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TMI Blog2015 (11) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act to the facts of the year under consideration, it cannot be disputed that the amount in question is not at all income of the firm, having been diverted by the overriding title of the charge stipulated by the relevant clauses of the partnership deed. - Decided in favor of assessee. Disallowance made u/s 14A read with Rule 8D - Held that:- The assessee’s argument of non-applicability of Rule 8D of the Rules to the year under consideration notwithstanding, it cannot be gain-said that the AO has reasonably calculated the disallowance. Finding no error therein, the action of the ld. CIT(A) in confirming this disallowance is upheld.- Decided against assessee. Addition being payment made to the legal heirs of a deceased partner, Sh. Anand Bhatt - Held that:- In the present case, the partnership deed nowhere stipulated that the amount to be paid was to be paid by way of the price of the share of the outgoing partner in the partnership. This is the material point of difference between the facts herein and those attending “V.G. Bhuta” (1993 (3) TMI 79 - BOMBAY High Court). The Ld. CIT(A) correctly confirmed the addition. - Decided against assessee. - I.T.A. Nos. 7324 & 1014/Mum/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter or delete any of the above grounds, if any when necessary. 3. In ITA No.1014/Mum/2013 for the assessment year 2009-10, the assessee has raised the following Grounds: As regards disallowance of depreciation on tenancy rights: 1. The Ld. CIT(A) was not justified in confirming the Assessing Officer s action of disallowance of depreciation on tenancy rights of ₹ 11,46,525/-. 2. The Ld. CIT(A) was wrong in concluding that tenancy rights did not fall within the block of intangible assets. 3. The Ld. CIT(A) failed to appreciate that tenancy rights were a form of licence. As regard addition of payment to Retired Partner 4. The Ld. CIT(A) erred in confirming addition of payment made to a retired partner of ₹ 10,74,36,715/- in terms of the partnership deed. 5. The Ld. CIT(A) failed to appreciate that such payment was diverted by overriding title. 6. The Ld. CIT(A) was wrong in holding that such payment, being a self imposed obligation, was a gratuitous one. 7. The Ld. CIT(A) erred in holding that payment was a capital expenditure , being a compensation for taking over the share of the deceased partners by the surviving partners, and that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership of the tenancy rights and not the ownership of immovable property; that the assessee was the owner of intangible assets being tenancy rights, since tenancy rights are recognized by law and the assessee was free to deal with the tenancy rights as it chose, subject to the provisions of law; and that the disallowance made on the same account for the assessment years 2003-04 2004-05 stood contested by the assessee before the Hon ble High Court. 7. The Ld. CIT(A) confirmed the rejection of the assessee s claim for depreciation on tenancy rights. It was observed that the issue stood decided in favour of the Revenue by the Tribunal in the assessee s own case for the assessment years 2003-04 2004-05. 8. Before us, the ld. counsel for the assessee has fairly contended that this issue stands decided in favour of the Department by the Tribunal in the assessee s own case for the assessment years 2006-07 2008-09 also, i.e., for the immediately preceding and the immediately succeeding years too. It has, however, been contended that the assessee s appeals stand admitted before the Hon ble High Court on this issue. 9. The Ld. DR, on the other hand, has strongly relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng partner in respect of appreciation in the value of the immovable properties held by the assessee firm to the extent of his share, as per clause 23.5 and for work done during the period of partnership, which was in progress on account of the fact that the work had not reached a stage of completion, where the client could be charged for it. The assessee contended that these were rough and ready measures to compensate the outgoing partner for his share of those profits of the firm, related to the period during which he was a partner of the firm, which profits had not been realized by the firm on account of the fact that assets had not been sold, or on account of clients not having been billed for the work-in-progress. The assessee submitted that it would be paying taxes on the entire fees received by it in that year and in the subsequent years including the value of the work-in-progress completed, as well as on the capital gains earned by it on the sale of the immovable properties, without claiming any depreciation in those years in respect of such payments to the outgoing partner; that further, the outgoing partner had paid tax on such amounts received by him from the firm u/s 176 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The payment of ₹ 3,69,45,176/- made by the assessee to the retired partner was disallowed. While doing so, the AO observed that in view of the amendment brought in w.e.f. 01.04.1993, in section 40(b) of the Income Tax Act, only the working partners of the firm are entitled to receive remuneration and interest for the services rendered by them during the relevant previous year. It was observed that therefore, payment made to a person other than working partners is not eligible for deduction from the income of a firm. It was observed that by incorporating the Clause in the partnership deed, the assessee-firm had created a liability and paid certain amounts to the retiring partner, which was defeating the intention of the legislature and as such, the Clause superseded the provisions of the Income tax Act itself. It was observed that since the payment made to the retired partner of the firm was not within the scope of any of the provisions of the Act, such payment could not be said to have been incurred for earning income of the partner. It was observed that the payments were planned by way of incentives to the partners so that they may continue in the firm, but that co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 367). The assessee has made the payments for business expediency i.e. to retain its partner and the payments were in the nature of incentive. This cannot be an example of diversion by an overriding charge. It is clear case of application of fund. In view of the above, the disallowance of ₹ 3,69,45,176/- made by the AO in respect of payment to the retired partner is confirmed. 