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Income Tax Appellate Tribunal, “A” BENCH : CHENNAI
Before: Hon’ble Shri NRS Ganesan, JM & Hon’ble Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Revenue and the Cross objection by the assessee arise out of the order of the Learned Commissioner of Income Tax(Appeals)-2, Chennai [in short the ld CIT(A)] in Appeal No.71/CIT(A)-2/2015-16 dated 28.03.2017 against the order passed by the ACIT, Non-Corporate Circle-1, Chennai [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 31.03.2015 for the Assessment Year 2012-13.
CO No. 111/CHNY/2017 M/s Deloitte Haskins & Sells A.Yr. 2012-13 2. The only issue to be decided in the appeal of the revenue is as to whether the ld CITA was justified in deleting the disallowance made in respect of payment of Rs 1,58,56,741/- made to retired partners in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a firm of chartered accountants and had filed its return of income for the Asst Year 2012-13 on 28.9.2012 declaring total income of Rs 10,70,28,740/-. Later the assessee filed a revised return of income on 31.3.2014 declaring total income of Rs 10,70,28,740/- i.e same as original return and claimed TDS credit of Rs 12,65,52,009/- as against the original TDS credit of Rs 10,16,17,748/- and claimed consequential refund thereon of Rs 9,34,80,130/- in the revised return. In the course of assessment proceedings, the ld AO sought to disallow the payment to retired partners in the sum of Rs 1,58,56,741/- among other disallowances. The assessee explained that during the Asst Year 2012-13, professional fees of RS 1,58,56,741/- were diverted by overriding title to the ex-partners or spouses of deceased partners (herein referred to as ‘retired partners’) as per partnership deed. The above amount of Rs 1,58,56,741/- was reduced from the gross professional fees of Rs 140,42,63,926/- credited to the profit and loss account. The assessee vide reply letter dated 12.3.2015 explained the transaction elaborately and justified its claim of deduction u/s 37(1) of the Act. The ld AO however examined the details and explanations filed by the assessee and held that the payment is an application of icnome and accordingly brought the same to tax. The ld AO also rejected the alternate claim of the assessee holding that the payment made to the retired partners is not expenditure to carry on the business but it was a gratuitous payment. Before the ld CITA, the assessee submitted that though the very same issue was decided against the assessee by his predecessor ld CITA, the assessee had ultimately succeeded the said issue before this tribunal for the Asst Year 2011-12 in and ITA No. 2079/Mds/2016 dated 25.11.2016. The ld CITA respectfully following this tribunal decision in assessee’s own case for the Asst Year 2011-12 supra, deleted the addition made by the ld AO. Aggrieved, the revenue is in appeal before us on the following grounds:- 2
CO No. 111/CHNY/2017 M/s Deloitte Haskins & Sells A.Yr. 2012-13 1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case.
The Ld. CIT(A) erred in deleting the disallowances made in respect of payment of Rs. 1,58,56,741/- made to retired partners claimed by the assessee on account of diversion of income by over-riding title.
2.1. The Ld. CIT(A) erred in deleting the disallowance without appreciating the fact that the provisions of Sec. 40(ba), clauses(i) & (ii) of 40(b) allow deduction of expenditure only if remuneration is payable to any partner of the firm and not a retired partner.
2.2. The Ld. CIT(A) failed to appreciate that the payments made to retired partners are not diversion of income on account of over-riding title but mere application of income on account of self imposed obligations.
2.3 The Ld. CIT(A) failed to appreciate that the doctrine of diversion of income by reason of overriding title applies only in cases where the income never reaches the assessee as his income. Whereas in the instant case the assessee had received the income and diverted it and therefore it was mere application of income.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) may be set aside and that of the AO restored.
The ld DR argued that this tribunal while deleting the addition made for Asst Year 2011- 12 had placed reliance on the co-ordinate bench decision of Mumbai Tribunal in the case of C.C.Chokshi & Co. vs JCIT in to 495/Mum/2003 for the Asst Years 1995-96 to 1997-98 , wherein on identical facts, it was held that the payment is by overriding title but not an application of income. The ld DR argued that this decision has been distinguished by yet another decision of Mumbai Tribunal in the case of S.B.Billimoria & Co. vs ACIT reported in (2010) 125 ITD 122 (Mum) dated 19.12.2008. Accordingly he pleaded that the latest decision of Mumbai Tribunal dated 19.12.2008 would hold the field as on date and prayed for restoration of the order of the ld AO in this regard.
