A.F. FERGUSON & CO., MUMBAI V. ACIT 11(2), MUMBAI

ITA 663/MUM/2010

• Counselvise Citation: 66319914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 24-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 27-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: MILIN THAKRE; JAYESH DESAI
• Keywords: Diversion of income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D : MUMBAI BEFORE SHRI D. MANMOHAN, (VICE PRESIDENT) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.663/MUM2010 ASSESSMENT YEAR : 2006-07 A.F. FERGUSON & CO. ALLAHABAD BANK BLDG. BOMBAY SAMACHAR MARG MUMBAI-400 001. ..( APPELLANT ) P.A. NO. (AABFA 5846 M) VS. THE ASSTT. COMMISSIONER OF INCOME TAX RANGE-11(2), AAYAKAR BHAVAN MUMBAI. ..( RESPONDENT ) APPELLANT BY : SHRI MILIN THAKRE AND SHRI JAYESH DESAI RESPONDENT BY : SHRI V. V. SHASTRI DATE OF HEARING : 27.7.2011 DATE OF PRONOUNCEMENT : . AUGUST, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 25.11.2009 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON THREE DIFFERENT G ROUNDS. 2. THE FIRST DISPUTE IS REGARDING ADDITION ON ACCOUNT OF SUNDRY CREDITORS. THE AO NOTED THAT THE ASSESSEE HAD SHOWN SUNDR Y CREDITORS AND OTHER LIABILITIES TO THE TUNE OF RS.74,96,201/- I N THE BALANCE SHEET WHICH COULD NOT BE ACCEPTED AS ASSESSEE WAS FOLLOWING CASH MET HOD OF ITA NO.663/M/10 A.Y:06-07 2 ACCOUNTING. THE AO FURTHER NOTED THAT SIMILAR DISPUTE HAD ARISEN IN ASSESSMENT YEAR 2001-02 IN WHICH THE TRIBUNAL HAD UPHELD THE ADDITIONS BEING INCREASE IN SUNDRY CREDITORS DURING THE Y EAR IN RESPECT OF CERTAIN ITEMS. HE, THEREFORE, COMPUTED THE DIFFER ENCE IN TERMS OF SUCH ITEMS BASED ON ORDER OF TRIBUNAL IN ASSESSMENT YEAR 20 01-02, WHICH WAS AS UNDER:- PARTICU- LARS BAL. AS AT 31.3.05 ADD TO 31.3.06 PAYMEN TS/W. BACK TO 31.3.06 BAL. AS ON 31.3.06 NET FIGURES OF ITEMS FOR A.Y. 06-07 AS PER THE ORDER OF ITAT CONFIRMED IN A.Y. 01-02 UNPAID CHEQUES 17500 15088 NIL 32588 15088 PROFESSION AL TAX 8758 15533 8758 15333 6775 SUNDRY CREDITORS 158688 317700 90000 386388 227700 PROFESSION AL TAX 2410 4590 2410 4590 2182 268564 THE AO THUS MADE ADDITION OF RS.2,68,564/-. IN APPEA L THE CIT(A) CONFIRMED THE ADDITION, AGGRIEVED BY WHICH THE ASSESSEE I S IN APPEAL. 2.3 WE HAVE HEARD BOTH THE PARTIES IN THE MATTER. I T IS NOT IN DISPUTE THAT THE ASSESSEE WAS FOLLOWING CASH METHOD OF ACCOU NTING AND THEREFORE, THE SUNDRY CREDITORS IN BALANCE SHEET COUL D NOT BE JUSTIFIED. SIMILAR ADDITION HAS ALREADY BEEN UPHELD BY THE TRIBUNAL IN ASSESSMENT YEAR 2001-02 IN ASSESSEES OWN CASE AND ADDITION IN THIS YEAR HAS BEEN MADE ON THE SAME BASIS. WE, THEREFORE, SE E NO ITA NO.663/M/10 A.Y:06-07 3 INFIRMITY IN THE ORDER OF CIT(A) CONFIRMING THE ADDI TION OF RS.2,68,564/- AND THE SAME IS THEREFORE, UPHELD. 