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Income Tax Appellate Tribunal, ‘’B’’ BENCH, AHMEDABAD
(Applicant) (Respondent) Assessee by : Shri Sanjay R. Shah, A.R Revenue by : Shri O.P. Sharma, CIT.DR सुनवाई क� तार�ख/Date of Hearing : 12/09/2019 घोषणा क� तार�ख /Date of Pronouncement: 16/10/2019 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Principal Commissioner of Income Tax-4, Ahmedabad [Ld. CIT in short], dated 16/03/2018 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dated 31/03/2016 relevant to Assessment Year (AY) 2013-14.
The assessee has raised the following grounds of appeal: Page 1 of 7
The appellant objects to the order dated 16 March 2018 ('impugned order') passed by the Principal Commissioner of Income-Tax-4 ('learned CIT) under section 263 of the Income Tax Act, 1961 (‘the Act) for the above mentioned assessment year, on the following among other grounds:
1. 1. The impugned order passed by the learned CIT under section 263 of the Act is bad in law and contrary to the provisions of the Act and hence ought to be quashed.
2. The learned CIT grossly erred in setting aside the Assessment Order dated 31 March 2016 passed by the Assessing Officer ('AO') under section 143(3) of the Act, without demonstrating as to how the Assessment Order is erroneous or prejudicial to the interest of the Revenue. The learned CIT failed to give his own reasoning to come to such conclusion and thus wrongly assumed jurisdiction under section 263 of the Act.
3. The learned CIT erred on facts and in law in holding that the Assessment Order dated 31 March 2016 is erroneous and prejudicial to the interest of the Revenue and thereby setting aside the Assessment Order and directing the AO to make a fresh assessment. 3.1 The learned CIT erred in holding that the AO has failed to make proper enquiry and apply his mind regarding the claim of payment to Retired Partners. The learned CIT ought to have appreciated that the AO had called for all the requisite details pertaining to the claim and only after consideration of the same, the assessment was completed. 3.2 The learned CIT failed to appreciate that the AO has taken a plausible view during the course of original assessment proceedings, therefore, it cannot be said that the Assessment Order is erroneous and prejudicial to the interest of the Revenue.
3.3 The learned CIT erred in stating that the case of the appellant squarely falls under Explanation 2 to section 263 of the Act without appreciating the fact that none of the conditions specified under the said Explanation are fulfilled.
3.4 The learned CIT failed to appreciate that the view taken by the AO was in consonance with the provisions of the Act and was duly supported by judicial precedents and hence, the provisions of section 263 of the Act have no applicability. 4. Payment to Retired Partners 4.1 The learned CIT erred in law as well as on facts in stating that the payment made to Retired Partners is capital in nature.
4.2 The learned CIT erred in law as well as on facts in observing that payment made to Retired Partners cannot be considered for the purpose of Business or Profession. 4.3 The learned CIT erred in disregarding the provisions of the Partnership Deed and stating that the Retired Partners are entitled to receive only capital balance as on the date of retirement. 4.4 The learned CIT failed to appreciate the binding obligation created on the firm by the Partnership Deed and also failed to appreciate the provisions of the law in this regard in the right perspective.
Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal.
The assessee in this appeal has challenged the order framed under section 263 of the Act by the Ld. CIT by holding that the assessment order passed under section 143(3) of the Act is erroneous insofar prejudicial to the interest of Revenue.
The facts in brief are that the assessee in the present case is a partnership firm and engaged in the activity of professional consultancy as chartered accountant. The assessment was framed under section 143(3) of the Act vide order dated 31 March 2016 after making certain additions of ₹3,03,46,867.00 to the total income of the assessee at ₹6,85,91,670.00 only.
3.1 Subsequently the learned CIT under section 263 of the Act observed that the order passed by the AO under section 143(3) of the Act is erroneous and prejudicial to the interest of revenue insofar the payment made to the partners on the retirement by the assessee was not disallowed being capital in nature. Accordingly the learned CIT vide order dated 16 March 2018 set aside the order of the AO framed under section 143(3) of the Act and directed him make proper inquiries regarding the amount/pension paid to the retiring partners.
