Appeal details
Counselvise Citation
[2019] 117 COUNSELVISE.COM (IT) 2082 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 5 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
19-06-2019
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
B
Assessment Year
2010-2011
Appeal Filed On
09-01-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO A.Y. APPELLANT RESPONDENT 5217/MUM/13 2005-06 MULLA & MULLA & CRAIGIE BLUNT & CAROE, MULLA HOUSE, 51, M.G.ROAD, FORT, MUMBAI [PAN: AABFM1563D] JOINT COMMISSIONER OF INCOME TAX-11(3), MUMBAI 4451/MUM/12 2008-09 ADDL. COMMISSIONER OF INCOME TAX-11(3), MUMBAI 248/MUM/14 2009-10 ASST. COMMISSIONER OF INCOME TAX-11(3), MUMBAI 249/MUM/14 2010-11 APPELLANT BY : SHRI P.J. PARDIWALA & SHRI NISHANT THAKKAR, RESPONDENT BY : SHRI RAJEEV GUBGOTRA, SR.AR DATE OF HEARING : 18 - 0 6 - 2019 DATE OF PRONOUNCEMENT : 19 - 06 - 2019 O R D E R PER G.S. PANNU, VICE PRESIDENT: THE CAPTIONED ARE FOUR APPEALS FILED BY THE ASSESSEE PERTAINING TO ASSESSMENT YEARS 2005-06, 2008-09, 2009 -10 AND 2010-11. SINCE THE APPEALS PERTAIN TO THE SAME ASSESSE E AND INVOLVE A COMMON ISSUE, THEY HAVE BEEN CLUBBED AND H EARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVITY. 2 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) 2. THE FACTS BEING SAME IN ALL THE YEARS, WE TAKE UP THE APPEAL FOR ASSESSMENT YEAR 2008-09 (ITA NO.4451/MUM/2012) A S THE LEAD CASE. THE SAID APPEAL IS DIRECTED AGAINST AN OR DER PASSED BY THE COMMISSIONER OF INCOME TAX(APPEALS)-2, MUMBAI DA TED 30.04.2012, WHICH IN TURN, ARISES OUT OF AN ORDER PA SSED BY THE ASSESSING OFFICER, DATED 31.12.2010 UNDER SECTION 143 (3)(II) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 3. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE FO R ASSESSMENT YEAR 2008-09 READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CA SE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS. 19,5 8,337/- PAID TO THE RETIRED PARTNERS AND THE LEGAL HEIRS OF THE DECEASE D PARTNERS AS PER THE PROVISION OF THE PARTNERSHIP DEED, AS INCOME OF THE APPELLANT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS. 19,5 8,337/- IS NOT A DIVERSION OF INCOME BY OVERRIDING TITLE. 3. WITHOUT PREJUDICE TO THE AFORESAID GROUNDS, THE CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS. 19,58,337 IS NOT AL LOWABLE AS AN EXPENDITURE UNDER SECTION 37 OF THE ACT AS INCURRED FOR THE BUSINESS OF THE APPELLANT . 4. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CAS E AND IN LAW THE CIT (A) OUGHT TO HAVE ALLOWED THE AMOUNT OF RS. 19,58,3 37/- AS A LOSS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN CHARGING INTEREST U/S.234A, 234B AN D 234C OF THE INCOME TAX ACT. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN PERMITTING PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT TO CONTINUE. THE APPELLANT CRAVES LEAVE TO ADD ANY FURTHER GROUN DS ON OR BEFORE THE DATE OF HEARING. 4. BRIEFLY PUT, THE RELEVANT FACTS ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM OF PRACTICING ADVOCATES, SOLICITORS A ND NOTARIES. 