2019 (4) TMI 979 - HC - Income Tax

Deduction on account of payments made to the legal heir of the deceased partner - admissible expenditure under the provisions of the partnership deed - compensation to the outgoing partner towards the appreciation in the value of the immovable properties held by the assessee firm to the extent of his share of the partnership - HELD THAT - As decided in PR. COMMISSIONER OF INCOME-TAX-16 VERSUS WADIA GHANDY CO. 2019 (2) TMI 1283 - BOMBAY HIGH COURT only to summarize, 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. In similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title. No substantial question of law arises for our consideration. The income tax appeal is dismissed.

Summary

Issues:
1. Deduction on payments made to legal heir of deceased partner as admissible expenditure under partnership deed.

Analysis:
The appeal before the Bombay High Court challenged the judgment of the Income Tax Appellate Tribunal regarding the deduction of payments made to the legal heir of a deceased partner by a partnership firm. The partnership deed specified that a retiring, deceased, or resigning partner should be compensated by the continuing partners. This compensation was based on the premise that the partner would have rendered services to clients during their tenure, leading to delayed payments. The firm claimed this compensation as a deductible expenditure, which the revenue objected to. The Tribunal, relying on precedent, including the judgment in CIT Vs. Crawford Bayley & Co., ruled in favor of the assessee, prompting the appeal.

The Court noted that similar issues had been raised previously, with the revenue's appeals being dismissed. Referring to a recent order, the Court highlighted a case where a partnership firm paid a retired partner based on the partnership agreement. The firm argued that the payment was compensation for the partner's share of profits and work done during the partnership, which had not been fully realized. The assessing officer disallowed the expenditure, but the Tribunal accepted the firm's stance, considering it as diversion of income at source. The Court cited previous decisions, such as Commissioner of Incometax v. Mulla and Mulla and Craigie, Blunt and Caroe, which discussed diversion of income by overriding title, supporting the Tribunal's decision.

Furthermore, the Court mentioned another case involving exclusion of amounts related to retired/deceased partners' shares due to overriding title in the partnership deed. The Tribunal's order, consistent with previous decisions, was upheld, emphasizing that no substantial question of law was raised. The Court highlighted that payments to outgoing partners were considered diversion of income at source in similar circumstances, leading to the dismissal of the income tax appeal. Ultimately, the Court dismissed the appeal challenging the deduction of payments to the legal heir of the deceased partner, affirming the Tribunal's decision based on the principles of diversion of income at source.