3. THE SECOND DISPUTE IS REGARDING ADDITIONS AMOUNTING TO RS.59,07,500/- AND RS.8,75,471/- ON ACCOUNT OF PAYMENT TO RETIRED PARTNERS AND WIVES OF DECEASED PARTNERS UNDER THE PROVISI ONS OF PARTNERSHIP DEED AS DIVERSION OF INCOME. DURING THE ASSE SSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED THAT RETIRED PARTNERS /WIVES OF DECEASED PARTNERS HAD OVERRIDING TITLE ON CERTAIN PERCEN TAGE OF GROSS FEES SUBJECT TO CERTAIN LIMITATION AS PROVIDED IN THE P ARTNERSHIP DEED. THE CLAIMS HAD BEEN MADE UNDER PROVISIONS OF THE DEED A ND THEREFORE, SHOULD BE ALLOWED AS DEDUCTION. THE AO HOWEVER, DID NOT ACCEPT THE CONTENTION RAISED. IT WAS OBSERVED BY HIM THAT PAYMENT TO EX- PARTNERS OR THEIR SPOUSES ON THEIR DEATH WAS NOT FOR REN DERING ANY PROFESSIONAL SERVICES FOR THE FIRM AND, THEREFORE, SUCH EX PENSES COULD BE ALLOWED AS DEDUCTION AGAINST THE PROFESSIONAL FEES OF THE ASSESSEE FIRM. THE AO ALSO OBSERVED THAT THE INCOME BY WAY OF PROFESSIONAL FEES OTHERWISE HAD REACHED THE ASSESSEE FIRM AND THEREFO RE, PAYMENT MADE BY IT TO THE EX-PARTNERS AND THEIR SPOUSES WERE ON LY APPLICATION OF INCOME AND COULD NOT BE ALLOWED AS DEDUCTION BY WAY OF OVERRIDING TITLE. THE AO THEREFORE, DISALLOWED THE CLAIM AND ADDED THE SAME TO THE TOTAL INCOME. IN APPEAL THE CIT(A) FOLLOWING TH E DECISION TAKEN IN ASSESSMENT YEARS 2003-04 AND 2004-05 CONFIRMED THE ADDITI ON MADE ITA NO.663/M/10 A.Y:06-07 4 BY THE AO, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL B EFORE THE TRIBUNAL. 3.1 BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE SAME ISSUE HAD ARISEN IN APPEAL IN ASSESSMENT YEAR 2003-04 AND TRIBUNAL AFTER DETAILED EXAMINATION IN ITA NO.1113/M/2007 V IDE ORDER DATED 13.8.2010, AFTER REFERRING TO VARIOUS CLAUSES OF PARTN ERSHIP DEED AGREED THAT IT WAS NOTHING BUT DIVERSION OF INCOME AN D ACCORDINGLY ALLOWED THE CLAIM. THE SAME DECISION WAS FOLLOWED IN ASSESSMENT YEAR 2004-05 IN WHICH THE TRIBUNAL FOLLOWING THE DECI SION IN ASSESSMENT YEAR 2003-04 ALLOWED THE CLAIM THAT YEAR ALSO . THEREFORE, THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE. THE LD. D R ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BE LOW AND PLACED RELIANCE ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. V.G. BHUTA (203 ITR 249). 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWA BILITY OF DEDUCTIONS ON ACCOUNT OF PAYMENTS MADE BY THE ASSESSEE TO T HE RETIRED PARTNERS AND WIVES OF DECEASED PARTNERS WHILE C OMPUTING THE TOTAL INCOME. THE PAYMENTS HAD BEEN MADE UNDER THE PR OVISIONS OF PARTNERSHIP DEED. THE SAME ISSUE HAD BEEN EXAMINED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04 IN ITA ITA NO.663/M/10 A.Y:06-07 5 