3 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) IT FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR2008-0 9 ON 27.09.2008 WHEREIN, INTER ALIA , IT CLAIMED DEDUCTION OF RS. 19,58,337/- ON ACCOUNT OF PAYMENT MADE TO RETIRING PARTNERS AND LEGAL HEIRS OF THE DECEASED PARTNERS. IN THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THE ABOVE FACT AND ACCORDINGLY, ASSESSEE WAS SHOW CAUSED AS TO WHY THESE PAYMENTS SHOULD NOT BE DISALLOWED. IN RESPONSE, ASSES SEE POINTED OUT THAT THE SAID PAYMENT WAS MADE IN TERMS OF A PARTNERSHIP DEED ENTERED DATED 01.04.2001. IT WAS FUR THER POINTED OUT THAT THE SAID PAYMENT WAS IN THE NATURE OF DIV ERSION OF INCOME BY OVERRIDING TITLE AS INCOME TO THAT EXTENT NE VER ACCRUED TO THE ASSESSEE FIRM BUT ALWAYS BELONGED TO THE RETIRING PARTNERS AND LEGAL HEIRS OF THE DECEASED PARTNERS. IT W AS ALSO POINTED OUT THAT THIS ISSUE AROSE IN EARLIER YEARS IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1969-70 AND THE HONBLE BOMBAY HIGH COURT VIDE ORDER DATED 20.09.1990 REPORTED IN [ 1991] 190 ITR 0198 DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE HOLDING THAT THIS PAYMENT IS IN THE NATURE OF DIVERSION OF INCOME BY OVERRIDING TITLE AND THUS CANNOT FORM PART OF INCOME OF THE ASSESSEE -FIRM. AFTER CONSIDERING THE ISSUE IN DETAIL, THE ASSESSING O FFICER HELD THAT MAIN ISSUE TO BE DECIDED IN THIS CASE WAS WHETHER THE PAYMENTS MADE TO THE RETIRED PARTNERS WAS AN APPLICATIO N OF INCOME OR A DIVERSION BY AN OVERRIDING TITLE. THE AS SESSING OFFICER FURTHER TOOK A VIEW THAT THE DECISION OF THE HONBLE BOMB AY HIGH COURT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1967-70 IN 190 ITR 198 WAS DECIDED MUCH BEFORE THE AMENDMENT MA DE IN THE ACT W.E.F 01.04.1993. THE ASSESSING OFFICER HELD THAT OVERRIDING TITLE HAS BEEN CREATED VOLUNTARILY BY THE A SSESSEE FIRM ITSELF AND AN OVERRIDING TITLE CANNOT BE CREATED SUO-M OTO OR 4 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) VOLUNTARILY AS PER LAW, THEREFORE, HE REJECTED THE AR GUMENT OF THE ASSESSEE AND DISALLOWED A SUM OF RS. 19,58,337/- PA ID TO RETIRING PARTNERS AND THE LEGAL HEIRS OF THE DEMISED PA RTNERS. ON APPEAL, CIT(A) AFFIRMED THE ORDER OF ASSESSING OFFIC ER. AGGRIEVED BY THE SAME, ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. BEFORE US, THE LD.REPRESENTATIVE FOR THE ASSESSEE S UBMITTED THAT THREE PARTNERS RETIRED FROM THE FIRM W.E.F. 31.03.20 01, VIDE A DEED OF PARTNERSHIP DATED 01.04.2001. THE THREE PARTNE RS WERE TO BE PAID THE FOLLOWING AMOUNTS IN 48 EQUAL MONTHLY INSTALMENTS: MR. J. P. THACKER RS. 40,00,000/- MR. S. K. WADIA RS. 30,00,000/- MR. K.F. MEHTA RS. 30,00,000/- 5.1. THE AFORESAID PAYMENTS WERE MADE UNDER CLAUSE 4 READ WITH CLAUSE 5(B) OF THE AFORESAID PARTNERSHIP DEED. A PART FROM ABOVE, AS PER CLAUSE 13 READ WITH CLAUSE 14 OF THE PA RTNERSHIP DEED, LEGAL HEIRS OF MR. S. D. COLABAWALA WERE ALSO TO BE PAID RS. 20,00,000/- IN 48 EQUAL MONTHLY INSTALMENTS. DURI NG THE YEAR UNDER CONSIDERATION, LAST 12 INSTALMENTS WERE PAID IN RESPECT TO THE RETIREMENT / DEATH OF THE AFORESAID FOUR PA RTNERS AMOUNTING TO RS. 19,58,337/-. THE INSTALMENTS PAID IN THE EARLIER YEARS TO THE VERY SAME PARTNERS WERE ALLOWED A ND ACCEPTED BY THE ASSESSING OFFICER TO BE NOT CHARGEABLE TO TAX IN THE HANDS OF THE ASSESSEE. THUS, THE LD. REPRESENTATIVE SUBMITTED THAT AS THE EARLIER INSTALMENTS OF THE PAYMENTS M ADE UNDER THE SAME DEED OF PARTNERSHIP HAS BEEN ACCEPTED BY THE DEPARTMENT TO BE NOT TAXABLE IN THE HANDS OF THE ASSESSEE FIRM, THE SAME VIEW SHOULD BE FOLLOWED IN THIS YEAR AS WELL . 5 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) 6. THE LD.REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ABOVE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1969-70 REPORTED IN [1991] 190 ITR 0 198 WHEREIN THE HONBLE HIGH COURT HAS EXAMINED THE ABOVE ISSUE AND HELD THAT PAYMENTS MADE TO RETIRING PARTNER OR LEGAL HEIRS OF DECEASED PARTNERS AS PER TERMS OF PARTNERSHIP DEED FO R THE WORK DONE BY THE FIRM UPTO THE DATE OF PARTNERS DEATH OR RE TIREMENT DID NOT REACH THE ASSESS-FIRM AS ITS INCOME BUT IT HAS BEEN DIVERTED AT SOURCE . 