At the outset, the learned AR for the assessing before us submitted that the AO in consequence to the direction of the learned CIT has made the addition of ₹1,05,30,092.00 on account of the payment made to the retiring partners which was reduced from the professional receipt of the assessee. The learned AR also drew our attention on the addition made by the AO in the order framed under section 143(3) read with section 263 of the Act dated 8 August 2018 which is available on record. The relevant extract of the order of the AO is reproduced as under:
“5. Subject to the above remarks and from the data made available, total income of the assessee is recomputed as under: Amounts (Rs.) 1. Total income as per order giving effect to the order of Rs.3,82,44,800/- Ld.CIT(A)-4, Ahmedabad dated 25.07.2017 2. Add: Addition in respect of payment made to Retiring Rs.1,05,30,092/- Partners deducted from professional receipts. Assessed income Rs.87,74,892/- Rounded off 4,87,74,890/-
The learned AR further submitted that the assessee preferred an appeal before the learned CIT (A) against the finding of the AO in the order framed under section 143(3) read with section 263 of the Act. The ld. CIT-A was pleased to delete the addition made by the AO by observing as under: 6.3 DECISION: I have carefully considered the contention of the AO, facts of the case and submission of the appellant. The AO has treated the entire payment made to retired partners of Rs. 1,05,30,0927- as disallowable and added to the returned income of the appellant firm on the ground that the entitlement of payment cannot be proved by making a provision in partnership deed. In his opinion, it should have legal entitlement as per the provision of the IT. Act, 1961. The AO further contended that Retiring partners are entitled to receive capital balance on the date of retirement. Therefore, whatever payments are required to be made to retired
partners are of capital nature and cannot be reduced from the income of the partnership firm. The AO further suggested that the appellant firm should have drawn Profit and Loss account up to the date of retirement and for the subsequent year and whatever amount is credited to capital account of the retiring partner should be disbursed. The benefits derived by the retiring partners for the services provided to build income of the firm should be considered as goodwill which is capital in nature and shall by no means be deducted from the income of the partnership firm.
It is observed from the submission of the appellant firm that being a firm of Chartered Accountants it maintains its books of accounts on cash basis and the partners play a pivotal role in the rendering of professional services. As a matter of practice, the appellant firm raises memo of fees on the client on completion of engagement. The income in respect of professional fees gets booked only on receipt of professional fees from the client. Similarly, at any given point of time, there are several ongoing professional engagements on which time has been spent and efforts are made. Such work in progress is not reflected in the accounts because of the cash method of accounting. Hence, there is considerable amount of income either unbilled or billed but not received. The appellant firm has incurred considerable amount of time which is devoted and efforts that are made during the period when retired partner was active in the firm and such sums are sometimes realized by the firm in the post retirement period.
The AR has also drawn my attention to clauses 10.m and 10.n of the partnership deed which deals with payment to the retired partners. It was explained by the appellant that in view of the clauses of the partnership deed, there is a prior charge in respect of payments due to retired partners on the gross fee received by the continuing partners. In view of the prior charge arising from the provisions of the partnership deed, the same is payable to the retired partners and therefore, it is not income of the appellant firm. The payment made to retired partners is not in respect of their capital balances but it is in the nature of diversion of gross fees received by the appellant firm in view of the prior charge created on such fees while they were partner of the appellant firm. Hence, such payment is not capital in nature as alleged by the learned AO, rather it is diversion of income due to prior charge created on the same. Similar issue had come up before me in appellant's own case for A.Y 2012-13 wherein I decided the issue in favour of the appellant considering the issue is squarely covered by the judgement of Hon'ble Bombay High Court, of Chennai and Mumbai Tribunals and order of my predecessor for AY 2014-15. In view of above facts and the ratio laid down by the case laws(Supra) there is a case for the appellant. It is mentioned that a similar issue was decided accepting the claim of the appellant vide order dated 26 October 2018 for AY 2012-13. The AO is directed to delete the impugned addition of Rs. 1,05,30,092/-. This ground of appeal is allowed.
5.1 The learned AR further claimed that the Revenue has not filed any appeal before the Tribunal against the finding of the learned CIT (A). Accordingly the learned AR submitted that there is no grievance to the assessee against the finding of the learned CIT under section 263 of the Act. Thus the learned AR contended that the issue raised in the appeal against the order of the learned CIT dated 16 March 2018 becomes infructuous and accordingly no separate adjudication is required.
5.2 However, the learned AR for the assessee further submitted that the assessee should be granted liberty to recall the order of this tribunal in the present case if in future the Revenue prefers any appeal against the order of learned CIT (A) dated 10 June 2019 for any reason as discussed above. In view of the above the learned AR for the assessee requested the Bench to dismiss the appeal of the assessee as infructuous but with the liberty to file the MA as per the provisions of law if any appeal is preferred by the Revenue as discussed above.
On the other hand the learned DR fairly conceded the fact that the Revenue has not preferred any appeal against the finding of the learned CIT (A) in the order dated 10 June 2019. Accordingly, he was of the view that the appeal filed by the assessee can be dismissed as infructuous.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we note that the grievance raised by the assessee against the order of the learned CIT under section 263 of the Act has been settled for the same assessment year by the CIT-A in his order dated 10 June 2019 which has been elaborated in the preceding paragraph. Therefore, once the issue raised by the learned CIT Page 6 of 7 under section 263 of the Act on account of payment to the retiring partners pension has been settled by the learned CIT (A) in his favour against the consequential order passed under section 263 of the Act, thus, we are of the view that the issue raised by the assessee becomes academic and does not require any separate adjudication.
7.1 Before parting, we are inclined to grant the liberty to the assessee to move an application for recalling of this order if the appeal, if any, has been preferred by the Revenue against the order of the learned CIT (A) dated 10 June 2019. The application for the calling of the order shall be made within the prescribed time.
In view of the above, we hold that there is no requirement to adjudicate the issue raised by the assessee on merit. Hence the ground of appeal of the assessee is dismissed.
In the result the appeal filed by the assessee is dismissed.
Order pronounced in the Court on 16/10/2019 at Ahmedabad.