DELOITTE HASKINS AND SELLS LLP,MUMBAI vs. NATIONAL E ASSESSMENT CENTRE, ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 16(2), MUMBAI, MUMBAI

1:4 The Appellant submits that the Assessing Officer be directed to delete the addition so made by him and to re-compute its total income and tax thereon accordingly.

Without prejudice to the foregoing:

1:5 The Appellant submits that the NFAC/ CIT(A) has erred in confirming the action of the Assessing Officer of considering the alleged difference between the receipts as per ITR Form/ Financial Statements and the service tax/ GST returns as Rs. 147,22,44,468/- as against the correct amount of Rs. 135,73,03,693/-.

1:6 The Appellant submits that the Assessing Officer has inadvertently considered the amount paid to retired partners of Rs. 11,49,40,775/- in the reconciliation amount and also separately made an addition in this regard and thereby making a double addition.

2:0 Re.: Payments made to retired partners amounting to Rs. 11,49,40,775/-:

2:1 The NFAC/ CIT(A) has erred in confirming the action of the Assessing Officer of considering the amount of Rs. 11,49,40,775/- paid to retired partners as income of the Appellant.

2:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, the said amount of Rs.

Deloitte Haskin and Sells LLP, AY 2018-19 11,49,40,775/- cannot be considered as its income as it was diverted by overriding title and the Assessing Officer ought to have held as such.

2:3 The Appellant submits that the Assessing Officer be directed to delete the addition so made by him and to re-compute its total income and tax thereon accordingly.

Without prejudice to the foregoing:

2:4 The Appellant submits that the payments made to retired partners ought to be allowed as a deduction u / s 37(1) of the Income-tax Act, 1961 ["the Act"] while computing its total income.

3:0 Re.: Credit for tax deducted at source amounting to Rs. 18,62,08,841/- granted short:

3:1 The NFAC/ CIT(A) erred in not directing the Assessing Officer to grant full credit for tax deducted at source of Rs. 82,84,20,418/- as claimed by the Appellant in its return of income for the year under consideration.

3:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, it is entitled to full credit for tax deducted at source from its income as claimed by it and NFAC/ CIT(A) ought to have held as such.

3:3 The Appellant submits that the Assessing Officer be directed to grant full credit for tax deducted at source as claimed by it and to re-compute its tax liability accordingly.

4:0 Re.: Levy of interest u/s. 234A of the Act:

4:1 The NFAC/ CIT(A) has erred in confirming the stand taken by the Assessing Officer of levying interest u / s / 234A of the Act.

4:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, no interest u / s 234A is leviable as the Appellant has filed its return of income within the stipulated due date as prescribed under the Act and the Assessing Officer ought to have held as such.

4:3 The Appellant submits that the Assessing Officer be directed to delete the levy of interest u/s. 234A of the Act and to re-compute its tax liability accordingly.

5:0 Re.: Levy of interest u/s. 234C of the Act:

5:1 The NFAC/ CIT(A) has erred in confirming the stand taken by the Assessing Officer in levying excessive interest u / s 234C of the Act.

5:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, interest u/s. 234C of the Act ought to be levied on the returned income and the NFAC/ CIT(A) ought to have held as such.

Deloitte Haskin and Sells LLP, AY 2018-19 5:3 The Appellant submits that the Assessing Officer be directed to levy of interest u / s 234C of the Act on the returned income and to re-compute its tax liability accordingly.”