7. THE LD.REPRESENTATIVE FURTHER SUBMITTED A CHART DE PICTING THE YEAR-WISE STATUS OF ALLOWANCE/ DISALLOWANCE OF THE SAID PAYMENT AND SUBMITTED THAT IN ASSESSMENT YEAR 1969-70, TH E APPEAL OF THE ASSESSEE ON THIS ISSUE WAS ALLOWED BY THE HONBLE HIGH COURT; FOR ASSESSMENT YEARS 1970-71 TO 1972-73 TH E SAID ISSUE WAS ALLOWED IN FAVOUR OF THE ASSESSEE BY CIT( A), AND THE DEPARTMENT HAD NOT PREFERRED FURTHER APPEAL BEFORE TR IBUNAL; AND, FROM ASSESSMENT YEAR 1975-76 TO 2004-05 THE SAID PAYMENT WAS ALLOWED BY THE ASSESSING OFFICER HIMSELF. FURTHER, IN ASSESSMENT YEARS 2006-07, 2007-08, 2013-14 AND 20 14-15, THE ASSESSING OFFICER HIMSELF ALLOWED THE CLAIM. IT WA S THUS SUBMITTED THAT IN EARLIER YEARS AND EVEN IN LATER YEARS THE ASSESSING OFFICER HIMSELF HAS ALLOWED THIS PAYMENT AN D THUS, THE SAME SHOULD ALSO BE ALLOWED IN CURRENT YEAR. 8. THE LD.REPRESENTATIVE RELIED ON THE DECISION OF TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. C. C. CHOKSHI & CO. IN ITA NO. 193 OF 2008 WHEREIN ON IDENTICAL FACTS, THE HIGH COURT 6 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) DISMISSED THE APPEAL OF THE REVENUE RELYING ON ITS DE CISION IN THE CASE OF ASSESSEE DISCUSSED ABOVE. OUR ATTENTION WAS DR AWN TO THE DECISION RENDERED BY THE TRIBUNAL IN THAT CASE AND POINTED OUT THAT AFTER DETAILED ANALYSIS OF VARIOUS CLAUSES OF TH E PARTNERSHIP DEED, THE TRIBUNAL ARRIVED AT THE CONCLUSIO N THAT WHEN THE PAYMENT WAS OBLIGATED BY THE PARTNERSHIP DEED, IT CANNOT BE SAID TO BE AN APPLICATION OF INCOME BY THE A SSESSEE FIRM. THE ASSESSEE IS,IN FACT, IN THE POSITION OF A COLLECTOR OF INCOME ON BEHALF OF THE PERSONS TO WHOM IT IS PAYABLE AND IS ONLY PAYING THE AMOUNT SUBSEQUENTLY. 9. THE LD.REPRESENTATIVE RELIED ON THE DECISION OF TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S. KANGA & CO. IN ITA NO. 2277 OF 2013 WHEREIN ON IDENTICAL FACTS THE HIGH COURT DISMISSED THE APPEAL OF THE REVENUE STATING THAT THE TRIB UNAL HAS CORRECTLY PLACED RELIANCE ON THE DECISION OF MULLA AND MULLA AND CRAIGIE BLUNT AND CAROE 190 ITR 198 (SUPRA) . 10. THE LD.REPRESENTATIVE FOR THE ASSESSEE FURTHER POI NTED TO THE CONTENTS OF PARTNERSHIP DEED OF EARLIER YEAR FOR WHICH THE HONBLE HIGH COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE; THE PAYMENT MADE TO RETIRING PARTNER AND LEGAL HEIRS O F THE DECEASED WAS COVERED BY THE CLAUSE NO. 16 OF THE PARTNERSHIP DEED AND THE CORRESPONDING CLAUSE IN THE P RESENT DEED IS CLAUSE NO. 14. IT WAS FURTHER POINTED OUT THAT E VEN IN EARLIER YEARS PARTNERSHIP DEED THERE WAS SCOPE FOR D ETERMINATION OF AMOUNT WHICH NEEDS TO BE QUANTIFIED IN FUTURE WHEREA S IN THE PRESENT PARTNERSHIP DEED, THE AMOUNT IS ALREADY QUANTIFI ED IN 7 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) THE PARTNERSHIP DEED ITSELF. APART FROM THIS, THERE IS NO DIFFERENCE IN THE OLD PARTNERSHIP DEED AND NEW PARTNER SHIP DEED. AS SUCH, RATIO LAID BY THE HONBLE BOMBAY HIGH IN ASSESSEES OWN CASE STILL HOLDS GOOD AND THE ISSUE IS SQUARELY COVERED BY THE SAID DECISION. 11. ON THE OTHER HAND LD. DR RELIED ON THE DECISION OF COORDINATE BENCH IN THE CASE OF S. B. BILLIMORIA & CO . VS. ACIT [2010] 125 ITD 122 (MUM.), TO SAY THAT PAYMENT MADE B Y THE ASSESSEE WAS GRATUITOUS IN NATURE AND THEREFORE NOT ALL OWABLE. THE LD. DR FURTHER RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. V. G. BHUTA REPORTED IN 2 03 ITR 249 (BOM). 