15. Before us, the ld. counsel for the assessee has maintained the stand taken by the assessee before the authorities below, contending that the payment was paid by way of remuneration to the retiring partner, Sh. Nihar Mody; that the amount was computed u/s 40(b) of the Income-tax Act, 1961; that this amounted to a sum of ₹ 5,90,41,084; that the actual remuneration paid was that of ₹ 37,00,500/-; that if this amount is regarded as remuneration, it falls within the limits prescribed by section 40(b) of the Act; that it was authorized by the partnership deed; that in case it is considered that the amount became payable only on the retirement of the partner after he ceased to be a working partner, the provisions of section 40(b) of the Act do not apply, the partner no longer being one wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, as applicable post amendment brought in w.e.f. 01.04,1993, only the working partners of a firm are entitled to receive remuneration and interest from the registered firm for the services rendered by them during the relevant previous year; that the case laws relied on by the assessee pertain an era pre-amendment of the provisions of sec. 40(b) of the Act and so, they are not applicable; that the decision in V.G. Bhuta (supra), has been rendered by the Hon ble Bombay High Court, i.e., the jurisdictional High Court so far as regards the assessee; that therefore, the payment is of capital nature; that the payment is an application of income and not expenditure diverted by any overriding charge; and that it is only a gratuitous payment. 17. In this regard, apropos the applicability or otherwise of section 40(b) of the Act to the facts of the year under consideration, it cannot be disputed that the amount in question is not at all income of the firm, having been diverted by the overriding title of the charge stipulated by the relevant clauses of the partnership deed [discussed in detail while dealing with this issue in ITA No.1014/M/2013 (infra)]. Therefore, the condition of rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, Ground nos. 8 9 are rejected. 23. Ground no.10 stands answered by our findings on Ground nos. 1 to 3, 4 to 7 and 8 to 9. 24. The Grounds of Appeal in ITA No.7324/M/2013 for A.Y.2007-08 are, therefore, partly accepted, as above. ITA No.1014/Mum/2013 for the assessment year 2009-10 25. Ground nos. 1 to 3 pertain to the assessee s claim of depreciation of ₹ 11,46,525/- on the block of tangible assets/tenancy rights. This matter has been decided by us in favour of the Department for the assessment year 2007-08, following ITAT orders in assessee s cases for the assessment years 2006-07 and 2008-09. The facts remaining, mutatis mutandis, the same for the assessment year 2009-10 also, Ground nos. 1 to 3 are rejected. 26. Coming to Ground nos. 4 to 7, the AO made addition of ₹ 10,74,36,715/-, being payment made to the legal heirs of a deceased partner, Sh. Anand Bhatt. The facts as per record are that on query, the assessee submitted before the AO as follows: a) The amount paid is ₹ 10,86,62,744/- paid to legal heirs of a deceased partner Sh. Anand Bhatt, less ₹ 12,26,029/- which is reduction of amount payable to retire partner Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a charge on the receipts, profits and assets of the firm. h) Such amount has accrued and is payable to the outgoing partner on his death or retirement, irrespective of whether the firm makes a profit or not in the subsequent years, and is an absolute obligation. 27. However, the AO did not agree with the stand taken by the assessee. The payment made by the assessee was disallowed. While doing so, the AO observed from the facts available on record in the assessee s case, it was quite manifest that all income by way of profession or otherwise had reached it without interruption and the assessee had applied the same for the payment in question, after having received such income; that as regards the assessee s reliance on the decision of the Hon ble High Court in the cases of Mulla Mulla and Craigie Blunt and Caroe, Crawford Bailey and C.N. Patuck, the Department had not accepted the same in principle; that in the case of C.C. Chokshi also, which had the same facts and circumstances, the Department has filed SLP before the Hon ble Supreme Court; that as regards the assessee s contention about diversion of income by overriding title, a stand taken by the assessee in earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 249) is squarely applicable in this case. Further, in view of the amendment with effect from 1.4.1993, only the working partners of the firm are entitled to receive remuneration and interest from the registered firm for the services rendered by them during the relevant previous year under consideration. Therefore, the payment made to persons other than working partners is not eligible for deduction from income of the firm. Also, it is pertinent to note that by incorporating the relevant Clause in the partnership deed, the firm has created liability to pay certain amounts to the retiring partner/legal heirs of deceased partners which is defeating the intention of the legislature and thus the said clause supercedes the provisions of the I.T. Act, 1961 itself. Since the payment made to the retired/legal heirs to deceased partners of the firm is not within the scope of any provisions of I-T Act, the same cannot be claimed as an expense. In this respect, reliance is placed on the decision of the Hon ble Bombay High Court in the case CIT V/s. Bhutta (203 ITR 249) wherein it is held that payment relating to period prior to the accounting year is not deductible in any case. