Principal Commissioner Of Income Tax-16 v. Wadia Ghandy & Co

1 / 7 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.273 OF 2017 Principal Commissioner of Income Tax-16 .... Appellant versus Wadia Ghandy & Co.... Respondent….... Mr.Suresh Kumar, Advocate for Appellant.Mr.Suresh Kumar, Advocate for Appellant. Mr.Hussain Dholkawala i/b. Ganesh & Co., Advocate for Respondent.Mr.Hussain Dholkawala i/b. Ganesh & Co., Advocate for Respondent. CORAM : AKIL KURESHI &SARANG V. KOTWAL, JJ.DATE: 09[th] APRIL, 2019. P.C. : 1. This Appeal is filed by the revenue to challenge the judgment of Income Tax Appellate Tribunal. Following questionis presented for our consideration; “Whether, on the facts and the circumstances of the caseand in law, the ITAT was justified in allowing thededuction on account of payments made to the legal heirof the deceased partner Shri Anand Bhat, as admissible 2 / 7 11-ITXA-273-17.odtexpenditure under the provisions of the partnershipdeed?” 2. The Respondent-Assessee is a partnership firm. Theassessee paid certain amount to a retired partner on the basis ofthe provisions made in the partnership deed. The deed providedthat the partner whose share is determined on account ofresignation, retirement or death, shall also be paid by thecontinuing partners of the firm, a sum equivalent to one and ahalf times the share of the profits and remuneration received byhim in the last accounting year immediately preceding the dateof determination of his share. This was primarily based on thepremise that the partner of the firm during his tenure wouldrender service to the clients for which bills may have been raised,but payments in full may not have been received and would bereceived after the partner retires, dies or resigns. The assesseeclaimed such payment by way of a deductible expenditure. Therevenue objected the same. The tribunal by the impugnedjudgment by relying upon the judgment of this Court in case ofCIT Vs. Crawford Bayley & Co. reported in 106 ITR 884 3 / 7 11-ITXA-273-17.odt (Bom.), held in favour of the assessee, upon which the presentAppeal has been filed. 3. Learned Counsel for the revenue fairly pointed out thatsuch an issue had come up before this Court on earlieroccasions, where the revenue's Appeals have been dismissed. Wemay refer to one recent order dated 12/02/2019 passed by thisCourt in Income Tax Appeal No.1696/16. While dismissing therevenue's Appeal, the Court made following observations; “2. The respondent assessee is a Partnership Firmengaged in providing legal services. During thecourse of scrutiny of the assessed return for theassessment year 2007- 2008, the Assessing Officerobjected to the claimant for deduction of a sum ofRs. 3.68 Crores which was paid by the assessee firmto its retired partner. The assessee pointed out thatthe payment was made in terms of clause 23.5contained in partnership agreement. By furtherelaborating the stand before the Assessing Officer,the assessee pointed out that the amount was paidby way of compensation to the outgoing partnerengaged in providing legal services. During thecourse of scrutiny of the assessed return for theassessment year 2007- 2008, the Assessing Officerobjected to the claimant for deduction of a sum ofRs. 3.68 Crores which was paid by the assessee firmto its retired partner. The assessee pointed out thatthe payment was made in terms of clause 23.5contained in partnership agreement. By furtherelaborating the stand before the Assessing Officer,the assessee pointed out that the amount was paidby way of compensation to the outgoing partner 4 / 7 11-ITXA-273-17.odttowards the appreciation in the value of theimmovable properties held by the assessee firm to theextent of his share of the partnership and also for thework done during the period of partnership, whichwas in progress on account of the fact that the workhad not been completed and therefore the clientscould be charged for the same. The assessee pointedout that in the partnership agreement itself therewas formula to compensate the outgoing partner forhis share of those profits of the firm in relation tothe period during which he was a partner and whichprofits had not been realized by the firm on accountof non-completion of the work during the tenure ofthe partner. The assessee firm further pointed outthat it would be paying taxes on the entire feesreceived by it in the year in which the bills would beraised. This was also including capital gains on thesale of the immovable properties, without claimingany depreciation in those years in respect of whichpayments to the outgoing partner were made. 3. The assessing officer did not accept the stand anddisallowed the expenditure. The assessee carried thematter in appeal. Tribunal by impugned judgmentreferred to and relied upon the earlier decisions ondisallowed the expenditure. The assessee carried thematter in appeal. Tribunal by impugned judgmentreferred to and relied upon the earlier decisions on 5 / 7 11-ITXA-273-17.odt the point to accept the assessee's stand. It appearsthat the assessee had taken both the groundsnamely, that the expenditure was made to dischargethe obligation undertaken by the firm as per therelevant clause of the partnership agreement andfurther that essentially this was a case of diversion ofincome at source. 