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND CONSIDERED THE MATERIAL PLACED BEFORE US. THE LIMITED CONTROVERSY BEFORE US IS WHETHER THE PAYMENT MADE BY THE ASSESSEE-F IRM TO RETIRING PARTNERS AND LEGAL HEIRS OF THE DECEASED PARTN ERS IN TERMS OF THE PARTNERSHIP DEED AMOUNTS TO DIVERSION OF I NCOME BY OVER RIDING TITLE AND THUS, EXCLUDIBLE FROM TOTAL INCOM E IN THE HANDS OF THE FIRM OR NOT. AT THE OUTSET, WE SHALL MAKE IT CLEAR THAT THE QUESTION SOUGHT HERE IS NOT WITH RESPECT TO THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER ANY PROVISIO N OF THE ACT AND, THEREFORE, THE SAME IS NOT REQUIRED TO BE ANALYSED FROM THE PERSPECTIVE OF ANY PARTICULAR SECTION UNDER THE ACT. THE QUESTION HERE IS WHETHER THE AMOUNT CLAIMED AS DEDUCTION BY THE ASSESSEE-FIRM CAN AT ALL BE SAID TO BE INCOME OF THE A SSESSEE IN VIEW OF THE FACT THAT SAME WAS DIVERSION OF INCOME BY OVER RIDING 8 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) TITLE AS CLAIMED BY THE ASSESSEE. IN THIS REGARD, AS PO INTED OUT BY THE ASSESSEE, THE ISSUE STANDS COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSESSEES OWN CASE FOR EARLIER YEAR. HOWEVER, THE ASSESSING OFFICER IN THE ASSESSMENT ORDER HAS STATED THAT THE DECISION OF THE HONBLE BOMBA Y HIGH COURT PERTAINS TO ASSESSMENT YEAR 1969-70 WHICH WAS MUC H BEFORE THE AMENDMENT IN THE ACT W.E.F. 01.04.1993 TO THE EFFECT THAT ONLY PAYMENT MADE TO WORKING PARTNERS TO THE EXTENT PROVIDED FOR UNDER THE ACT IS DEDUCTIBLE AND NO OTHER P AYMENT MADE TO PARTNERS IS DEDUCTIBLE IN THE HANDS OF THE ASS ESSEE-FIRM. AS DISCUSSED EARLIER, WE ARE DECIDING THE ISSUE OF W HETHER PAYMENT MADE BY THE FIRM AMOUNTS TO DIVERSION OF INCO ME OR NOT AND, THEREFORE, THE REASON ASSIGNED BY THE ASSESSING O FFICER THAT THERE WAS AMENDMENT IN THE ACT AND, THEREFORE, THE DECIS ION OF EARLIER YEAR CANNOT BE APPLIED TO THE FACTS OF THE CURR ENT YEAR, IS QUITE IRRELEVANT. 12.1. WE SHALL NOW ANALYSE THE CLAUSES OF THE PARTNER SHIP DEED THAT WAS IN OPERATION DURING THE YEAR FOR WHICH THE ISSU E HAS BEEN DECIDED BY THE HONBLE BOMBAY HIGH COURT AND THE CLAUSES OF THE PARTNERSHIP DEED IN OPERATION DURING THE CURRENT YEAR. IT WAS POINTED OUT BY THE LD. COUNSEL OF THE ASSESSEE THA T THE RELEVANT CLAUSE IN THE EARLIER AGREEMENT WAS CLAUSE NO . 16. FOR SAKE OF BREVITY, WE REPRODUCE THE CLAUSE 16 OF THE EA RLIER PARTNERSHIP DEED WHICH READS AS UNDER: 16. IN THE EVENT OF THE RETIREMENT OR DEATH OF ANY OF THEM THE PARTIES HERETO THE RETIRING PARTNER OR THE ESTATE O F THE DECEASED PARTNERS, AS THE CASE MAY BE, SHALL BE ENTITLED TO THE SHARE OF PROFITS OF THE FIRM (IN CASES WHERE THE SHARE IS QU ANTIFIED, THE 9 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) QUANTIFIED SHARE) FOR ALL THE WORK DONE BY THE FIRM UPTO THE DATE OF HIS RETIREMENT OR DEATH, AS THE CASE MAY BE , AND ALL NECESSARY APPORTIONMENT SHALL BE MADE FOR THE PURPO SE PROVIDED ALWAYS AND IT HAS BEEN HEREBY EXPRESSLY AG REED BETWEEN THE PARTIES HERETO THAT NOTWITHSTANDING ANY -THING OTHERWISE CONTAINED IN THESE PRESENTS. (A) IT SHALL BE LAWFUL FOR THE SURVIVING OR CONTINUING AGREEMENT PARTNERS OF THE FIRST TO THE EIGHTH PARTS IN AGREEM ENT WITH THE RETIRING PARTNER OR PARTNERS OR THE HEIRS, EXECUTOR S OR ADMINISTRATORS OF ANY DECEASED PARTNER OR PARTNERS TO QUANTIFY THE SHARE OF THE PROFITS OF THE PARTNER WHO HAS RET IRED OR DIED IN RESPECT OF THE WORK DONE UPTO THE DATE OF HIS RETIR EMENT OR DEATH AND ALSO TO ARRIVE AT ANY AGREEMENT FOR PAYIN G SUCH SHARE OF PROFITS OF THE RETIRED OR DECEASED PARTNER OR THE QUANTIFIED AMOUNT, AS THE CASE MAY BE, IN ONE OR MO RE LUMP SUMS /OR BY