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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI G.S. PANNU (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the revenue against the order dated 28/10/2015 passed by the Ld. Commissioner of Income Tax (Appeals)-5, Mumbai, for the assessment year 2010-11, whereby the Ld. CIT (A) has allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee a firm of Chartered Accountants engaged in the profession of providing professional services in the field of audit, taxation, consultancy etc., filed its return of income for the assessment year under consideration declaring the total income of Rs. 2,64,99,890/-. Since, the case was selected for scrutiny, notice u/s 143 (2) and 142 (1) were issued. In response to the said notices, the authorized representative (AR) of the assessee appeared and furnished the necessary details before the AO. After hearing the AR, the AO inter alia made additions of 2 Assessment Year: 2010-11 Rs. 38,92,725/- on account of payment to legal heir of the deceased partner, Rs. 17,79,563/- u/s 40(a)(ia) of the Act, on account of payment made to professional/other consultant and Rs. 3,77,491/- u/s 40(a)(i) of the Act, on account of membership to foreign affiliates and determined the total income of the assessee at Rs. 3,25,49,690/-. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) following the decision of the ITAT, Mumbai in the assessee’s own case for the A.Y. 2005- 06 decided both the issues in favour of the assessee and deleted the addition made by the AO.
Aggrieved by the order of Ld. CIT (Appeals), the revenue has preferred the present appeal before the Tribunal on the following effective grounds:-
1. “Whether on facts and in circumstances of the case and in law, the ld. CIT (A) was justified in deleting the disallowance of payments out of profits of the firm to ex-partner of Rs. 38,92,725/- by holding that the same was in terms of the partnership deed, without appreciating the settled legal position that such payments are in the nature of an obligation voluntarily agreed to and such an obligation cannot be ‘diversion by an overriding charge’, as claimed by the assessee. Reliance is placed on the decision of the ITAT, ‘F’ Bench, Mumbai S.B. Billimoria & Co. Vs ACIT-11(3), Mumbai [2010] 125 ITD 122 [Mum].
2. Whether on facts and in circumstances of the case and in law, the ld. CIT (A) was justified in deleting the disallowance of payments out of profits of the firm to ex-partner of Rs. 38,92,725/- without appreciating the ratio laid down by the Hon’ble Supreme court in the case of CIT Vs Sitaldas Tirathdas [1991] 41 ITR and Moti Lal ChhadmiLal Jain Vs CIT [1991] 190 ITR 1 that where the obligation to pay, flows out of an antecedent and independent title in the former, it would be a case of diversion of income. But, where the obligations are self-imposed as gratuitous, it is a case of application of income.
3 Assessment Year: 2010-11
3. Whether on facts and circumstances of the case and in Law, the Ld. CIT (A) was justified in deleting the disallowance for short deduction of TDS for Rs. 17,79,563 u/s 40(a)(ia) of the Income Tax Act, in respect of payment made to non- professional assistants.
Whether on facts and in circumstances of the case and in law, the Ld. CIT (A) was justified in deleting the disallowance u/s 40(a)(i) for non-deduction of TDS from the payment made to Baker Tilly International (BTI) as per the provisions of section 195(1) of the Income Tax Act.” 4. Vide Ground No. 1 and 2, the revenue has challenged the action of the Ld. CIT (A) in deleting the disallowance of Rs. 38,92,725/- made by the AO being payment made to legal heir of the deceased partner on the ground that these payment are not business expenditure within the meaning of section 37 (1) of the Act. Before us, the Ld. Departmental Representative (DR) relying on the assessment order submitted that the Ld. CIT (A) has wrongly deleted the disallowance of payments to the legal heir of the deceased partner amounting to Rs. 38,92,725/- out of the profits of the firm by holding that the same has been made in terms of partnership deed. The Ld. DR further submitted that the Ld. CIT (A) has decided this issue in favour of the assessee without appreciating the legal position that such payments are in the nature of an obligation voluntarily agreed to and such an obligation cannot be treated as business expenditure u/s 37(1) of the Act.
On the other hand, the Ld. counsel for the assessee submitted that this issue is covered by the order of the Mumbai Bench of the ITAT in the assessee’s own appeals for the A.Ys. 2005-06, 2006-07 and 2007-08. The Ld. counsel further submitted that since the order passed by the Ld. CIT (A) is in accordance with the order passed by the Tribunal in assessee’s own cases, there is no merit in the contention of the revenue.