Particulars Amount Amount (in Rs.) (in Rs.) Professional Fees as per schedule 9 of the 1178,40,39,244 profit and loss account (A)

Add: i. Out of pocket expenses subject to 49,79,37,371 Service Tax/GST ii. Invoice rendered in FY 17-18 but not 160,42,16,076 paid by client till 31 March 2018 iii. Intra firm invoices 41,47,6 1,648 Total (B) 251,69,15,095 Less: Invoice issued in the earlier years but (115,96,1 1,402) payment received during the FY 17-18 Total (C) (115,96, 1 1,402) Total Output Supply as per GST and 1314,13,42,937 Service Tax (A+B-C) i. Out of pocket expenses subject to S Tax/ GST - Rs.49,79,37,371

Many clients is required to reimburse expenses incurred by appellant in providing services e.g. travel expenses, hotel stay, etc. Since the expenses are reimbursable by the client, the expense so incurred are not debited to the profit and loss account. Further, when invoice rendered on client for out of pocket expense (OPE') is received, such receipt is credited to the such expense account. Thus, incurrence of expenses and recovery of the same has no impact on the profit and loss account of the appellant. However, under Service tax / GST law OPE invoice rendered on the client is subject to service tax/ GST and accordingly they are considered as taxable service for the purpose of service tax/ GST return. Whereas, OPE invoices being in the nature of reimbursement of expense, do not form part of the professional fees considered in the return of income. Accordingly, for the purpose of reconciliation, the above amount is added to the grosss receipts from profession as per books. ii. lnvoice rendered in EY 17-18 but not paid by client till 31.3.18- Rs.160,42,16,076

Service tax/ GST is required to be paid on billing basis and accordingly Service tax / GST return include fees for which invoices are rendered. Such invoices may or may not have been paid by the client in the same financial

Deloitte Haskin and Sells LLP, AY 2018-19 year. As appellant is following cash system of accounting, fee is accounted and offered to tax in the year of receipt. Accordingly, for the purpose of reconciliation, the above amount is added to the gross receipts Irom profession. iii. Intra firm invoices - Rs. 41,47,61,648 The appellant has premises all over India and is registered under GST authorities in 9 states under GST regime which are treated as "distinct persons as per GST law. In case of supply of goods or services by such distinct persons to each other (For eg. DHS LLP Maharashtra to DHS LLP Gurgaon), invoice is raised by supplier on the recipient of goods or service with GST. These intra-firm invoices are disclosed in GST returns of the Supplier and forms part of aggregate turnover as per GST law. However, in financials both income and expenses are netted off in P&L since it is income and expenses pertaining to same entity. Therefore, there is a reconciliation difference to the extent of intra-firm invoices between GST returns and income as per financial statements. Therefore, to arrive at the professional fees shown as per GST return, the above amount was added in the reconciliation. iv. Professional fees received - Rs.115,96,1 1,402 Invoices which was raised during earlier years aggregating to Rs.l15,96,1 1,402 has been received during the current year. These fees are included in the profit and loss account and accordingly offered to tax. Since these invoices were reported in earlier years i.e. in the year of issue in Service Tax return, it is reduced from the gross receipts in the reconciliation.

3.3. Considering the above submissions of the assessee, ld. Assessing Officer observed and accepted that the gross receipt/turn over from professional services is Rs.1314,13,42,937/- only. He analysed the submissions and found it satisfactory. Accordingly, the difference initially computed by the ld. Assessing Officer of Rs.2294,40,98,802/- was recomputed by him at an amount of Rs.147,22,44,468/-. Before concluding to make this addition, ld. Assessing Officer noted that assessee firm has explained this difference. After noting that since the assessee has accepted this difference, he proceeded to make the addition to the total income of the assessee as income from business and profession.

3.4. The ld. Assessing Officer observed from the profit and loss account that an amount of Rs.11,49,40,775/- has been reduced