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds accepted is misplaced because the Hon ble Supreme Court had not decided the appeal before it on merits. Though a firm is expected to function on the basis of the Partnership Act, but as far as taxability is concerned, the provisions of I.T. Act would take precedence. The issue in hand is to determine whether it was an application of fund or a diversion by an overriding charge so far as taxation is concerned. The Hon ble Supreme Court had set the law clear in this regard in the case of CIT vs. Sitaldas Tirathdas 41 ITR 367. The payments to partners are governed under the Partnership Act read with the Income-tax Act. The Income-tax Act has clear provisions with regard to payment to working partners. The assessee is not entitled to make a further claim over and above what has been paid to partners in terms of the Income-tax Act, and the amendment w.e.f. 1.4.93 (supra) is relevant in this context. It is also observed that the said overriding title has been created voluntarily by the assessee itself. As per law, an overriding title cannot be created suo moto or voluntarily by the assessee. Therefore, on this count also, the assessee s contention is rejected. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to place strong reliance on the impugned order. It has been contended that as correctly observed by the ld. CIT(A), by incorporating the relevant clause in the partnership deed, the assessee firm has created a liability to pay certain amounts to the retiring partners; that this had correctly been found to be conflicting with the provisions of the Income Tax Act; that as per the decision of the Hon ble Supreme Court in the case of CIT vs. Sitaldas Tirathdas , reported at 41 ITR 367 (SC), the payment of the nature of the one under consideration is an application of fund and not of diversion by overriding charge. It has been contended that even otherwise, the payment having been made by the assessee for business expediency, it is not an instance of diversion by overriding charge. 31. We have heard the parties and have perused the material available on record with regard to this issue. Coming straightway to the decision of the Hon ble Supreme Court in the case of CIT vs. Sitaldas Tirathdas reported at 41 ITR 367(SC), in that case, the assessee, was an individual. He was required, under a consent decree, to pay certain sums as maintenance to his wife and children. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It was observed that it is the payment of first kind, i.e., payment made under obligation, and not of the second, which can be excused. It was observed that the second payment is merely an obligation to pay another portion of one s own income, which has been received and is since applied. It was observed that the first is a case in which the income never reaches the assessee who, even if he was to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. On the facts of the case, it was observed that the wife and children of the assessee continued to be members of the family and they received a portion of the income of the assessee after the assessee had received the income as his own. It was observed that the case was that of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge, the assessee became only a collector of another s income. It was observed that the matter would have been different, if such an overriding charge had existed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s certified or his/her representatives, as the case may be. 23:3 No such Partner shall be entitled to claim any share in respect of outstanding of the firm on accrual or other basis on determination of his/her share in the firm. 23:4 The continuing Partners shall be liable to pay and shall pay to and shall be entitled to receive and shall receive from such partner or his/her representatives, as the case may be, the following amounts: a) the fixed capitals standing to the credit/debit of Such Partner. b) the amount standing to the credit/debit of his/her current account after adjusting his/her share in the profits of the partnership up to the date of determination of his share after deducting tax liability payable by the firm and taking into account drawings of withdrawals made by Such partner as entered in the current account of such partner, and c) the amount standing to the credit/debit of such partner. 34. Clause 23:5 of the partnership deed runs thus: 23:5 The continuing partners shall also pay Such Partner or his/her representatives, as the case may be ( provided Such Partner is entitled to a share in the immovable assets described in Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under clause 23:7} or his representative, as the case may be, whose share is determined on account of death or permanent incapacity shall also be entitled to a sum which as near as possible to the share of profit of and remuneration received by him/her in the last accounting year. In order to enable the firm to make such payment, the firm will take an appropriate insurance policy and the premium in respect of such policy will be paid by the firm. 23:9 In addition to the sums payable under clauses 23:4, 23:5 and 23:7, the continuing partners shall be liable to pay and shall pay to the said Noshir , Hamid and Anand or their respective representatives, on determination of their shares, the amounts provided for in clauses 7.8 of this deed. 23:10 The sums payable under clauses 23:4, 23:5 and 23:7, the continuing partners to Such Partner or his representatives in such instalments and over such period as may be mutually agreed upon, and failing such agreement, between twelve and thirty-six months from the date of determination of the share of such parter. 