DCIT, Circle-4(2), Ahmedabad V. M/s. Deloitte Haskins and Sells , Ahmedabad

ITA 2422/AHD/2018

AI Insights

The case revolves around the appeal by the Revenue against the order of the CIT(A) which allowed the deduction of retirement benefits paid to retiring partners by the assessee firm, Deloitte Haskins & Sells. The firm argued that the payment was a diversion of income by overriding title, as it was based on the partnership deed and related to work-in-progress handled by the retiring partners. The AO had initially disallowed this deduction, treating it as income of the firm. However, the CIT(A) reversed this decision, leading to the Revenue's appeal to the Tribunal. The Tribunal, referencing various precedents and the specifics of the partnership deed, upheld the CIT(A)'s decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133472 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-07-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 13-12-2018
• Other Referred Cases: C.C. Chokshi & Co. Vs. JCIT, ACIT v. M/s C.C. Chokshi & Co., Deloitte Haskins & Sells, DCIT versus Wadia Ghandy& Company, Mulla & Mulla & Craigie Blunt &Caroe, S B Billimoria and Co
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Audit objection; Diversion of income; Tax effect; Set aside
• Section: 147; 148; 37; 143(3); 40(b); 37(1); 250; 139(1)

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘A’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R.SENTHIL KUMAR, JUDICIAL MEMBER ITA No.2422/Ahd/2018 Assessment Year :2012-13 The DCIT, Cir.4(2) Ahmedabad. Vs. M/s.Deloitte Haskins & Sells Shapath V Besides Crowne Plaza S.G. Highway Ahmedabad 380015. PAN : AABFD 7919 A (Applicant) (Responent) Assesseeby : Shri Niraj Sheth, AR & Shri Vimal Desai, AR Revenue by : Shri Atul Pandey, Sr.DR स ु नवाई क तार ख/D a t e o f H e a r i n g : 1 0 / 0 7 / 2 0 2 3 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t : 0 6 / 1 0 / 2 0 2 3 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER This is Revenue’s appeal against the order of the ld.Commissioner of Income Tax(A)-4, Ahmedabad [‘ld.CIT(A)’ for short] dated 26.10.2018 passed under section 250 of the Income Tax Act, 1961 [hereinafter referred to as "the Act" for short]for the Asst.Year 2012-13. 2. This is second round of litigation before the Tribunal. In the first round, as evident from the case record,appeal of the Revenue was dismissed by the Tribunal vide consolidated order dated 14.8.2019 in ITA No.1398/Ahd/2017 and 627 others appeals, (in ITA No.2422/Ahd/2018 2 which group included the appeal of the Department in ITA No.2422/Ahd/2018 also) due to low tax effect involved, being below Rs.50 lakhs, as stipulated by the CBDT vide circular no.17/2019 dated 8.8.2019 for filing appeal before the Tribunal. Against this order, the Revenue filed MA No.383/Ahd/2019 seeking recall of the order qua the above appeal of Revenuefor adjudicating the issue raised in the appeal on merits, on the ground that it was a case reopened on audit objection, and thus, it falls within the exception clause provided in the instruction. However, the MA of the Revenue was dismissed by the ITAT by order dated 20.1.2020. The Revenue challenged this order before the Hon’ble jurisdictional High Court, in SCA No.9995 of 2021 and others, and the Hon’ble High Court by order dated 8.7.2022 quashed and set aside order of the ITAT dated 9.9.2020 passed in the MA and directed the Tribunal to restore the appeal of the Revenue to be heard on merits. Accordingly, this matter came up before this Bench for adjudication afresh on merit. 3. The only ground raised by the Revenue is against the order of the ld.CIT(A) in deleting addition of Rs.70,15,919/-relating to retirement benefits given by the assessee-firm to its retiring partners under section 37(1) of the Act. 4. The facts in brief, which can be noticed from the orders of the Revenue authorities are that the assessee is a partnership firm engaged in practicing as a firm of Chartered Accountants. It filed its return of income under section 139(1) declaring total income at Rs.4,08,35,250/-. The return was selected for scrutiny assessment under section 143(3) and the assessees returned income was accepted by the Department. However, thereafter, the AO noticed from Schedule 9 of profit & loss account, regarding professional fees ITA No.2422/Ahd/2018 3 that the assessee has directly deducted an amount of Rs.70,15,919/-, paid to retiring partners, from gross professional receipts and thereby reduced its income to that extent. Accordingly, the AO reopened the assessment under section 147 of the Act by issuing notice under section 148 of the Act, proposing that an amount of Rs.70,15,919/- paid to the retiring partners, directly deducted from Gross professional receipts, was not allowable and was to be treated as income of the firm. According to the AO, the payment made to the retired partners could not be considered from current business or profession because the service rendered by the partners was of past period; that the partners were not employees of the firm, but owners; that the partners were entitled to receive only from the capital balance as on the date of retirement, and therefore, payment made to the partners was capital in nature, and could not be allowed as expenditure under section 37 of the Act. The AO was further of the view that any provision made in the partnership deed would not override the statutory provisions of the Act, because there was no provision in the Act for allowance of remuneration and interest paid to the retired partners. 