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2019 (3) TMI 332 - AT - Income TaxDiversion of income by way of overriding title - right to receive the money - sum paid by the assessee-firm to the legal heirs of the deceased partners - legal heirs of the deceased partner was paid a sum as per the terms mentioned in clauses 23 and 24 of the partnership deed dated 31.12.2007 - not for purpose of business of the assessee-firm and added back - HELD THAT - Diversion of income at source can take place either under a legal compulsion or under a contractual obligation or else under a statutory provision. In the case of CIT v. Smt.Kamlabai Juthalal 1975 (7) TMI 25 - BOMBAY HIGH COURT it was held that where obligation is undertaken by the assessee to apply the income in a particular way before being received by the assessee or its accrual, the same results in the diversion of income. On the other hand, where the obligation to apply income is undertaken after being received or accrued to the assessee, it will be the case of application of money and will be liable to be taxed in hands of assessee. The underlying test, therefore, is whether the income in question ever reaches to the assessee. In the instant case, the effect of creation of the overriding of income is achieved by clause 23 of the partnership deed dated 31.12.2007. In identical factual situation, the Mumbai Tribunal in the case of ACIT v. Deloitte Haskins & Sells 2018 (5) TMI 418 - ITAT MUMBAI had held that the payment made by a firm to the ex-partners and spouses / legal heirs of the deceased partners would be paid part of the income of the assessee-firm for the services rendered by them. The Mumbai High Court in case of CIT v. Kanga & Co. 2016 (2) TMI 573 - BOMBAY HIGH COURT had confirmed the Tribunal order, wherein the Tribunal held that payment by firm relatable to retired / deceased partner s would tantamount to diversion of income by overriding title. Therefore,amount of should be allowed as deduction in the case of the assessee-firm - Decided in favour of assessee.
Issues Involved:
1. Whether the CIT(A) was right in confirming the assessment order disallowing the amount of ?19,45,455 paid to the legal heirs of a deceased partner. Issue-wise Detailed Analysis: 1. Confirmation of Assessment Order Disallowing ?19,45,455: The core issue revolves around the disallowance of ?19,45,455 paid to the legal heirs of a deceased partner by the assessee-firm. The CIT(A) upheld the Assessing Officer's (A.O.) decision, which was based on the premise that this payment was a diversion of income and not an expenditure incurred for the business purposes of the assessee-firm. The A.O. had argued that the payment did not qualify as a business expense under Section 37 of the I.T. Act, as it was not incurred wholly and exclusively for the purpose of business. 2. Assessee's Appeal and Grounds: The assessee contested the CIT(A)'s decision on several grounds, primarily arguing that the payment was in accordance with the partnership deed and constituted a diversion of income by overriding title. The assessee emphasized that the payment was an allowable deduction as per clauses 23 and 24 of the partnership deed dated 31.12.2007, which obligated the firm to make such payments to the legal heirs of a deceased partner. 3. Examination of Partnership Deed Clauses: The Tribunal scrutinized clauses 23 and 24 of the partnership deed. Clause 23 stated that a retiring or deceased partner (or their legal heirs) is entitled to a lump sum payment equivalent to two years' share of net earnings if the partner retires or dies after the age of sixty-five. Clause 24 added that if a partner dies while still a partner, their legal heirs are entitled to the monies in the deceased partner's accounts and a pension if the partner had completed at least 15 years of service before attaining the age of 65. 4. Legal Precedents and Doctrine of Overriding Title: The Tribunal referred to multiple legal precedents, including the Supreme Court's ruling in CIT v. Sitaldas Tirathdas and the Bombay High Court's decision in CIT v. Mulla & Mulla & Craigie Blunt & Careo. These cases established that if an income is diverted before it reaches the assessee due to an overriding title, it is deductible. The Tribunal noted that the payment in question was a diversion of income by overriding title, as it was an obligation imposed by the partnership deed before the income reached the assessee. 5. Mumbai Tribunal and High Court Decisions: The Tribunal also cited similar cases, such as ACIT v. Deloitte Haskins & Sells, where payments to ex-partners and legal heirs were deemed diversions of income by overriding title. The Mumbai High Court in CIT v. Kanga & Co. confirmed that payments to retired or deceased partners' legal heirs constituted a diversion of income by overriding title. Conclusion: Based on the analysis of the partnership deed, relevant legal precedents, and the doctrine of overriding title, the Tribunal concluded that the payment of ?19,45,455 to the legal heirs of the deceased partner was indeed a diversion of income by overriding title. Therefore, it should be allowed as a deduction in the assessee-firm's case. The appeal filed by the assessee was allowed, and the disallowance by the CIT(A) was overturned. Order Pronouncement: The order was pronounced on the 1st of March, 2019, allowing the appeal filed by the assessee.
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