2019 (2) TMI 1283 - HC - Income Tax

Deduction on account of payments made to the retired partners as 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 - 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 involved:
Challenge to judgment of Income-tax Appellate Tribunal regarding deduction on payments made to retired partners as admissible expenditure under partnership deed.

Analysis:
1. The appeal was filed by the Revenue challenging the Tribunal's judgment allowing a deduction for payments made to retired partners as admissible expenditure under the partnership deed. The question of law raised was whether the ITAT was justified in allowing the deduction. The respondent, a Partnership Firm providing legal services, made a payment of ?3.68 Crores to a retired partner, citing it was compensation for appreciation in the value of immovable properties and work done during the partnership period. The firm argued that the payment was in accordance with the partnership agreement's clause 23.5. The Assessing Officer disallowed the expenditure, leading to an appeal by the assessee.

2. The Tribunal referred to previous decisions and accepted the assessee's stand, considering it a case of diversion of income at source. The Court cited the case of Commissioner of Income-tax v. Mulla and Mulla and Craigie, Blunt and Caroe, where the concept of diversion of income at source by overriding title was discussed under similar circumstances. The Court held that the amounts paid to heirs of deceased partners could not be assessed as the firm's income.

3. Following the decision in Mulla and Mulla and Craigie, Blunt and Caroe, the Court dismissed the Revenue's appeal, noting that the Tribunal's order was consistent with previous decisions in the assessee's case for earlier assessment years. The Tribunal's reliance on previous court decisions led to the conclusion that no substantial question of law arose for consideration. The Court emphasized that in cases where payments to outgoing partners were based on services rendered during their tenure but not realized due to incomplete work, it constituted diversion of income at source by overriding title.

4. In conclusion, the Court dismissed the income tax appeal, stating that no substantial question of law was raised. The payment to the outgoing partner was deemed a diversion of income at source by overriding title, in line with previous court decisions. The judgment highlighted the firm's obligation to compensate the outgoing partner for services rendered during the partnership period, even if the income was not realized due to incomplete work.