5. The assessee countered that it was following cash method of accounting; that the amount of payment to retired partners was excluded from the firm’s income on the basis of the principle of diversion by overriding title, because at the time of retirement of those partners, there was considerable amount of income either unbilled or billed but not received, and the same were treated as work-in-progress to be received from the clients for which, cost was incurred and time was devoted and efforts were made during the period when retiring partners was active in the firm; that the ITA No.2422/Ahd/2018 4 impugned payment was made to the retired partners as per the specific provision contained in the partnership deed, wherein partners served the firm over 20 years, was entitled to certain payment for a specified period after the retirement, which was a prior charge on the gross fees; that payment made to the retired partners was not capital in nature, rather it was diversion of income due to prior charge created on the same, and therefore, it should not be considered as income of the assessee-firm. To support its case, the assessee had also relied on various case laws including the decisions of the ITAT, Mumbai Bench in the cases of the assessee’s sister concern viz. C.C.Chokshi & Co. Vs. JCIT, ITA No.492 to 495/Mum/2003. However, the ld.AO did not agree with the contentions of the assessee. The AO maintained his stand against the claim of the assessee that amount of Rs.70,15,919/- deducted from the income of the assessee for making payment to retired partners was nothing but diversion of income which was against the provisions of the Act, and he considered the same as income of the assessee and added to the total income of the assessee. The assessee, thereafter, went in appeal before the first appellate authority raising both on validity of reassessment proceedings and the addition on the merit. The ld.CIT(A) allowed the claim of the assessee on merit. While doing so, the ld.CIT(A) followed the decision of his predecessor for the Asst.Year 2014-15 where similar addition was deleted by the ld.CIT(A) in favour of the assessee. In support of his finding, the ld.CIT(A) also relied on various case laws and also the decisions of the ITAT, Mumbai Bench in the case of sister concern of the assessee. Aggrieved by the order of the ld.CIT(A), the Revenue is in appeal before the Tribunal. ITA No.2422/Ahd/2018 5 6. Before us, the ld.DR supported order of the AO, and further stated that it is a clear case of diversion of funds in order to avoid tax liability. He further submitted that assessee’s claim of payment to retired partners could not be allowed in view of the provisions of section 40(b) of the Act, and making some provision in the clauses of the partnership deed, will not override the legal provision so as to entitle the assessee to make deduction on account of payment made to the retired partners directly from the income of the assessee-firm. He further submitted that AO has appreciated the issue both in law and on facts, and rejected the claim of the assessee, which order deserves to be upheld, and that of the ld.CIT(A) be set aside. 7. On the other hand, the ld.counsel for the assessee while reiterating the submissions made before the lower authorities, also relied on various cases laws including decision of the ITAT Ahmedabad Bench in ITA No.1984/Ahd/2017 dated 1.10.2019 in the assessee’s own case wherein similar claim of the assessee for the subsequent assessment year i.e. Asst.Year 2014-15 was allowed by the Tribunal following the decision of the Chennai Bench of the ITAT in the case of assessee’s sister concern, viz. CC Chokshi & Co. for the Asst.Year 2000-01 & 2001-02. The Tribunal ruled in favour of the assessee by upholding the finding of the of the ld.CIT(A) on the similar issue. The ld.counsel for the assessee drew our attention to para 5.4 of the order of the ITAT, Ahmedabad cited (supra) in agreeing with the claim of the assessee that payment made to the retired partners was allowable expenditure and the same would amount to diversion of income at source by overriding title. He submitted that the ld.CIT(A) while appreciating the claim of the assessee, also taken into consideration the proposition of law laid ITA No.2422/Ahd/2018 6 down by various higher Courts in this behalf, and therefore, the impugned order being passed in the light of judicial precedent deserves to be confirmed. The case laws relied on by the assessee are as under: i) Mumbai Tribunal decision in case of C.C. Chokshi & Co. ITA No. 492 to 495/Mum/2003; ii) Mumbai Tribunal decision in case of ACIT v. M/s C.C. Chokshi & Co. ITA Nos 7791 and 9213/Mum/2004; iii) Chennai Tribunal decision in case of Deloitte Haskins & Sells ITA No.2079/Chny/2016; iv) Bombay High Court judgement in case of CIT v. M/s C.C. Chokshi & Co. (ITXA No. 209 and 193 of 2008); v) Bombay High court judgement in case of CIT v. A.F. Ferguson & Co. (ITA No. 87 of 2011); vi) Mumbai Tribunal decision in case of Deloitte Haskins & Sells ITA No.4844/Mum/2011 and 2768/Mum/2013; vii) Mumbai ITAT decision in case of Mulla & Mulla & Craigie Blunt &Caroe ITA No. 5217/Mum/2013 (considers the decision of S B Billimoria and Co, which was relied upon by the Learned DR at the time of hearing - placed at Sr. No. 9); viii) Bombay HC judgement dated 12 February 2019 in case of Wadia Ghandy&Co. 1696 of 2016; ix) Mumbai ITAT decision in case of S B Billimoria and Co. ITA No. 2863 & 2897/Mum/2006 (relied on by the learned DR at the time of hearing. In para 19 and 20 of the order, ITAT holds that the decision in C C Chokshi & Go's case (Sr. No. 1 above) is distinguishable. 