2022 (9) TMI 1048 - AT - Income Tax

Addition being professional fees diverted by overriding title to retired partners in terms of the Partnership Deed - assessee s claim of deduction paid to retired partners, claimed on the ground that the amount represented diversion by overriding titlewas rejected by the Assessing officer; and the amount was added to assessee s income - HELD THAT - Representatives of both sides were in agreement at the time of hearing before us that the issue in the present appeal before us for Asst. Year 2009-10 is identical to the issue in Asst. Year 2011-12. Representatives of both sides were also in agreement at the time of hearing before us that the facts and circumstances for Asst. Year 2009-10, to which the present appeal before us pertains, are similar to the facts and circumstances of Asst. Year 2011-12 to which aforesaid order 2021 (1) TMI 738 - ITAT DELHI of Co-ordinate Bench of ITAT, Delhi pertains. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of re-assessment order under section 147 read with section 143(3) of the Income Tax Act, 1961.
2. Disallowance of payment to retired partners amounting to Rs. 1,37,75,514.

Detailed Analysis:

1. Validity of Re-assessment Order:
The appellant challenged the re-assessment order dated 31 December 2016, claiming it was ultra vires and bad in law. The appellant argued that all material facts were disclosed during the original assessment, making the initiation of re-assessment proceedings after four years from the end of the assessment year (AY) 2009-10 invalid. The appellant also contended that the re-assessment was based on a mere change of opinion without any new tangible material and was initiated solely on the basis of an audit objection. The appellant further argued that the re-assessment order was barred by limitation as the reasons for initiating the proceedings were communicated after six years from the end of AY 2009-10. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the validity of the re-assessment proceedings, noting that the notice under section 148 was issued within the permissible timeframe and that the appellant had filed a return in response to the notice, thus questioning the jurisdiction was not permissible.

2. Disallowance of Payment to Retired Partners:
The appellant contested the addition of Rs. 1,37,75,514 made by the Assessing Officer (AO), which was claimed as professional fees diverted by overriding title to retired partners as per the Partnership Deed. The CIT(A) confirmed the addition, following the order for AY 2011-12, stating that the facts and circumstances were identical. The appellant argued that the payment was not income of the firm as it was diverted by overriding title and that it was a prior charge on the income, not an application of income. The appellant also contended that the payment should not be disallowed under section 40(a)(ia) for non-deduction of tax at source, as no tax was required to be deducted. Additionally, the appellant argued that the payment was not in the nature of remuneration to working partners and should not be disallowed under section 40(b).

Tribunal's Decision:
The Tribunal acknowledged that the issue regarding the disallowance of payment to retired partners was covered in favor of the appellant by the order of a Co-ordinate Bench of the Income Tax Appellate Tribunal (ITAT), Delhi, dated 15 January 2021, for AY 2011-12. Both parties agreed that the facts and circumstances were similar for AY 2009-10 and AY 2011-12. The Tribunal, following the precedent, directed the AO to delete the addition of Rs. 1,37,75,514. Consequently, the grounds of appeal related to the disallowance were allowed.

Infructuous Grounds:
Given the decision on the merits of the addition, the Tribunal deemed the grounds related to the validity of the re-assessment order as infructuous and declined to decide on them.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the deletion of the disallowance of Rs. 1,37,75,514 and treating the grounds related to the validity of the re-assessment order as infructuous.