Deloitte Haskin and Sells LLP, AY 2018-19 under the head ‘Payments to retired persons’ for which explanations were called for. Assessee furnished its details along with documentary evidences and stated that this amount diverted to retired partners and spouses of deceased partners (hereinafter referred as ‘retired partners’) is in accordance with clauses 11.7, 16.13 and 16.14 of the partnership deed. According to the assessee, these payments were made in accordance to the partnership deed for which detailed compilation of partnership deed, deeds of accession and supplementary deeds were placed on record. 3.5. Assessee explained the practice adopted by it in rendering the professional and recognising revenue on its account. It was submitted that memo of fees is raised on the client upon completion of an engagement. Income in respect of professional fees gets booked only on receipt of professional fees from the client. At any given point of time, there are several ongoing professional engagements for which professional time has been spent and efforts made. Such work in progress is not reflected in the accounts because of the cash method of accounting. This practice results into considerable amount of income which is either unbilled or billed but not received and work in progress to be received from the clients for which costs are incurred, time is devoted and efforts made during the period when retired partners were active in the firm. Such sums will be realised by the firm in the post retirement period of the partner so retired. The firm continues its operations on the engagement even after the retirement of a partner with same name and apparatus. Assessee submitted that it is an ongoing firm which has the base of clients and human and physical infrastructure built over a period of time inter alia with efforts made by the retiring partners. 3.6. In terms of the clauses of the partnership deed and other relevant documents, assessee submitted that there is prior charge in Deloitte Haskin and Sells LLP, AY 2018-19 respect of payments due to the retired partners on the gross fees received by continuing firm. Owing to prior charge arising from the terms and provisions of the partnership deed, sum payable to the retired partners is diverted by way of superior title and is thus not an income in the hands of the assessee firm. It cannot be said to be a part of assessee’s income, considering the nature of obligation in respect of such sum payable by it. Assessee placed reliance on several judicial precedents including in its own case, passed by various co- ordinate benches of ITAT. 3.7. In the alternate, assessee also submitted that payment of Rs.11,49,40,775/- is an expenditure allowable u/s. 37(1) of the Act, as it was incurred for the purpose of carrying on the profession of the firm. Further, these payments made by the assessee to the retired partners has been included in the income of the respective retired partners, who have offered the same to tax in their return of income for the year under consideration. However, ld. Assessing Officer did not find favour with the submissions made by the assessee and concluded to disallow the payments so made to the retired partners. 3.8. While completing the assessment, TDS credit to the assessee was restricted to Rs.64,22,11,577/- by ld. Assessing Officer resulting into a short credit of Rs.18,62,08,841/-. 3.9. Aggrieved, assessee went in appeal before the ld. CIT(A).

Deloitte Haskin and Sells LLP, AY 2018-19 6.1. From the details furnished and extracted above, we note that there are out of pocket expenses which has been subjected to service tax/GST, there are intra firm invoices which are disclosed in service tax returns and forms part of the aggregate turn over as per Service Tax law. However, in financials these intra-firm invoices are both income and expenses and are netted off in profit and loss account, since it is income and expense pertaining to same assessee firm.

6.2. Further, assessee follows cash method of accounting and only the fees which is received during the year is considered as income whereas for the purpose of service tax and GST, the gross receipts/turnover is based on invoices issued and not on the basis of fees collected. Considering all these facts on record supported by documentary evidences, we find the reconciliation furnished by the assessee is justified. Accordingly, the difference between the gross receipts/turnover as per the ITR and service tax added by the ld. Assessing Officer is deleted. Ground no.1 alongwith with its sub grounds are allowed.

Deloitte Haskin and Sells LLP, AY 2018-19 7.1. Ld. Counsel referred to the list of retired partners containing details of payments made to them in the year under consideration placed at page 131 of the paper book. For this purpose, he referred to the clauses contained in the partnership deed. From Clause 11.7, it was pointed out that payments to retired partners in terms of clause 16.14 shall have a prior charge on the gross fees and assets of the assessee firm. Consequent to this, the real income accruing to assessee shall be the income left after satisfying such charge. The said clause of the partnership deed is reproduced as under: 11.7.1. It is agreed that payments as provided in Clause l6.14.1 shall have a prior charge on the gross fees and assets of the LLP and consequently the real income accruing to the LLP as constituted from time to time during the period such payments are to be made shall be the income left after satisfying such charge. [It is clarified that similar obligations hitherto incurred shall continue to be fulfilled.] 11.7.2. No Partner. his heirs, or his legal representatives or nominees are or shall be entitled to any lump sum payment in lieu of the payments provided in Clause 1l6.14.1.