PERIODICAL INSTALMENTS WITH OR WITHOUT INTEREST BUT SO THAT ALL SUCH AMOUNT SHOULD BE PAID WITHIN A PER IOD OF FIVE YEARS FROM THE DATE OF RETIREMENT OR DEATH IT BEING AGREED THAT THE AMOUNT THAT MAY BE SO AGREED UPON AS THE SHARE OF PROFITS IN THE FIRM PAYABLE TO A RETIRING PARTNER OR A DECE ASED PARTNER FOR ALL THE WORK DONE BY THE FIRM UP TO THE DATE OF DEATH OR RETIREMENT AS THE CASE MAYBE, OR ANY QUANTIFICATION OF THE SHARE OF PROFITS OF A PARTNER WHO HAS RETIRED OR DIED AND ANY AGREEMENT TO PAY THE SAID SHARE OF PROFITS OR THE Q UANTIFIED AMOUNT THEREOF IN LUMP SUM OR BY PERIODICAL INSTALM ENTS WITH OR WITHOUT INTEREST SHALL BE FINAL AND BINDING ON ANY RETIRING PARTNER AND ON THE HEIRS, EXECUTORS AND ADMINISTRAT ORS OF ANY DECEASED PARTNER AS THE CASE MAY BE AND THE SURVIVI NG OR REMAINING PARTNERS AND SHALL NOT BE QUESTIONED BY A NY OF THEM IN ANY COURT OF LAW OR OTHERWISE HOWSOEVER; (B) IN THE CASE OF THE SAID ENGINEER, THE SAID KAVASHA THE SAID BHARUCHA AND THE SAID NANAVATI, THEIR RESPECTIVE SH ARES BEING QUANTIFIED AT THE RESPECTIVE AMOUNTS PER MONTH PROV IDED FOR IN CLAUSE 5 HEREOF, THEY SHALL BEEN TITLED RESPECTIVEL Y ONLY TO BE PAID THEIR RESPECTIVE QUANTIFIED SHARES UPTO THEIR RESPECTIVE DATES OF RETIREMENT OR DEATH. (UNDERLINED FOR EMPHASIS BY US) 12.2. WE SHALL NOW ADVERT TO THE CLAUSE NOS. 13 AND 14 OF THE PARTNERSHIP DEED DATED 01.04.2001 WHICH IS RELEVANT FO R THE YEAR UNDER CONSIDERATION AND PURSUANT TO WHICH ASSESSEE CL AIMS TO 10 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) HAVE MADE PAYMENT TO RETIRING PARTNER AND LEGAL HEIRS OF THE DECEASED PARTNERS DURING THE YEAR. THE CLAUSE NOS. 13 AND 14 OF THE PARTNERSHIP DEED DATED 01.04.2001 READ AS UNDER: 13. IN THE EVENT OF THE DEATH, RETIREMENT OR INSOL VENCY OF ANY PARTNER OR DETERMINATION OF THE SHARE OF ANY PARTNE R AS HEREINAFTER PROVIDED, THE DECEASED PARTNER OF HIS L EGAL REPRESENTATIVE, THE RETIRING PARTNER, THE INSOLVENT PARTNER, OR THE PARTNER WHOSE SHARE SHALL HAVE BEEN DETERMINED, AS THE CASE MAY BE (HEREINAFTER FOR BREVITYS SAKE REFERRE D TO AS THE OUTGOING PARTNER) SHALL, SUBJECT TO THE OTHER PROV ISIONS HEREOF, HAVE NO SHARE, RIGHT, TITLE OR INTEREST IN ANY RECE IPTS OF THE FIRM AFTER THE DATE OF HIS DEATH, RETIREMENT OR INSOLVEN CY OR TERMINATION OF THE SHARE EVEN THOUGH SUCH RECEIPTS MAY RELATES TO WORK DONE PRIOR TO THE DATE OF DEATH RETIREMENT, INSOLVENCY OR DETERMINATION OF THE SHARE, AS THE CASE MAY BE . ON SUCH DEATH, RETIREMENT OR INSOLVENCY OF ANY PARTNER OR D ETERMINATION OF THE SHARE OF ANY PARTNER, THE OUTGOING PARTNER S HALL BE ENTITLED TO SUCH AMOUNT AS MAY BE PAYABLE TO SUCH P ARTNER AS PER THE BOOKS OF ACCOUNT OF THE FIRM UPTO THE DATE OF DEATH, RETIREMENT, INSOLVENCY, OR TERMINATION OF SHARE OF SUCH PARTNER, AS THE CASE MAY BE, AFTER TAKING INTO CONSIDERATION THE PROFITS OF THE FIRM UPTO THE DATE OF HIS DEATH, RETIREMENT, INSOLVENCY, OR TERMINATION OF SHARE, AS THE CASE MAY BE. SUCH PROF ITS SHALL BE DETERMINED ON PROPORTIONATE TIME BASIS HERETO OF TH E FIRST TO THE NINTH PARTS OR OF THE SURVIVORS OF THEM. THE AM OUNT SO FOUND SHALL BE PAYABLE IN ONE OR MORE LUMPSUM OR BY PERIODICAL INSTALMENTS AS MAY BE DECIDED BY THE MAJ ORITY OF THE PARTIES HERETO OF THE FIRST TO THE NINTH PARTS OR THE SURVIVORS OF THEM, BUT SO THAT THE SAME SHALL BE PA ID WITHIN A PERIOD OF NOT MORE THAN THREE YEARS FROM THE DATE O F HIS DEATH, RETIREMENT, INSOLVENCY OR TERMINATION OF SHARE AS T HE CASE MAY BE. IF, ON THE OTHER HAND, ON MAKING ACCOUNTS AS AFORE SAID ANY AMOUNT IS FOUND TO BE DUE AND PAYABLE BY SUCH PARTN ER TO THE FIRM, SUCH AMOUNT SHALL BE RECOVERED FROM HIM OR HI S ESTATE, AS THE CASE MAY BE, IN SUCH MANNER AS THE MAJORITY OF THE PARTIES HERETO OF THE FIRST TO THE NINTH PARTS, OR OF THE S URVIVORS OF THEM, MAY FROM TIME TO TIME DECIDE OR MAY BE SET OF F OR ADJUST AGAINST ANY AMOUNT THAT MAY BE DUE BY THE FIRM TO S UCH PARTNER OR HIS ESTATE OR HIS ASSIGNS IN INSOLVENCY. 