WADIA GHANDY & CO, MUMBAI V. ADDL CIT RG 11(3), MUMBAI

ITA 7324/MUM/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2105 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 01-07-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 12-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Business expenditure; Diversion of income; Earning of tax free income; Capital expenditure
• Section: 14A; 32

Judgement Text

IN INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH G MUMBAI . BEFORE SH. A.D. JAIN, JUDICIAL MEMBER AND SH. N.K. BILLAIYA, ACCOUNTANT MEMBER I.T.A. NOS. 7324 & 1014/MUM/2013 ASSESSMENT YEARS: 2007-08 & 2009-10 M/S. WADIA GHANDY & CO. VS. ADDL. COMMISSIONER OF I NCOME-TAX, N.W.WADIA BUILDING, RANGE 11(3), MUMBAI. 123, M.G.ROAD, FORT, MUMBAI-400020. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. HIRO RAI, RESPONDENT BY:SH. G.M. DOSS, SR.DR DATE OF HEARING : 09/07/2015 DATE OF PRONOUNCEMENT: 07/10/2015 ORDER PER A.D. JAIN, JM: THESE ARE ASSESSEES APPEALS FOR THE ASSESSMENT YE ARS 2007-08 & 2009-10 AGAINST TWO SEPARATE ORDERS DATED 10.10.201 3 & 04.01.2013 PASSED BY THE LD. CIT(APPEALS), MUMBAI-7 & 2. THE ISSUES I NVOLVED IN BOTH THE APPEALS ARE ALMOST COMMON. THEREFORE, THESE APPEALS HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 2 2. IN ITA NO.7324(MUM.)/2013 FOR THE ASSESSMENT YEA R 2007-08, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: AS REGARDS DISALLOWANCE OF DEPRECIATION ON TENANCY RIGHTS: 1. THE LD. CIT(A) WAS NOT JUSTIFIED IN CONFIRMING T HE ASSESSING OFFICERS ACTION OF DISALLOWANCE OF DEPRECIATION ON TENANCY RIGHTS OF RS.20,38,268/-. 2. THE LD. CIT(A) WAS WRONG IN CONCLUDING THAT TEN ANCY RIGHTS DID NOT FALL WITHIN THE BLOCK OF INTANGIBLE ASSETS. 3. THE LD. CIT(A) FAILED TO APPRECIATE THAT TENANCY RIGHTS WERE A FORM OF LICENCE. AS REGARD ADDITION OF PAYMENT TO RETIRED PARTNER 4. THE LD. CIT(A) ERRED IN CONFIRMING ADDITION OF P AYMENT MADE TO A RETIRED PARTNER OF RS.3,68,45,176/- IN TERMS O F THE PARTNERSHIP DEED. 5. THE LD. CIT(A) FAILED TO APPRECIATE THAT SUCH PA YMENT WAS DIVERTED BY OVERRIDING TITLE. 6. THE LD. CIT(A) WAS WRONG IN HOLDING THAT SUCH P AYMENT MADE TO PERSONS OTHER THAN WORKING PARTNER IS NOT ELIGIB LE FOR DEDUCTION FROM INCOME OF THE FIRM. 7. THE LD. CIT(A) ERRED IN HOLDING THAT PAYMENT MAD E TO PERSON OTHER THAN WORKING PARTNERS AND WERE ION THE NATURE OF INCENTIVE, AND THAT THIS WAS NOT AN EXAMPLE OF DIVE RSION OF INCOME BY OVERRIDING TITLE. AS REGARDS DISALLOWANCE U/S 14A 8. THE LD. CIT(A) ERRED IN UPHOLDING DISALLOWANCE O F RS.1,21,915 UNDER SECTION 14A READ WITH RULE 8D. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 3 9. THE LD. CIT(A) FAILED TO APPRECIATE THAT NO EXPE NDITURE HAD BEEN INCURRED TO EARN THE RELEVANT EXEMPT INCOME AN D THAT THEREFORE NO DISALLOWANCE WAS WARRANTED. 10. APPELLANTS PRAY THAT THE ORDER OF THE LD. CIT(A ) BE MODIFIED BY: A. ALLOWING DEPRECIATION OF RS.20,38,268 ON TENANCY RI GHTS; B. DELETING ADDITION OF PAYMENT TO RETIRED PARTNER OF RS.3,69,45,176. C. DELETING DISALLOWANCE U/S 14A OF RS.1,21,915/-. 