7.2. Ld. Counsel also referred to clause 16.13 dealing with right to receive payments on retirement or death from which he pointed out that the sums payable to the retired partners shall be determined on the basis of amounts billed, but not received, work completed, but not billed and work partly completed and not billed as at the date of death or retirement or as the case may be, having regard to the fact that the assessee follows cash system of accounting. He reiterated the practice adopted by the assessee in respect of rendering of professional services and recognising revenue on its account which is already elaborated in above paragraphs and therefore not repeated for the sake of brevity.

Deloitte Haskin and Sells LLP, AY 2018-19 7.3. Ld. Counsel took us through the aforesaid clauses of partnership deed relating to payments made to the retired partners in order to explain that there is a prior charge of the gross fees received by the continued partners because of which it is not an income of the assessee firm. He submitted that the amount paid to the retired partners is a consideration to them for the assessee to continue the same business in the same line with the new partners and to retain the retired partners to support competitiveness on their own and not to join a new firm which is a threat to the existing firm as well as to settle the pending bills relating to income earned by them as a partner during their tenure in the assessee firm. On a specific query by the bench, Ld. Counsel for the assessee made a statement and gave the assurance that there is no change in the terms of the Partnership Deed in respect of payments to retired partners, in the case of the assessee. Ld. Counsel, by summarising various clauses of the partnership deed submitted the following: i. “Under the deed a partner who has served the firm for a qualifying period exceeding 20 years as defined in the deed, is entitled to certain payment for a specified period after the retirement. ii. such payment is in respect of amounts billed but not received & Work-in Progress as at the date of retirement having regard to the fact that the Partnership follows the cash system of accounting; in consideration of the Retiring Partner permitting the continuing Partners the use of the Firm name & to carry on the profession, along with the clientele and the attendant rights of the Firm and the contribution made by the surviving Partner during his association with the Firm, in increasing the future income earning, for agreeing to assume the liability in respect of payment to retired partners of the legacy firm etc. iii. every partner including incoming partner agrees to the covenants with the retiring partner by being a party to the partnership deed, iv. such payment is made by specific provision in the Deed, a prior charge on the gross fees and assets of the firm. v. retirement of a partner does not affect continuation of the firm vi. retiring partner does not have any right, title or interest in Goodwill, vii. retiring partner is bound by negative covenants in respect of not engaging himself in any professional practice, etc. In view of the facts emanating from the contents of the Partnership Decd. the appellant submitted that:

Deloitte Haskin and Sells LLP, AY 2018-19 i. There is a prior charge in respect of payments due to the retired partners on the gross fees received by the continuing firm, ii. In view of prior charge arising from the provision of the Partnership Deed, the sum payable to the retied partners is diverted away by superior title and therefore is not the income of the appellant firm. iii. The nature of obligation is such that the sum payable to retired partners cannot be said to be part of appellant income.”

7.4. He also contended that this amount has already been included in the income of the retired partners and offered to tax under their return of income for the year under consideration.

7.5. He placed reliance on the decisions of the Co-ordinate Bench of ITAT in assessee’s own case for Assessment Year 2008-09 and Assessment Year 2012-13 wherein it was held that payment to retired partners is diverted by overriding title and is not an income of the assessee firm. He also referred to several decisions of the group concerns which are placed on record. Ld. Counsel also placed reliance on the decision of Hon'ble Jurisdictional High Court of Bombay in the case of CIT vs. A.F. Ferguson & Co. in ITA(L)No.97/2011, dated 21.07.2011. From this he referred to the substantial question of law which dealt with the identical issue. The same is reproduced as under:

(a) Whether on the facts and circumstances of the case and in law the Hon'ble Tribunal was justified in upholding order of the CIT(A) deleting the addition made by Assessing Officer disallowing payment of Rs. 32,85,000/- made to 3partner/spouses of deceased partners, by holding that payment has been paid on account of overriding title on the profits and allowing claim of the Assessee?

