ASST CIT 16(3), MUMBAI vs. WADIA GHANDY & CO., MUMBAI

O R D E R Per Shamim Yahya, A. M.: These are cross appeals by the assessee and Revenue arising out of the order of ld. Commissioner of Income Tax (Appeals) dated 26.02.2016, pertaining to assessment year 2011-12.

2 & 2835/Mum/2016 Wadia Ghandy & Co. Assessee's appeal: 2. The grounds of appeal read as under:

2. The ld. Commissioner of Income Tax (Appeals) failed to appreciate that tenancy rights were a form of license. Revenues appeal:

read as under:

1. On the facts and in the circumstances of the case and in law, whether the ld. CIT(A) has erred in deleting the addition made by the A.O. amounting to Rs.1,49,27,137/- on account of payments made to the legal heirs of the deceased partner and disallowance of payment made to retired partner amounting to Rs.2,27,70,651/-.

2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.

4. The brief facts of the case are as under: The facts of the case, in brief, are that the assessee is a partnership firm of practicing advocates, solicitors and notaries. Its source of income consists of income from profession. It filed its original return of income for assessment year 2011-12 on 30.09.2011 declaring total income of Rs.24,02,02,163/- and revised return of income on 30.03.2013 declaring total income of Rs.23,94,80,668/-, which was processed u/s. 143(1) of the Act. The assessment was completed u/s. 143(3) of the Act on 28.03.2014 determining total income at Rs.27,77,98,380/- by disallowing payment made to retired/deceased partner of Rs.3,76,97,788/- and deprecation on tenancy rights of Rs.6,44,920/-.

3 & 2835/Mum/2016 Wadia Ghandy & Co. 5. Against the above order of the assessing officer, the appeal was preferred before the ld. Commissioner of Income Tax (Appeals). On the issue of payment made to legal heirs of the deceased partner, the ld. Commissioner of Income Tax (Appeals) referred to earlier order of the ld. Commissioner of Income Tax (Appeals) for assessment year 2010-11 and deleted the addition.

‘In those appeals, the grounds raised by the appellant were as under:- “As regard addition of payment to Retired Partner

4. The Ld.CIT(A) erred in confirming addition of payment made to a retired partner of Rs.3,68,45,176/- in terms of the partnership deed.

5. The Ld.CIT(A) failed to appreciate that such payment was diverted by overriding title.

6. The Ld.CIT(A) was wrong in holding that such payment made to persons other than working partner is not eligible for deduction from income of the firm.

7. The Ld.CIT(A) erred in holding that payment made to person other than working partners and were on the nature of incentive and that this was not an example of diversion of income by overriding title.” After discussing the facts of the case and the submissions of the Department and the appellant, the Hon’ble ITAT decided as under:

17. In this regard, apropos the applicability or otherwise of section 40(b) of the Act to the facts of the year under consideration, it cannot be disputed that the amount in question is not at all income of the firm, having been diverted by the overriding title of the charge stipulated by the relevant clauses of the partnership deed [discussed in detail while dealing with this issue in (infra)]. Therefore, the condition of rendering of services, as envisaged by the provisions of section 40(b) of the Act, does not come into play as the common law concept of diversion of income by overriding title exists regardless of the 4 & 2835/Mum/2016 Wadia Ghandy & Co. amendment brought in by the legislature in the provisions of section 40(b) of the Act. Moreover, in “V. G. Bhuta” (supra), the payment was optional, which is not so herein, having been circumscribed by the mandatory clauses of the partnership deed.

‘6.1 I have carefully considered the facts of the case and the submissions of the appellant. I have also gone through the various decisions relied upon by the A.O. and the Ld. AR. The Hon’ble ITAT vide its order & 1014/Mum/2013 dated 07.10.2015, for A.Ys. 2007-08 and 2009-10 has decided the issue against the appellant. The relevant part of the order is reproduced as below:- “10. Since the Tribunal has consistently decided this issue against the assessee over the years and none of the orders of the Tribunal has been shown to have been either reversed or stayed on appeal, respectfully following the said earlier Tribunal orders, this issue is decided against the assessee for the year under consideration. Reference in this regard is made to the Tribunal order in the assessee’s case for the assessment years 2006-07 & 2007-08, the Tribunal has held as follows: “3. We have heard the arguments of both the sides and also perused the relevant material on record. The Ld. counsel for the assessee has fairly and covered against the assessee and in favour of the Revenue by the decision of the Tribunal rendered in assessee’s own case for assessment years 2003-04 & 2004-05 vide its order dated 29th Oct., 2009 passed in ITA Nos. 355 & 356/Mum/2008 wherein the orders of the learned CIT(Appeals) confirming the disallowance made by the A.O. on account of assessee’s claim for depreciation on tenancy rights was 5 & 2835/Mum/2016 Wadia Ghandy & Co. upheld by the Tribunal. As the issue involved in the years under consideration as well as all the material facts relevant thereto are admittedly similar to assessment years 2003-04 & 2004-05, we respectfully follow the order of the Tribunal for assessment years 2003- 04 and 2004-05 (supra) and uphold the impugned orders of the learned CIT(Appeals) confirming the disallowance made by the A.O. on account of depreciation made by the A.O. on account of depreciation claimed by the assessee on tenancy rights.” The appellant vide its submission dated 29.04.2015 in Ground II(g) has also accepted that the said depreciation has been disallowed from assessment year 2003-04 onwards and the Commissioner (Appeals) & Tribunal have upheld such disallowance. Therefore, respectfully following the decision of the Hon’ble ITAT, the ground of the appellant is dismissed.’