NO.1113/M/2007. THE TRIBUNAL AFTER EXAMINATION OF V ARIOUS CLAUSES OF PARTNERSHIP DEED NOTED THAT RETIRED PARTNERS AND SPOUSE S OF DECEASED PARTNERS HAD AN OVERRIDING TITLE UP TO CERTAIN PERCEN TAGE OF GROSS FEES COLLECTED BY THE FIRM SUBJECT TO CERTAIN CONDITIONS. THUS THE PROVISIONS OF PARTNERSHIP DEED CREATED OVERRIDING TITLE IN FAVOU R OF THESE PERSONS ON CERTAIN PERCENTAGE OF RECEIPTS IRRESPECTIVE OF THE FACT WHETHER THERE WAS PROFIT OR NOT. THE TRIBUNAL OBSERVED THAT THE CASE OF THE ASSESSEE WAS COVERED BY THE DECISION OF THE TRIBUNAL IN CASE OF C. C. CHOKSHI & CO. IN ITA NO.492 TO 495/M/2003 IN WHICH A SIMILAR CLA IM HAD BEEN ALLOWED. THE TRIBUNAL AFTER DETAILED DISCUSSION AND AF TER REFERRING TO THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT VS. SITALDAS TIRATHDAS (41 ITR 367) AND THE JUDGMENT OF HONBLE S UPREME COURT IN CASE OF PRINCE KHANDELRAO GAIKWAR VS. CIT (16 ITR 294) AND SEVERAL OTHER JUDGMENTS HELD THAT IT WAS A CASE OF DIVERSION OF INCOME AND NOT APPLICATION OF INCOME. THE FACTS IN THIS YEAR ARE I DENTICAL. THE LD. DR HAS PLACED RELIANCE ON THE JUDGMENT OF HONBLE BOMBA Y HIGH COURT IN THE CASE CIT VS. V.G. BHUTA (SUPRA), WHICH HAD ALSO BEEN CITED BY THE DEPARTMENT BEFORE THE TRIBUNAL. WE HAVE ALSO GO NE THROUGH THE SAID JUDGMENT AND FIND THAT THE SAID CASE IS DISTINGUISHA BLE. IN THAT CASE, THE CLAUSE 18 OF THE PARTNERSHIP DEED PROVIDED THA T THE FIRM WOULD NOT STAND DISSOLVED ON THE DEATH OF THE PARTNER BUT THE SURVIVING PARTNER OR PARTNERS WOULD SUCCEED TO THE SHARE OF THE ITA NO.663/M/10 A.Y:06-07 6 DECEASED PARTNER IN THE PARTNERSHIP DEED. THE CLAUSE RE QUIRED THAT THE SURVIVING PARTNERS HAD TO PAY TO THE LEGAL REPRESE NTATIVE OF THE DECEASED PARTNERS CERTAIN AMOUNTS AS PRICE OF SUCH SHARES. T HE HONBLE COURT NOTED THAT THE PARTNERSHIP DEED DID NOT MAKE IT OBLIGATORY ON THE PART OF THE SURVIVING PARTNERS TO PAY THE AMOUNTS. IT WAS TO BE PAID ONLY IF THEY WANTED TO TAKE OVER SHARE OF THE DECEASED PARTNER AND CONTINUE PARTNERSHIP BUSINESS. THIS CLEARLY I NDICATED THAT WHAT WAS PAID WAS BY WAY OF PRICE OF SHARE OF THE DECEA SED PARTNER IN THE PARTNERSHIP DEED. THE HONBLE HIGH COURT ACCORDINGL Y HELD THAT AT THE MOST IT WAS APPLICATION OF INCOME THAT HAD ACCRUED TO THE ASSESSEE AND THE DISALLOWANCE OF THE CLAIM HAD ACCORDINGLY BEEN UPHELD. THE FACTS IN CASE OF THE ASSESSEE ARE OBVIOUSLY DISTINGUISHABLE AN D THEREFORE, THE SAID JUDGMENT WILL HAVE NO APPLICATION IN THE PRESENT CASE. WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2003-04 AND 2004-0 5 (SUPRA) SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLA IM OF THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING DISALLOWANCE OF RS.5. 