7.6. Hon'ble High Court gave its decision by referring to its own earlier decision in the case of CIT vs. C.C. Chokshi & Co. in of 2008 and 193 of 2008, dated 25.07.2008 wherein the similar question raised by the Revenue was rejected.

Deloitte Haskin and Sells LLP, AY 2018-19 III. Mumbai Tribunal decision in the assessee's own case for the AY 2006-07 to 2008-09 in ITA No. 6786/Mum/2011 and ITA No.2221Mum/2011 IV. Mumbai Tribunal decision in the assessee's own case for the AY 2012-13 in ITA No. 7515/Mum/2016 V. Delhi Tribunal decision in the case of Deloitte Haskins & Sells in ITA No.3715/De/20 17 for the AY 2011-12; 9.2. From the decisions of Co-ordinate Benche of ITAT, Chennai in the case of ACIT vs. Deloitte Haskins & Sells in dated 25.11.2016, identical issue was dealt whereby addition so made was deleted. In the said decision, reliance was placed on the order of another Co-ordinate Bench of ITAT, Mumbai in the case of C.C. Chokshi & Co. vs. JCIT in ITA No. 492- 495/Mum/2003 for Assessment Year 1995-96 to 1997-98, dated 24.04.2006. Case of C.C. Chokshi & Co. travelled before the Hon'ble Jurisdictional High Court of Bombay, where the appeals by the Revenue were dismissed by placing reliance on the decision of the Hon'ble Court in the case of CIT vs. Mulla & Mulla & Craigie Blunt & Caroe [1991] 190 ITR 198 (Bom). 9.3. On a specific query to the ld. Counsel of the assessee in respect to the findings given in the case of Mulla & Mulla & Craigie Blunt & Caroe (Supra), ld. Counsel took the Bench through the decision and pointed out that Hon'ble’ Court has dealt with the issue on identical set of facts by referring to the substantial questions of law. While answering the substantial questions of law, the Hon'ble Court noted that there was a legal obligation in terms of the deed of retirement to pay in a particular manner to the erstwhile partner in respect of realisation fees after their retirement. It was held to be an instance of the source of income being subject to an obligation. Thus, the outstanding fees paid to the retiring partners as per the terms of the Deloitte Haskin and Sells LLP, AY 2018-19 deed of retirement were held not assessable as income of the firm. The Hon'ble Court by relying on the decision of Hon'ble Supreme Court in the case of Sital Das Thirath Das [1961] 41 ITR 367 (SC) noted that the true test for the application of the rule of diversion of income by overriding charge was whether the amount deducted in truth never reached the assessee as income. According to it, there is a difference between the amount which a person is obliged to apply out of his income and amount which by the nature of the obligation cannot be said to be a part of his income where as a result of the obligation income is diverted before it reaches the assessee which is deductable. Thus. the substantial question of law was answered in negative, i.e., in favour of the assessee.

10.1. Thus, the reliance placed by the ld. DR on the case of S.B. Billimoria & Co. (Supra) is of no support to her.

by the assessee in this respect are allowed.

12. On the third issue relating to short credit of TDS, ld. CIT(A) has directed the ld. Assessing Officer to verify the records and allow the credits subject to verification. We concur with the directions given by the ld. CIT(A) and accordingly remit this matter to the file of ld. Assessing Officer in terms of the directions so given. Accordingly, ground no.3 taken by the assessee is allowed for statistical purposes.

13. Ground no.4 and 5 are consequential in nature and therefore need no adjudication.

14. In the result, appeal of the assessee is allowed. Order is pronounced in the open court on 21 June, 2024