CO No. 111/CHNY/2017 M/s Deloitte Haskins & Sells A.Yr. 2012-13 5. In response to this, the ld AR submitted that the decision of Mumbai Tribunal in the case of C.C.Chokshi & Co in to 495/Mum/2003 dated 24.2.2006 had been approved by the Hon’ble Bombay High Court and placed the copy of the said order before us. Accordingly, he argued that the issue under consideration has been settled in favour of the assessee by the decisions of Hon’ble Bombay High Court in the following cases :- a) CCIT vs C.C.Chokshi & Co. in of 2008 and 193 of 2008 dated 25.7.2008 b) ACIT Vs A.F.Ferguuson & Co. in ITA No. 87 of 2011 dated 21.7.2011
We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find that this tribunal had placed reliance on the decision of Mumbai Tribunal in the case of C.C.Chokshi & Co., which was later approved by the Hon’ble Bombay High Court vide order dated 25.7.2008. Further we find that the Hon’ble Bombay High Court in the case of A.F.Ferguson & Co supra had dismissed department’s appeal by answering first substantial question of law with reference to allowability of payments made to retired partners on account of overriding title on the profits, in favour of the assessee. We find that the Mumbai Tribunal in the case of S.B.Billimoria & Co supra held that the principles laid down in C.C.Chokshi & Co., case was not applicable because of the reason that the covenants in the partnership agreement in S.B.Billimoria’s case allowed the parterns to carry on the business subject to approval of majority of partners as per Para 20 of the said decision, whereas, in C.C.Chokshi & Co. case, it was not possible and there is no such enabling covenant which allows the remaining partners to carry on business without making payment to retired partners. These two clinching distinguishing features advances the case of the assessee. We find from the perusal of the partnership agreement of the assessee herein, the continuing partners cannot carry on business without making the payment to retired partners. Similarly there is no clause in the partnership agreement of the assessee 4
CO No. 111/CHNY/2017 M/s Deloitte Haskins & Sells A.Yr. 2012-13 which enables the continuing partners to carry on the business with majority partners consent. Hence it could be safely concluded that the decision of S.B.Billimoria is factually distinguishable. We hold that the issue under dispute is now settled by the two decisions of Hon’ble Bombay High Court supra and respectfully following the same, we do not find any infirmity in the order of the ld CITA in this regard. Accordingly, the grounds raised by the revenue are dismissed.
Now let us come to Cross Objection of the assessee.
The Ground No.1 raised by the assessee in its cross objections is only supportive of order of the ld CITA and hence we do not deem it necessary to address the alternate claim made thereon by the assessee.
The only issue to be decided in the cross objections of the assessee is as to whether the ld CITA was justified in upholding the disallowance of interest on TDS of Rs 1,18,902/- in the facts and circumstances of the case.
9.1. The brief facts of this issue is that the ld AO observed that the assessee had debited in its profit and loss account an amount of Rs 1,18,902/- towards delay in remittance of tax deduction at source, which in the opinion of the ld AO, was not an allowable deduction. The assessee pleaded that the said payment of interest is only compensatory in nature and moreover, the TDS portion is not the tax pertaining to the assessee herein, instead the same represents the tax pertaining to the payee. Hence the same is squarely an allowable deduction. But this argument did not hold water and the ld AO disallowed the same in the assessment. Before the ld CITA, the assessee contended that section 40(a)(ii) of the Act is applicable to taxes paid by the concerned assessee on its income. However, the payment under consideration is not tax of the assessee but rather it is the tax of the payee. The ld CITA however observed that the assessee’s plea for allowability of the payment of interest 5
CO No. 111/CHNY/2017 M/s Deloitte Haskins & Sells A.Yr. 2012-13 on TDS is not acceptable, since the expenditure on the interest has arisen on account of a clear default on the part of the assessee, in remitting the TDS belatedly to Government account. Accordingly, the ld CITA upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds:- 1. Payment to retired partners to be allowed as deduction under section 37(1) of the Act 1.1. Without prejudice to the claim that the payment to retired partners is diversion of income by overriding title and not chargeable to tax, the Ld. CIT(A) ought to have appreciated that payment made to retired partners is incurred wholly for the purpose of carrying on the profession of the firm and as such the same is allowable as revenue expenditure under section 37(1) of the Act.
2. Disallowance of Interest on TDS Rs. 1,18,902/- 2.1. The Ld. CIT(A) erred in confirming the order of the Assessing Officer (‘AO’) in concluding that interest on TDS of Rs. 1,18,902/- is not an allowable deduction. 2.2. The Ld. CIT(A) failed to appreciate the fact that interest incurred on delayed remittance of TDS is compensatory in nature and hence allowable u/s 37(1) of the Act. 2.3. The Ld. CIT(A) ought to have appreciated that interest on TDS does not amount to tax as per section 40(a)(ii) of the Act and hence is an allowable expense.
3. The Respondent craves leave to add, alter, amend, substitute, rescind, modify and/or withdraw in any manner whatsoever all or any of the foregoing grounds at or before the hearing of the appeal.
9.2. We have heard the rival submissions. We find that the assessee had merely made belated payment of TDS belonging to the payees and not the assessee. Hence the said interest which was paid for delayed remittance of TDS is only compensatory in nature. The decision relied upon by the ld CITA was in the context of payment of interest on payment of direct taxes and since the direct tax payment is not an allowable expenditure, the interest paid thereon is also not an allowable deduction. But the assessee had only made payment of professional fees to third parties on which tax has been deducted at source and remittance was made belatedly to the account of the central government. Hence the TDS does not CO No. 111/CHNY/2017 M/s Deloitte Haskins & Sells A.Yr. 2012-13 belong to the assessee and instead it belongs to the payee. Hence the said TDS / tax belongs to the payee. The assessee had merely made compensatory payment of interest on delayed remittance of TDS which is squarely an allowable deduction in the computation of income of the assessee firm. Accordingly, the grounds raised by the assessee in its cross objections are allowed.
In the result, the appeal of the revenue is dismissed and cross objections of the assessee is allowed.
Order pronounced in the Court on 08.02.2018