23:10 The payments to be made under clauses 7.8, 23:5, 23:7 and 23:8 shall and constitute a charge on the receipts, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 23:10 lays down that the sums payable under clauses 23:4, 23:5 and 23:7 shall be paid by the continuing partners of the firm to such partner or his/her representatives in such instalments and over such period as may be mutually agreed upon and failing such agreement, between twelve and thirty six months from the date of determination of the share of such partner. The payments, inter-alia, under Clauses 23:5 23:7 shall be and constitute a charge on the receipts, profits and assets of the firm. Further, payments to be made under, inter-alia, clause 23:7 shall be diverted by overriding title to such partner or his/her representatives. 37. Now, in keeping with Sitaldas Tirathdas (supra), it is to be seen whether the present case is one of an overriding charge, so that the payment can be said to be a diversion of income by way of such overriding charge, the amount having never reached the assessee at all, as its income. For this, as observed by their Lordships of the Hon ble Supreme Court, the decisive test is the nature of the obligation. In the present case, the total amount payable to Nihar A Mody on his retirement, was determined and set out in the deed of retirement dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -worthy that the amount was payable, irrespective of whether the assessee firm made a profit or not and whether or not the continuing partners, of the firm desired to subsequently continue the profession of practicing advocates and solicitors. 41. Moreover, in the case of Raja Bejoy Singh Dadhuria (supra), considered in Sitaldas Tirathdas (supra), there was a charge for maintenance created against the assessee. In the case before us too, as evident from the above discussion, the charge having been fixed by virtue of the above clauses of the partnership deed, it stood pre-created against the assessee-firm and in keeping with the enunciation by the Privy Council in Raja Bejoy Singh Dadhuria (supra), the income must not be deemed to have reached the assessee, since it was diverted to the retiring partner. Therefore, the case of the present assessee falls squarely within ratio of Raja Bejoy Singh Dadhuria (supra), as considered in Sitaldas Tirathdas (supra). 42. The ld. CIT(A), while deciding the matter against the assessee, has sought to place reliance on Sitaldas Tirathdas (supra). Now, this is evidently in oblivion of the observations made by their Lordships of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate legal proceedings. Besides, even otherwise, as correctly contended on behalf of the assessee, law nowhere provides that something self imposed or gratituitous is not allowable. The order under appeal does not advert to and dilate upon this aspect of the matter. 46. The Ld. CIT(A) also observed that the payment in question was a compensation for taking over the share of the outgoing partner by the surviving partners. This, despite the fact that as per the relevant clauses of the partnership deed, the outgoing partner was separately paid towards the balances in his capital account, current account, loan account, the appreciation in the immovable property and the goodwill. That being so, there is no question of the payment being a compensation for taking over the share of the retiring partner by the surviving partners of the firm. This observation of the ld. CIT(A), as such, has no legs to stand on. Nothing contrary has been brought out in the order by the ld. CIT(A) to buttress this observation. It is just that the ld. CIT(A) has erroneously viewed the payment under consideration in the light of the decision in CIT vs. V.G. Bhuta , 203 ITR 249 (Bom.), as relied on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative (page 203, placitum A of the report). 50. It was on the basis of the above and on the basis of the fact that in accordance with even clause 18 of the first deed, the payment was not to be made immediately and it could be deferred, that applying Sitaldas Tirathdas (supra), their Lordships held that it was a case of application or apportionment of income and not of diversion by overriding title, and that the fact that the application was done so as to discharge an obligation undertaken by the assessee made no difference. 51. Now, as discussed, in the present case, the partnership deed nowhere stipulated that the amount to be paid was to be paid by way of the price of the share of the outgoing partner in the partnership. This is the material point of difference between the facts herein and those attending V.G. Bhuta (supra). To reiterate, in Sitaldas Tirathdas (supra), the Hon ble Supreme Court has enunciated that the true test for the application of the rule of diversion of income by overriding charge, is the nature of the obligation. Where the amount is obligated to be applied out of income, the payment cannot be excused from being taxed. It is precisely suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, wherein Sitaldas Tirathdas (supra) was relied on, to hold that in case by some obligation, income is diverted before it reaches the assessee, the amount is taxable; and that as per the relevant clauses of the partnership deed, there was an obligation and income had been diverted before it reached the assessee and it was not a case of application of income, as in Sitaldas Tirathdas . The Department s appeal was dismissed by the Hon ble High Court. 55 In A.F. Ferguson Co. vs. ACIT , 2011 TIOL 604 (ITAT-Mum) also, it was held that payments made to the wives of the deceased partners in terms of the partnership deed, has an overriding effect over the income of the firm and hence, it is a case of diversion of income by overriding title, allowable as a deduction and not one of application of income, as in Sitaldas Tirathdas . 56. It has rightly been pointed out that all the three last mentioned cases are post S.B. Billimoria and Co. (supra). 57. Apropos CIT vs. Imperial Chemicals Industries (India) Pvt. Ltd , 74 ITR 17 (SC), which was relied on by the AO, at the outset, the same is not applicable. Therein, the Tribunal had found that there was no evidence of any agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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