ACIT 16(3) , MUMBAI vs. M/S. WADIA GHANDY & CO, MUMBAI

1. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in allowing the deduction on account of payments of Rs. 1,92,72,262/- made to the legal heirs of the deceased partner/retired partners holding that payment had been made on account of overriding title on the profits?

Brief facts of the case are that assessee is a firm of practising advocates, solicitors and notaries. The assessee source of income mainly consists of income from profession. Assessee filed its return of income on 30-11-2015 declaring total income at Rs 48,50,88,570/-. The case of assessee was selected for scrutiny u/s 143(2). During assessment proceeding it was observed by the AO that assessee firm has made payments to the retired partner/ legal heir of the deceased partner amounting to Rs. 1,92,72,262/-.

During the assessment proceeding AO is of the opinion that this amount paid to the legal heir of a deceased partner is basically in the form of diversion of income or it is a gratuitous payment which is not allowable u/s 37of the act. AO further held that same can’t be allowed in terms of sec 40 (b) also being the payment made to person other than working partner. Against this disallowance assessee preferred an appeal before the Ld.CIT(A) (NFAC, Delhi). 4. The Ld. CIT (A) allow the appeal of the assessee firm considering the decision of honourable jurisdictional high court vide of 2017 dated 09-04-2019, decisions of Mumbai ITAT in the assessee own case vide ITA No. 1014/Mum/2013, ITA No. 3161/Mum/2015, ITA No. 3400/Mum/2016 and ITA No. 6183/Mum/2016 for AY 2009-10, 2010-11, 2011-12 and 2012-13. 5. We have gone through the order of AO, order of Ld.CIT(A) , previous orders of Mumbai ITAT and decision of honourable Mumbai High court in assessee own case. We observed that the issue raised by the revenue, settled in favour of assessee time and again by ITAT and honourable jurisdictional High Court. We have considered the case laws relied upon by the department also in there favour. We have thoroughly considered the relevant covenants of partnership deed vide clause 22, 23.5, 23.7 and 23.10. We found sec 40(b) doesn’t come into play at all in the given set of facts. As far as allowability of the same u/s 37 being a payment in the nature of overriding charge over the revenues of the firm, same is allowable as held by ITAT Mumbai and honourable Mumbai High court in assessee own case. 6. For reference we are reproducing the relevant extract of ITAT decision duly discussed the objections and judicial pronouncement relied upon by the assessee and Revenue as under vides ITA No. 3400/Mum/2016: “As regards, the Revenue’s appeal we find that as regards payment to retired partners, the Ld. Commissioner of Income Tax (Appeals) has followed the ITAT order in assessee’s own case. No case has been made out that this has been reversed by the Hon’ble High Court. As regards the issue of payment to legal heirs of deceased partners, the same was also considered by the ITAT in assessee’s own case in for A.Y. 2009-10 vide order dated 07.10.2015. The Tribunal has elaborately considered the issue in Para 26 to Para 61 by referring extensively to partnership deed on various case laws and thereafter held the issue in favour of the assessee and against the Revenue. Since the above has not been reversed by the Hon’ble High Court, we follow the same and uphold the order of the Ld. Commissioner of Income Tax (Appeals). In the result, the appeal by the assessee as well as by the Revenue stands dismissed.”

In addition to above we are reproducing relevant extracts of the decision of Hon’ble Jurisdictional High Court also in the case of assessee as under: “3. The only issue in this appeal is the exclusion from the income of the firm, the amounts relatable to the retired/deceased partner/s share by diversion on account of overriding title in favour of the ex- partner/s or their heirs/executors by virtue of the partnership deed.

We find that the impugned order of the Tribunal has dismissed the Revenue's appeal by inter alia recording the fact that in the order of the Commissioner of Income Tax (Appeals) (CIT A)) had only followed the consistent view of the Tribunal in the assessee's own case for the earlier Assessment years. In fact, the impugned order of the Tribunal has further placed reliance upon the decision of this Court in Income Tax Appeal No.860 of 2009 dated 19/6/2009 rendered in the respondents-assessee's own case as well as decision of this Court in the case of CIT vs. Mulla and Mulla and Craigie, Blunt and Caroe, (1991) 190 ITR 198 while dismissing the Revenue's appeal.

In view of impugned order of the Tribunal merely following the orders of this Court, we are of the view that the appeal does not raise any substantial question of law.

It is not necessary to refer to long line of decisions of this Court and other High Courts taking a similar view in the similar circumstances. Only to summarize, undisputed facts are that the partnership firm envisaged payment to a outgoing partner on the basis that the partner would have rendered service during his tenure as a partner of the firm but could not enjoy the fruits thereof on account of the fact that the work having remained incomplete, the concerned client had not been billed for the work already done. In similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title. No substantial question of law arises for our consideration. The income tax appeal is dismissed." In the result, the Appeal is dismissed.”

We respectfully follow the decision of jurisdictional high court and ITAT Mumbai as Ld. DR is not able to counter the same with any fresh argument or evidence which controvert the abovementioned decisions in favour of assessee in view of above we sustain the decision of Ld.CIT(A) and dismiss all the grounds raised