4 Assessment Year: 2010-11
We have heard the rival submissions and also gone through the material placed before us including the cases relied upon by the authorities below. As pointed out by the Ld. counsel for the assessee, the coordinate Bench of the ITAT, Mumbai has decided the identical issue in favour of the assessee in assessee’s own case for the A.Y. 2005-06, ITA No. 1271/Mum/2010 for the A.Y. 2006-07 and ITA No. 4930/Mum/2011 for the A.Y. 2007-08. The relevant paras of the order of the coordinate Bench read as under:- “53.We have heard the arguments and have perused the material on record and case cited before us. The issue, in so far as the assessee is concerned, can be said to in favour and covered by an order of the coordinate Bench in its own case in assessment year 1981-82. We also find that the AO has himself conceded that the Hon’ble Bombay High Court in the case of Mulla & Mulla has held that in overriding charge to have been created over the assessee, “where, by the obligation, income is diverted before it reaches the assessee, it is deductible:. Since the payment has been made by the firm to the legal heir of its deceased partner, as per the clauses of the partnership deed dated 1.4.2000 having unequivocal covenants. In our opinion, the amount so paid to the legal heir of the deceased partner is an allowable expense. 54. In these circumstances, we set aside the orders of both the revenue authorities on this issue & direct the AO to allow Rs. 20,26,244/- paid to the legal heir of the deceased partners.”
Since, the coordinate Bench has decided the identical issue in favour of the assessee in assessee’s own case for the assessment years 2005-06, 2006- 07 and 2007-08 vide order dated 19.06.2013 and the Ld. CIT(A) has decided the issue in question in favour of the assessee by following the decision of the coordinate Bench, we do not find any reason to interfere with the findings of the Ld. CIT(A). Hence, respectfully following the decision of the coordinate Bench, we uphold the findings of the Ld. CIT (A) and dismiss this ground of appeal of the revenue.
5 Assessment Year: 2010-11
Ground No. 3 pertains to disallowance of payment made to professionals/non-professional assistants to the tune of Rs. 17,19,563/- u/s 40(a)(ia) of the Act on the ground that the tax at source has been deducted u/s 194C instead of 194J of the Act, which resulted into short deduction of tax. The Ld. DR submitted that since the assessee has made short deduction of tax amounting to Rs. 17,19,563/- u/s 194J after taking into account tax deducted at source u/s 194C, the Ld. CIT(A) ought to have confirmed the addition made by the AO u/s 40(a)(ia) of the Act for short deduction of tax at source.
On the other hand, the Ld. counsel for the assessee submitted that this issue is covered in favour of the assessee by the order of the Tribunal rendered in the assessee’s own case for the A.Y. 2009-10. Since, the findings of the Ld.CIT (A) are based on the decision of the ITAT, Mumbai, there is no merit in the appeal of the revenue:
Having gone through the relevant material on record we notice that the coordinate Bench has decided the identical issue in favour of the assessee in assessee’s own case for the assessment year 2009-10. During the course of assessment proceedings, it was noticed that the assessee had made payments amounting to Rs. 17,19,563/- to professionals and non professional for their services hired by the assessee firm. It was noticed that the assessee had deducted tax u/s 194C instead of 194J of the Act, which resulted into short deduction of tax. AO accordingly invoked provisions u/s 40(a)(ia) of the Act and made addition of the said amount. In the first appeal the Ld. CIT(A) deleted the said addition by following the decision of the ITAT Mumbai.
6 Assessment Year: 2010-11
We notice that the coordinate Bench of the Tribunal has decided the identical issue in favour of the assessee in the assessee’s own case for the assessment year 2009-10. The relevant para of the order reads as under:
At the time of hearing before us , the ld. Representatives of both the sides have agreed that this issue is squarely covered in favour of the assessee by the decision of the Hon’ble Calcutta High Court in the case of CIT vs S.K.Tekriwal, 361 ITR 432(cal) wherein it was held that the disallowance by invoking the provisions of section 40(a)(ia) of the Act can be made only when there is failure on the part of the assessee to deduct the tax at source and not in case where there is only short deduction of tax at source. Respectfully following the said decision of the Hn’ble Calcutta High Court, we uphold the impugned order of the ld. IT(A) deleting the disallowance made by the A.O. u/s 40(a)(ia) of the Act for short deduction of tax at source and dismiss ground No 2 of the Revenue’s appeal
Since the coordinate Bench has decided the identical issue in the similar set of facts and since the findings of the Ld. CIT(A) are in accordance with the findings of the coordinate Bench, we do not find any reason to interfere with the findings of the Ld. CIT(A). We accordingly uphold the findings of the Ld CIT(A) and dismiss this ground of appeal
of the revenue.