14(A) IN THE EVENT OF THE DEATH OF ANY OF THE PARTI ES HERETO OF THE FIRST TO NINETEENTH PARTIES OR IN THE EVENT OF HIS RETIREMENT CONSEQUENT UPON ILLNESS OR ACCIDENT INCAPACITATING HIM FROM 11 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) CARRYING ON THE PROFESSION OF SOLICITOR, ATTORNEY O R ADVOCATE, THERE SHALL BE PAID TO THE PERSON OR PERSONS NOMINA TED BY HIM IN HIS LIFETIME BY A WRITING ATTESTED BY TWO PARTNE RS OF THE FIRM AND LEFT OR FILED IN THE OFFICE OF THE FIRM, AND FA ILING ANY SUCH NOMINATION, TOO THE ESTATE OF SUCH DECEASED PARTNER , OR TO SUCH RETIRING PARTNER, AS THE CASE MAY BE, THE RESPECTIV E AMOUNTS MENTIONED HEREINAFTER IN THIS SUB-CLAUSE AGAINST TH E NAME OF EACH SUCH PARTNER, IN 48 EQUAL MONTHLY INSTALMENTS THAT IS TO SAY:- .. . (B) THE AMOUNTS TO BE PAID UNDER THIS CLAUSE SHALL BE P AID OUT OF THE RECEIPTS OF THE FIRM FOR THE PERIOD SUBS EQUENT TO THE DEATH OR RETIREMENT AS THE CASE MAY BE, OF THE PART NER CONCERNED, TO THE INTENT THAT THE SAME SHALL BE PAI D IN FIRST INSTANCE OUT OF SUCH RECEIPTS OF THE FIRM, AND CHAR GED ON THE RECEIPTS OF THE FIRM, BEFORE THE BALANCE THEREOF IS DISTRIBUTED BETWEEN THE PARTNERS OF THE FIRM ENTITLED TO THE PR OFITS OF THE FIRM. IT IS HEREBY ALSO EXPRESSLY AGREED AND DECLARED THAT THERE SHALL BE NO PERSONAL LIABILITY OF THE PARTNERS OF THE FIRM FOR THE TIME BEING OR ANY OF T HEM OR THEIR RESPECTIVE HEIRS, EXECUTORS OR ADMINISTRATORS ESTAT E AND EFFECTS TO PAY THE INSTALMENTS OR ANY OF THEM OR ANY PART T HEREOF. IT IS HEREBY ALSO EXPRESSLY AGREED AND DECLARED THAT THE PERSON RECEIVING SUCH PAYMENT SHALL BEAR AND PA Y INCOME- TAX OR ANY OTHER TAX OR DUTY WHICH MAY BECOME PAYAB LE IN RESPECT OF SUCH PAYMENT AS IF THE SAME WERE THE INC OME OF THE BENEFICIARY OR BENEFICIARIES RECEIVING SUCH PAYMENT AND THE PARTNERS OF THE FIRM SHALL BE INDEMNIFIED IN RESPEC T THEREOF AS HEREAFTER PROVIDED IN CLAUSE 18 HEREOF. (C) NOTHING CONTAINED IN THIS CLAUSE 14 OF THIS AGREEME NT SHALL BE CONSTRUED AS OBLIGING ANY PARTNER TO RETIRE AS A PA RTNER OF THE SAID FIRM, IT BEING CLEARLY UNDERSTOOD THAT THIS CLAUSE IS INTENDED ONLY TO PROVIDE AN OPTION TO ANY SUCH PARTNER TO RETIRE SHO ULD HE SO THINK FIT. (UNDERLINED FOR EMPHASIS BY US) FROM A PERUSAL OF CLAUSE NO.16 OF THE OLD AGREEMENT A ND CLAUSE NOS. 13 AND 14 OF THE NEW AGREEMENT, IT IS AMPLY CLE AR THAT IN SUM AND SUBSTANCE THE ONLY DIFFERENCE IS THAT IN OLD AG REEMENT AMOUNTS PAYABLE TO THE RETIRING PARTNERS AND LEGAL HEIRS WERE NOT 12 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) QUANTIFIED AND IT ONLY PRESCRIBED A METHOD FOR QUANTI FICATION OF AMOUNT, WHEREAS IN THE NEW AGREEMENT THE AMOUNT TO BE P AID TO THE PARTNERS ON RETIREMENT AND OTHERWISE IS DULY QUANTIFI ED. APART FROM THE AFORESAID, WE DO NOT FIND DIFFERENCE IN THE TERMS AND CONDITIONS PRESCRIBED IN THE TWO AGREEMENTS. 