8. We have heard both the parties and perused orders of both the authorities below. We also gone through the various case laws cited by both the sides on the issue. The issue agitated by the Revenue before us is, whether payment made to retired partners is deductible ITA No.2422/Ahd/2018 7 directly from the income of the assessee at the first instance, as the assessee claimed the same having overriding title on the profits of the assessee firm. This issue, we find, has been adequately adjudicated and covered by the decisions of various higher Courts, including similar issue raised in the assessee’s own case for Asst.Year 2014-15, wherein the ITAT, Ahmedabad Bench has allowed claim of the assessee holding that the deduction of payment made to the retired partners was charge on the income of the assessee-firm, in terms of obligation created by the partnership. The relevant observations of the Tribunal on the issue are at para-5.4, which read as under: “5.4 The only issue remaining for adjudication now is the dispute regarding payment made to the retired partners and this issue is in dispute before us in assessment year 2014 - 15. The Ld. authorised representative has placed reliance on a number of judicial precedents on the issue wherein it has been held that payments made to retired partners are an allowable expenditure. We find that an identical issue had come up before ITAT Chennai bench in the case of a related concern of the assessee in assessment year 2011 - 12 and the ITAT Chennai bench in ITA No. 2077/MDS/2016, vide order dated 25/11/2018, after relying on an order of ITAT Mumbai Bench in the case of CC Chokshi & Co. for assessment years 2000 - 01 and 2001 - 02 had held the issue in favour of the assessee. The Hon'ble High Court of Bombay in the case of DCIT versus Wadia Ghandy& Company, vide judgement dated 12/02/2019, also upheld an identical order of ITAT Mumbai and noted that payment to the partner would amount to diversion of income at source by overriding title. The court went on to observe that it was not necessary to refer to long line of decisions where a similar view in similar circumstances had been taken. The 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. The Hon'ble Bombay High Court held that in similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title. The Ld. senior departmental representative could not point out any judgement to the contrary on this issue as well and, therefore, in view of the ratio of the decisions as aforesaid and as relied upon by the Ld. authorised representative, on identical facts, we find no hesitation in agreeing with the findings recorded by the Ld. first appellate authority. Accordingly, the ground raised by the Department does not succeed ITA No.2422/Ahd/2018 8 6.0 In the final result both the appeals filed by the Department stand dismissed. 9. Further, the ld.counsel for the assessee drew our attention to relevant covenant contained clause no.10.m of the partnership deed which provides for “right to receive payments on retirement or death and determination and payment of amounts”. We find that the proposition of the law laid down by the higher Courts in this behalf still hold good, as the ld.DR except citing one solitary decision of the ITAT Mumbai Bench in the case of S.B. Billimoria & Co. Vs. ACIT, in ITA No.2863 & 2897/Mum/2006 has not been able to point out how various case laws relied on by the ld.counsel for the assessee were not applicable to the facts of the present case. On the contrary, the ld.counsel for the assessee pointed out that Mumbai Bench of the ITAT in the case of Mulla & Mulla and Craigie Blunt &Caroe, ITA No.5217/Mum/2013 had considered the decision of the ITAT, Mumbai Bench in the case of S.B. Billimoria & Co. (supra) and still ruled in favour of the assessee. Since, the ld.DR has been unable to bring to our notice any infirmity in order of the ld.CIT(A), and has not been able to point out why judicial decisions relied upon by the ld.CIT(A) and cited by the Ld.counsel for the assessee are not applicable to the facts of the present case, and further noting that in the case of the assessee itself in subsequent assessment year 2014-15 (reproduced above), the ITAT has ruled in favour of the assessee on the similar issue, holding the income paid to the retiring partners, as not being income of the assessee’s partnership firm, we see no reasons to reverse finding of the ld.CIT(A) on the issue. ITA No.2422/Ahd/2018 9 His order, deleting the addition made by the AO of the amount paid to the retiring partners amounting to Rs.70,15,919/- is confirmed, and the ground raised by the Revenue, thus rejected. 10. In the result, the appeal of the Revenue is dismissed. Order pronounced in the Court on 6 th October, 2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad,dated 06/10/2023