00 LACS BEING PAYMENT MADE TO MR. E.A. KSHIRSAGAR, A RETIRED EMPLOY EE. THE AO NOTED ON DETAILED EXAMINATION OF EXPENSES THAT THE SU M OF RS.5.00 LACS BEING PAYMENT TO SHRI KSHIRSAGAR A RETIRED EMPLOYE E HAD BEEN INCLUDED UNDER THE HEAD PAYMENT TO RETRIED PERSON OR WIDOWS OF EX- ITA NO.663/M/10 A.Y:06-07 7 PARTNER. THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTIO N 37(1). THE CLAIM HAD BEEN DISALLOWED BY THE AO. THE CIT(A) NOTED THAT THE ASSESSEE HAD PROVIDED COPY OF SOME INTER-OFFICE CORRESPONDE NCE DATED 13.5.2004 SIGNED BY SHRI A.K. MAHINDRA AND STATING T HAT MR. KSHIRSAGAR WOULD BE ENTITLED TO PENSION OF RS.4.00 LACS W .E.F. 1.4.2004. SUBSEQUENTLY IT WAS SUBMITTED THAT THE AMOU NT WAS RAISED TO RS. 5.00 LACS WITH THE CONSENT OF ALL THE PARTNERS. THE CIT (A) OBSERVED THAT THERE WAS NO EVIDENCE OF AGREEMENT OF AL L THE PARTNERS. IT WAS ALSO OBSERVED BY HIM THAT IT WAS NOT REGULAR PR ACTICE FOR MAKING PAYMENT OF PENSION TO RETIRED EMPLOYEES OF THE FIRM. HE, THEREFORE, CONFIRMED THE DISALLOWANCE, AGGRIEVED BY WHICH THE ASSESSE E IS IN APPEAL BEFORE THE TRIBUNAL. 4.1 BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD BEEN ALLOWED PENSION OF RS.4.00 LACS W.E.F. 1. 4.2004 AND IN THE EARLIER YEAR THE SAME AMOUNT HAD ALREADY BEEN ALLOWED AS DEDUCTION. IN THE CURRENT YEAR, ONLY AMOUNT HAS BEEN INCREASED TO RS.5.00 LACS ON WHICH TAX HAS ALREADY BEEN DEDUCTED AT SO URCE. IT WAS ALSO SUBMITTED THAT NO AMOUNT CAN BE PAID TO EMPLOYEE OR EX-PARTNER WITHOUT AGREEMENT OF PARTNERS. IT WAS ACCORDINGLY URGE D THAT THE CLAIM SHOULD BE ALLOWED. THE LD. DR PLACED RELIANCE ON THE ORDER OF THE CIT(A). ITA NO.663/M/10 A.Y:06-07 8 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF RS.5.00 LACS PAID TO EX-EMPLOYEE AS PENSION. WE FIND THAT EX-EMPLOYEE SHRI KSHIRSAGAR HAD BEEN SANCTIONED PENSION OF RS.4.00 LACS W.E.F. 1.4.20 04 WHICH HAD BEEN INCREASED TO RS.5.00 LACS DURING THE YEAR. THE SUM OF RS.4.00 LACS HAS ALREADY BEEN ALLOWED AS DEDUCTION IN ASSESSMENT YE AR 2005- 06. THEREFORE, ALLOWABILITY OF CLAIM IS NOT IN DISPU TE. THE CIT(A) DISALLOWED THE CLAIM ON THE GROUND THAT THERE WAS NO E VIDENCE OF AGREEMENT OF PARTNERS TO PAY INCREASED AMOUNT. IN OUR VIEW THE CLAIM SHOULD NOT BE DISALLOWED ON SUCH GROUND. NO AMOUNT CAN BE PAID TO EMPLOYEE OR EX-PARTNER WITHOUT THE CONSENT OF THE PAR TNERS. THE CLAIM IS OTHERWISE ALLOWABLE AND THERE IS NO DISPUTE ON THE A MOUNT PAID. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND ALLOW TH E CLAIM. 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 10.8.2011. SD/- SD/- (D. MANMOHAN) (RAJENDRA SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 10.8.2011. JV. ITA NO.663/M/10 A.Y:06-07 9 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.