4. We notice that similar questions have beenconsidered by this Court on numerous occasions. Incase of Commissioner of Income-tax v. Mulla andMulla and Craigie, Blunt and Caroe reported in 190ITR 198 the concept of diversion of income at sourceby overriding title was discussed at length undersomewhat similar circumstances. The Court madethe following observations:- “In the present case, the assessee-firm was under a legalobligation in terms of the deed of partnership datedSeptember, 1, 1967, and the clauses in the two subsequentpartnership deeds to pay out standing fees for the work doneup to and during the period when the deceased partners werepartners. This was also an instance of the source of incomebeing subject to an obligation. We are in agreement with theCalcutta decision and hold that the amounts so paid by theassessee-firm to the heirs of the deceased partners cannot beassessed as the income of the firm.” 6 / 7 11-ITXA-273-17.odt 5. The decision in the case of Mulla and Mulla andCraigie, Blunt and Caroe (supra) was followed by thisCourt in Income Tax Appeal No.2277 of 2013 in thecase of Commissioner of Income Tax-11, Mumbai v.M/s Kanga & Co. (ITXA 2277/2013) decided on 1[st]February, 2016. The Court observed as under:-Craigie, Blunt and Caroe (supra) was followed by thisCourt in Income Tax Appeal No.2277 of 2013 in thecase of Commissioner of Income Tax-11, Mumbai v.M/s Kanga & Co. (ITXA 2277/2013) decided on 1[st]February, 2016. The Court observed as under:- 3. “The only issue in this appeal is the exclusion fromthe income of the firm, the amounts relatable tothe retired/deceased partner/s share by diversionon account of overriding title in favour of the ex-partner/s or their heirs/executors by virtue of thepartnership deed.the income of the firm, the amounts relatable tothe retired/deceased partner/s share by diversionon account of overriding title in favour of the ex-partner/s or their heirs/executors by virtue of thepartnership deed. 3. “The only issue in this appeal is the exclusion fromthe income of the firm, the amounts relatable tothe retired/deceased partner/s share by diversionon account of overriding title in favour of the ex-partner/s or their heirs/executors by virtue of thepartnership deed.the income of the firm, the amounts relatable tothe retired/deceased partner/s share by diversionon account of overriding title in favour of the ex-partner/s or their heirs/executors by virtue of thepartnership deed. 4. We find that the impugned order of the Tribunalhas dismissed the Revenue's appeal by inter aliarecording the fact that in the order of theCommissioner of Income Tax (Appeals) (CIT A))had only followed the consistent view of theTribunal in the assessee's own case for the earlierAssessment years. In fact, the impugned order ofthe Tribunal has further placed reliance upon thedecision of this Court in Income Tax AppealNo.860 of 2009 dated 19/6/2009 rendered in therespondents-assessee's own case as well as decisionof this Court in the case of CIT vs. Mulla andMulla and Craigie, Blunt and Caroe, (1991) 190ITR 198 while dismissing the Revenue's appeal.has dismissed the Revenue's appeal by inter aliarecording the fact that in the order of theCommissioner of Income Tax (Appeals) (CIT A))had only followed the consistent view of theTribunal in the assessee's own case for the earlierAssessment years. In fact, the impugned order ofthe Tribunal has further placed reliance upon thedecision of this Court in Income Tax AppealNo.860 of 2009 dated 19/6/2009 rendered in therespondents-assessee's own case as well as decisionof this Court in the case of CIT vs. Mulla andMulla and Craigie, Blunt and Caroe, (1991) 190ITR 198 while dismissing the Revenue's appeal. 5. In view of impugned order of the Tribunal merelyfollowing the orders of this Court, we are of theview that the appeal does not raise any substantialquestion of law.”following the orders of this Court, we are of theview that the appeal does not raise any substantialquestion of law.” 6. It is not necessary to refer to long line of decisions ofthis Court and other High Courts taking a similar viewin the similar circumstances. Only to summarize,undisputed facts are that the partnership firmenvisaged payment to a outgoing partner on the basisthat the partner would have rendered service duringhis tenure as a partner of the firm but could not enjoythe fruits thereof on account of the fact that the workhaving remained incomplete, the concerned client hadnot been billed for the work already done. In similarcircumstances, the courts have held that payment tothe partner would amount to diversion of income atsource by overriding title. No substantial question oflaw arises for our consideration. The income taxappeal is dismissed.”this Court and other High Courts taking a similar viewin the similar circumstances. Only to summarize,undisputed facts are that the partnership firmenvisaged payment to a outgoing partner on the basisthat the partner would have rendered service duringhis tenure as a partner of the firm but could not enjoythe fruits thereof on account of the fact that the workhaving remained incomplete, the concerned client hadnot been billed for the work already done. In similarcircumstances, the courts have held that payment tothe partner would amount to diversion of income atsource by overriding title. No substantial question oflaw arises for our consideration. The income taxappeal is dismissed.” 4. In the result, the Appeal is dismissed. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.)