Income Tax Appeal v. Wadia Ghandy & Co

Ladda IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL No. 1696 of 2016Pr. Commissioner of Income-tax-16..Appellant. ..Appellant. Vs Wadia Ghandy & Co. ..Respondent. Mr. Suresh Kumar for the Appellant. CORAM : AKIL KURESHI & B. P. COLABAWALLA, JJ. DATED :- 12TH FEBRUARY, 2019. P.C.: 1This appeal is filed by the Revenue challenging judgmentof Income-tax Appellate Tribunal (for short “Tribunal”). Theappellant Revenue urges following question of law for ourconsideration:- “Whether on the facts and the circumstances of the case and inlaw, the ITAT was justified in allowing the deduction on accountof payments made to the retired partners as admissibleexpenditure under the provisions of the partnership deed?” 2.The respondent assessee is a Partnership Firm engaged in providing legal services. During the course of scrutiny of the assessed return for the assessment year 2007-2008, the Assessing Officer objected to the claimant fordeduction of a sum of Rs. 3.68 Crores which was paid by theassessee firm to its retired partner. The assessee pointed outthat the payment was made in terms of clause 23.5 containedin partnership agreement. By further elaborating the standbefore the Assessing Officer, the assessee pointed out that theamount was paid by way of compensation to the outgoingpartner towards the appreciation in the value of the immovableproperties held by the assessee firm to the extent of his shareof the partnership and also for the work done during the periodof partnership, which was in progress on account of the factthat the work had not been completed and therefore the clientscould be charged for the same. The assessee pointed out that inthe partnership agreement itself there was formula tocompensate the outgoing partner for his share of those profitsof the firm in relation to the period during which he was apartner and which profits had not been realized by the firm onaccount of non-completion of the work during the tenure of thepartner. The assessee firm further pointed out that it would bepaying taxes on the entire fees received by it in the year inwhich the bills would be raised. This was also including capital gains on the sale of the immovable properties, without claimingany depreciation in those years in respect of which payments tothe outgoing partner were made. 3.The assessing officer did not accept the stand anddisallowed the expenditure. The assessee carried the matter inappeal. Tribunal by impugned judgment referred to and reliedupon the earlier decisions on the point to accept the assessee'sstand. It appears that the assessee had taken both the groundsnamely, that the expenditure was made to discharge theobligation undertaken by the firm as per the relevant clause ofthe partnership agreement and further that essentially this wasa case of diversion of income at source. 4.We notice that similar questions have beenconsidered by this Court on numerous occasions. In case ofCommissioner of Income-tax v. Mulla and Mulla and Craigie,Blunt and Caroe reported in 190 ITR 198 the concept ofdiversion of income at source by overriding title was discussedat length under somewhat similar circumstances. The Courtmade the following observations:- “In the present case, the assessee-firm was under a legalobligation in terms of the deed of partnership dated September, 1,1967, and the clauses in the two subsequent partnership deeds topay out standing fees for the work done up to and during the periodwhen the deceased partners were partners. This was also aninstance of the source of income being subject to an obligation.We are in agreement with the Calcutta decision and hold that theamounts so paid by the assessee-firm to the heirs of the deceasedpartners cannot be assessed as the income of the firm.” “In the present case, the assessee-firm was under a legalobligation in terms of the deed of partnership dated September, 1,1967, and the clauses in the two subsequent partnership deeds topay out standing fees for the work done up to and during the periodwhen the deceased partners were partners. This was also aninstance of the source of income being subject to an obligation.We are in agreement with the Calcutta decision and hold that theamounts so paid by the assessee-firm to the heirs of the deceasedpartners cannot be assessed as the income of the firm.” 5.The decision in the case of Mulla and Mulla andCraigie, Blunt and Caroe (supra) was followed by this Court inIncome Tax Appeal No.2277 of 2013 in the case ofCommissioner of Income Tax-11, Mumbai v. M/s Kanga & Co.(ITXA 2277/2013) decided on 1[st] February, 2016. The Courtobserved as under:- 3.“The only issue in this appeal is the exclusion from theincome of the firm, the amounts relatable to theretired/deceased partner/s share by diversion onaccount of overriding title in favour of the ex-partner/sor their heirs/executors by virtue of the partnershipdeed. income of the firm, the amounts relatable to theretired/deceased partner/s share by diversion onaccount of overriding title in favour of the ex-partner/sor their heirs/executors by virtue of the partnershipdeed. 4.We find that the impugned order of the Tribunal hasdismissed the Revenue's appeal by inter alia recordingthe fact that in the order of the Commissioner ofIncome Tax (Appeals) (CIT A)) had only followed theconsistent view of the Tribunal in the assessee's owncase for the earlier Assessment years. In fact, theimpugned order of the Tribunal has further placedreliance upon the decision of this Court in Income Taxdismissed the Revenue's appeal by inter alia recordingthe fact that in the order of the Commissioner ofIncome Tax (Appeals) (CIT A)) had only followed theconsistent view of the Tribunal in the assessee's owncase for the earlier Assessment years. In fact, theimpugned order of the Tribunal has further placedreliance upon the decision of this Court in Income Tax Appeal No.860 of 2009 dated 19/6/2009 rendered inthe respondents-assessee's own case as well asdecision of this Court in the case of CIT vs. Mulla andMulla and Craigie, Blunt and Caroe, (1991) 190 ITR198 while dismissing the Revenue's appeal. 5.In view of impugned order of the Tribunal merelyfollowing the orders of this Court, we are of the viewthat the appeal does not raise any substantial questionof law.” 6. It is not necessary to refer to long line of decisions of this Court and other High Courts taking a similar view in the similarcircumstances. Only to summarize, undisputed facts are that thepartnership firm envisaged payment to a outgoing partner on thebasis that the partner would have rendered service during his tenureas a partner of the firm but could not enjoy the fruits thereof onaccount of the fact that the work having remained incomplete, theconcerned client had not been billed for the work already done. Insimilar circumstances, the courts have held that payment to thepartner would amount to diversion of income at source by overridingtitle. No substantial question of law arises for our consideration. Theincome tax appeal is dismissed. (B.P. COLABAWALLA, J.) (AKIL KURESHI, J)