12.3. THE HONBLE BOMBAY HIGH COURT, AFTER CAREFULL Y CONSIDERING THE TERMS OF THE OLD AGREEMENT, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN [1991] 190 ITR 0198, AND T HE RELEVANT EXTRACT OF THE SAID JUDGMENT IS REPRODUCED HEREUNDER: 6. WE HAVE ALREADY REFERRED TO THE TRIBUNAL'S FIND INGS IN DETAIL IN THE THIRD PARAGRAPH OF THE JUDGMENT. WE A RE IN AGREEMENT WITH THE TRIBUNAL THAT IN VIEW OF CLAUSES 11 AND 16 OF THE DEED OF PARTNERSHIP DATED 1-9-1967 TO WHICH BOTH LATE SHRI N.K. PETIGARA AND SHRI KHAMBATA WERE PARTIES A ND IN VIEW OF CLAUSES 3, 4 AND 6 OF THE TWO PARTNERSHIP D EEDS DATED 20-3-1968 AND 17-3-1969, THE ASSESSEE-FIRM WAS UNDE R A LEGAL OBLIGATION TO PAY THE SHARE OF THE DECEASED P ARTNERS IN THE INCOME OF THE FIRM FOR THE WORK DONE BY THE FIR M UP TO THE DATE OF THE DEATH OF THE AFORESAID TWO PARTNERS TO THEIR LEGAL HEIRS. AS HELD BY THE TRIBUNAL, THESE AMOUNTS WERE COLLECTED BY THE ASSESSEE-FIRM MERELY AS AGENTS OF THE PREDEC ESSOR FIRMS AND NOT IN THEIR OWN RIGHTS. THEY COLLECTED THE INCOME BELONGING TO THE PREDECESSOR FIRMS FOR THE SAKE OF CONVENIENCE AND AS EXCEPT FOR THESE TWO PARTNERS ALL OTHER PART NERS WERE COMMON. THEY INCLUDED THE AMOUNT RECEIVABLE ON BEHA LF OF THE CONTINUING PARTNERS IN THE INCOME OF THE FIRM. 7. WE HAVE NO DIFFICULTY IN HOLDING THAT IN THE FAC TS OF THE CASE THE CALCUTTA HIGH COURT DECISION IN G. BASU & CO.'S CASE (SUPRA) IS SQUARELY APPLICABLE. IN THE CALCUTTA HIG H COURT CASE TWO FIRMS WERE CARRYING ON PRACTICE AS CHARTERED AC COUNTANTS. THEY WERE FACING CERTAIN TROUBLES ON ACCOUNT OF DIS PUTES AND DIFFERENCES AMONG THE PARTNERS. THE DISPUTE WAS REF ERRED TO ARBITRATOR FOR SETTLEMENT. PURSUANT TO THE AWARD OF ARBITRATION AND IN CONSEQUENCE OF THE DEED OF RETIREMENT THREE PARTNERS OF ONE OF THE FIRMS RETIRED IN DECEMBER 1969. AS PER T HE TERMS OF THE DEED OF RETIREMENT CERTAIN SPECIFIC ITEMS OF OU TSTANDING FEES WERE DIRECTLY ASSIGNED TO THE RETIRING PARTNER S. THE 13 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) QUESTION AROSE WHETHER THOSE OUTSTANDING FEES WHICH WERE DIRECTLY ASSIGNED TO THE RETIRING PARTNERS REPRESEN TED THE INCOME OF THE FIRM. OBSERVING THAT THERE WAS A LEGA L OBLIGATION IN TERMS OF THE DEED OF RETIREMENT TO PAY IN A PART ICULAR MANNER THE ERSTWHILE PARTNERS IN RESPECT OF REALISA TION OF FEES AFTER THEIR RETIREMENT, IT WAS HELD TO BE AN INSTAN CE OF THE SOURCE OF INCOME BEING SUBJECT TO AN OBLIGATION. TH E OUTSTANDING FEES PAID TO THE RETIRING PARTNERS AS P ER THE TERMS OF THE DEED OF RETIREMENT WERE HELD NOT ASSESSABLE AS INCOME OF THE FIRM. INCIDENTALLY THE CALCUTTA HIGH COURT H AD IN THIS REGARD REFERRED TO AND RELIED UPON THE SUPREME COUR T DECISION IN THE CASE OF CIT V. SITALDASTIRATHDAS [1961] 41 I TR 367 AND THE MADRAS HIGH COURT DECISION IN THE CASE OF V.N.V . DEVARAJULU CHETTY& CO. (SUPRA). 8.IN THE PRESENT CASE ALSO THE ASSESSEE-FIRM WAS UN DER A LEGAL OBLIGATION IN TERMS OF THE DEED OF PARTNERSHIP DATE D 1-9-1967 AND THE CLAUSES IN THE TWO SUBSEQUENT PARTNERSHIP D EEDS TO PAY OUTSTANDING FEES FOR THE WORK DONE UP TO AND DU RING THE PERIOD WHEN THE DECEASED PARTNERS WERE PARTNERS. TH IS WAS ALSO AN INSTANCE OF THE SOURCE OF INCOME BEING SUBJ ECT TO AN OBLIGATION. WE ARE IN AGREEMENT WITH THE CALCUTTA H IGH COURT DECISION AND HOLD THAT THE AMOUNTS SO PAID BY THE A SSESSEE- FIRM TO THE HEIRS OF THE DECEASED PARTNERS CANNOT B E ASSESSED AS THE INCOME OF THE FIRM. (UNDERLINED FOR EMPHASIS BY US) 12.4. IN OUR VIEW, THE TERMS OF THE PARTNERSHIP DEED DATED 01.04.2001 ARE ALSO IN LINE WITH THE OLD AGREEMENT E XCEPT THAT THE AMOUNT TO BE PAID TO THE RETIRING PARTNERS AND LEGA L HEIRS HAVE BEEN QUANTIFIED IN THE NEW AGREEMENT. THUS, WHEN THE FACT SITUATION REMAINS THE SAME, WE DO NOT FIND ANY REASON FOR NOT FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH CO URT IN ASSESSEES OWN CASE. THE ASSESSING OFFICER HAS NOT F OLLOWED THE ORDER OF THE HONBLE HIGH COURT BECAUSE AS PER HIM, TH ERE WAS AMENDMENT IN THE ACT W.E.F. 01.04.1993 AND THEREAFTER, ONLY PAYMENT MADE TO THE WORKING PARTNERS OF THE FIRM IS ALLO WABLE. WE DO NOT AGREE WITH THE REASON CITED BY THE ASSESSING O FFICER AS 14 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) THE ISSUE HEREIN IS ON A DIFFERENT FOOTING, AND THE AME NDMENT MADE BY THE ACT DOES NOT AFFECT THE CASE OF THE ASSESSEE AS ASSESSEE IS NOT CLAIMING ANY DEDUCTION U/S 40 OF THE A CT, RATHER THE CASE OF THE ASSESSEE IS THAT THE IMPUGNED SUM DOES N OT ENTER THE COMPUTATION OF INCOME AT ALL. AS PER THE ASSESSEE, THE AFORESAID AMOUNT IS EXCLUDIBLE FROM TOTAL INCOME AT THE THRESHOLD ITSELF. IT IS ALSO IMPORTANT TO NOTE HERE THAT THE HONBLE HIGH COURT IN ABOVE CASE, WHILE DECIDING THE ISSUE IN FAVO UR OF THE ASSESSEE, CONSIDERED THE DECISION OF IN THE CASE OF CIT V. SITALDAS TIRATHDAS [1961] 41 ITR 367, WHICH HAS BEEN RELIED UPON BY THE ASSESSING OFFICER IN THE INSTANT YEAR WHILE DISALLOWIN G THE CLAIM OF THE ASSESSEE. SINCE THE HONBLE HIGH COURT HAS ALRE ADY CONSIDERED THE SAID DECISION, WE ARE NOT DISCUSSING T HE APPLICABILITY OF THE SAID CASE TO THE FACTS OF THE PRES ENT CASE; AND, IT WOULD SUFFICE TO NOTE THAT THE ASSESSING OFFICER HAS E RRED IN PLACING RELIANCE ON THE AFORESAID DECISION. 12.5. WE FURTHER STATE THAT THE NEW AGREEMENT CLEARLY S PELLS OUT THAT THE LIABILITY TO PAY INCOME TAX ON AMOUNT RECEIVED BY THE RETIRING PARTNERS OR BENEFICIARY WILL BE ON THEM AND NOT ON THE ASSESSEE-FIRM. THUS, LIABILITY TO PAY TAX, IF AT ALL, IN TERMS OF THE AGREEMENT ALSO, IS UPON THE PARTNER OR THE BENEFICIARY RECEIVING SUCH PAYMENT. AS SUCH, IT IS THE PARTNERS OR BENEFICIAR IES RECEIVING SUCH PAYMENT WHO SHOULD BE TAXED AND NOT THE ASSESSEE. FURTHER, IT IS ALSO OBSERVED FROM THE TERMS OF THE AGREEMENT THAT THE ABOVE PAYMENT WERE TO BE SET-ASIDE AT T HE THRESHOLD FROM THE RECEIPTS OF THE FIRM AND WILL, THUS , NOT REACH THE HANDS OF THE OTHER PARTNERS OF THE FIRM AND, THEREFOR E, CANNOT BE TREATED AS INCOME OF THE ASSESSEE-FIRM WHO HAS MER ELY ACTED 15 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) AS A PASS THROUGH ENTITY FOR THIS PAYMENT. WE, ACCORDI NGLY, SET- ASIDE THE ORDER OF CIT(A) AND DIRECT THE ASSESSING OFF ICER TO ALLOW THE EXCLUSION OF RS.19,58,337/-ON ACCOUNT OF PAYMENT M ADE TO RETIRING PARTNERS AND LEGAL HEIRS OF THE DECEASED PARTN ERS. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED, AS ABOVE. 14. INSOFAR AS APPEALS OF ASSESSEE FOR ASSESSMENT Y EARS 2005- 06, 2009-10 AND 2010-11 IN ITA NO. 5217/MUM/2013, I TA NO. 248/MUM/2014 AND ITA NO. 249/MUM/2014 ARE CONCERNED , THE ISSUE INVOLVED AND THE FACTS AND CIRCUMSTANCES THEREIN STAND ON IDENTICAL FOOTING TO THAT IN APPEAL OF ASSESSEE FOR AS SESSMENT YEAR 2008-09, THEREFORE, OUR DECISION THEREIN SHALL APPLY MUTATIS MUTANDIS TO THE SAID APPEALS ALSO. 15. RESULTANTLY, ALL THE APPEALS OF THE ASSESSEE ARE A LLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH JUNE, 2019 SD/- SD/- (AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER VICE PRESIDENT /MUMBAI; /DATED : 19-06-2019 TNMM 16 MULLA & MULLA & CRAIGIE BLUNT & CAROE (4 APPEALS) / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ! ( ) / THE CIT(A), MUMBAI 4. ! / CIT, MUMBAI 5. $%& '( , * '( + , / DR, ITAT, MUMBAI 6. &,- . / GUARD FILE / BY ORDER, //TRUE COPY// / (DY./ASST. REGISTRAR) * '( +, / ITAT, MUMBAI
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