribunal referenced the consistent accounting method followed by the assessee and similar decisions in other cases, concluding that the advance could not be treated as income until the services were rendered.

Summary:
The Tribunal partly allowed the assessee's appeal, holding that the pension payments to retired partners were a diversion of income by overriding title and not an application of income. The Tribunal directed the AO to verify and allow the correct TDS credit and to correctly levy interest under Section 234D. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that advances received for services not yet rendered do not constitute income.

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