13. Vide ground No 4 the revenue has challenged the action of the Ld. CIT(A) in deleting the disallowance u/s 40(a)(i) of the Act for non deduction of tax at source from the payment made to Baker Tilly International (BTI) as per the provisions of section 195(1) of the Act. The Ld. DR relying on the assessment order, submitted that since the assessee has failed to deduct the tax at source while making payment, the Ld. CIT(A) has wrongly deleted the addition made by the AO.
7 Assessment Year: 2010-11
On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT(A) submitted that since the issue is covered by the order of the ITAT Mumbai rendered in assessee’s own case for the assessment year 2005-06 the Ld CIT(A) has rightly deleted the addition made on account of disallowance made u/s 40(a)(i) of the Act.
We have perused the material on record in the light of the rival contentions of the parties including the cases relied upon by the authorities below. During the course of assessment proceedings it was noticed that the assessee had debited an amount of Rs. 3,77,491/-as membership fees to foreign affiliates. In response to the show cause as to why the aforesaid amount should not be disallowed u/s 40(a)(i) of the Act, the assessee submitted that it had paid the said amount to BTI as fees computed with reference to the fees earned from international clients referred by the other members of BTI. The said amount has been claimed under the head ‘sub contract fees’ in the P & L account. It was further contended that it did not deduct the tax at source because the same is not chargeable to tax in India. However, the AO rejected the contention of the assessee and disallowed the said amount u/s 40(a)(i) of the Act. In the first appeal the Ld. CIT(A) deleted the said disallowance by following the decision of the Mumbai ITAT rendered in the assessee’s own case for the assessment year 2005-06 referred above.
We notice that the co-ordinate Bench has decided the identical issue in favour of the assessee and deleted the disallowance holding that relying on the judgment of the Hon’ble Supreme Court. The relevant portion of the findings of the coordinate Bench read as under:-
41. We have heard the arguments of both the sides and have also perused the material placed before us and the case laws 8 Assessment Year: 2010-11 cited by both the parties. We find that both the parties i.e. revenue authorities and the assessee have treated simply on the path of deductibility of TAS and relied on the case laws. When we read the relevant provisions, along the Circular, and the relevant clauses of the agreement, we find that no part of the payment made as subscription to BTI has resulted in income in its hands. Since the payment has been made in a foreign country, TAS provisions have to be applied guardedly. Clause 3.5 of the agreement (as reproduced herein above) gathers importance, which reads, “Nothing in the arrangements envisaged by these Bye-laws shall constitute a partnership, joint venture or agency relationship between the company and the Members or any of them or between any of the Members. No Member is an agent of the Company or of any other Member, and a Member does not have authority to bind or to act on behalf of the Company or any other Member.
The relevant clause, specifies that the company shall not constitute any partnership, joint venture or agency relationship with its members. This clears the deck to come to the conclusion that the subscription paid to BTI does not involve any income element and therefore, the provisions of TAS shall not be applicable. Besides the above observation, it would be worthwhile to mention that the case of Arthur Anderson & Co. (supra), relied upon by the DR, was on distinct facts, hence cannot be relied upon, under the present set of facts and circumstances. So far as the case of GE Technology (supra), the Hon’ble Supreme Court explains the applicability of expression “The expression “chargeable under the provisions of the Act” in section 195 (1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted”. In the present context, we find that none of the conditions gets fulfilled herein, in which case, the case, as cited is in effect, in favour of the assessee.
9 Assessment Year: 2010-11
In these circumstances, we set aside the orders of both the revenue authorities and direct the AO to delete the disallowance of Rs. 2,17,594/- made to BTI.” 17. Since, the coordinate Bench has decided the identical issue in favour of the assessee in the assessee’s own case referred above and since the findings of the Ld. CIT(A) are based on the decision of the coordinate Bench, we do not find any reason to interfere with the findings of the Ld. CIT(A). We accordingly uphold the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. In the result, appeal filed by the revenue for assessment year 2010-2011 is dismissed.