11. APPELLANTS CRAVE LEAVE TO ADD TO, ALTER OR DELE TE ANY OF THE ABOVE GROUNDS, IF ANY WHEN NECESSARY. 3. IN ITA NO.1014/MUM/2013 FOR THE ASSESSMENT YEAR 2009-10, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: AS REGARDS DISALLOWANCE OF DEPRECIATION ON TENANCY RIGHTS: 1. THE LD. CIT(A) WAS NOT JUSTIFIED IN CONFIRMING T HE ASSESSING OFFICERS ACTION OF DISALLOWANCE OF DEPRECIATION ON TENANCY RIGHTS OF RS.11,46,525/-. 2. THE LD. CIT(A) WAS WRONG IN CONCLUDING THAT TEN ANCY RIGHTS DID NOT FALL WITHIN THE BLOCK OF INTANGIBLE ASSETS. 3. THE LD. CIT(A) FAILED TO APPRECIATE THAT TENANCY RIGHTS WERE A FORM OF LICENCE. AS REGARD ADDITION OF PAYMENT TO RETIRED PARTNER 4. THE LD. CIT(A) ERRED IN CONFIRMING ADDITION OF P AYMENT MADE TO A RETIRED PARTNER OF RS.10,74,36,715/- IN TERMS OF THE PARTNERSHIP DEED. 5. THE LD. CIT(A) FAILED TO APPRECIATE THAT SUCH PA YMENT WAS DIVERTED BY OVERRIDING TITLE. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 4 6. THE LD. CIT(A) WAS WRONG IN HOLDING THAT SUCH P AYMENT, BEING A SELF IMPOSED OBLIGATION, WAS A GRATUITOUS O NE. 7. THE LD. CIT(A) ERRED IN HOLDING THAT PAYMENT WA S A CAPITAL EXPENDITURE , BEING A COMPENSATION FOR TAKING OVER THE SHARE OF THE DECEASED PARTNERS BY THE SURVIVING PARTNERS, AN D THAT IT WAS A PERSONAL EXPENDITURE OF THE SURVIVING PARTNERS. 8. APPELLANTS PRAY THAT THE ORDER OF THE LD. CIT(A) BE MODIFIED BY: A. ALLOWING DEPRECIATION OF RS.11,46,525/- ON TENANCY RIGHTS; B. DELETING ADDITION OF PAYMENT TO LEGAL HEIRS OF DECE ASED PARTNER OF RS.10,74,36,715/-. APPELLANTS CRAVE LEAVE TO ADD TO, ALTER OR DELETE A NY OF THE ABOVE GROUNDS, IF ANY WHEN NECESSARY. ITA NO.7342/MUM/2013 FOR THE ASSESSMENT YEAR 2007-0 8. 4. THE FACTS AS PER THE RECORD ARE THAT THE AO FOU ND THE ASSESSEE TO BE OCCUPYING THE SECOND FLOOR OF N.M. WADIA BUILDING, 123, M.G.ROAD, FORT, MUMBAI AS A TENANT, FOR MANY DECADES. THE BUILDING IS OWNED BY THE N.M. WADIA CHARITIES TRUST. NONE OF THE PARTNERS OF THE ASSESSEE IS EITHER A TRUSTEE OR A MANAGER OF THIS TRUST. A PART OF THE F IRST FLOOR WAS OCCUPIED BY INTERNATIONAL PHOTO PRODUCTS, A PARTNERSHIP FIRM. T HE SAID PARTNERSHIP FIRM HAD AGREED TO CREATE A SUB-TENANCY IN FAVOUR OF MAH ERNOSH HUMRANWALA, ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 5 WHICH COULD NOT BE COMPLETED, SINCE THE LANDLORD WA S NOT AGREEING TO THE TRANSFER. 5. APROPOS GROUND NOS. 1 TO 3, THE ASSESSEE HAD CL AIMED DEPRECIATION OF RS.20,38,268/- ON THE BLOCK OF TANGIBLE ASSETS. WRI TTEN SUBMISSIONS DATED 18.08.2009 WERE FILED BEFORE THE AO. THE AO EXAMIN ED THE SUBMISSIONS OF THE ASSESSEE AND REFERRED TO THE PROVISIONS OF SECT ION 2(11)(B) OF THE INCOME TAX ACT, WHICH DEALS WITH INTANGIBLE ASSETS. THE AO ALSO NOTED THAT THIS WAS A RECURRING ISSUE, REGARDING WHICH, THE ASSESSEES APPEAL FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05 HAD BEEN DISMISSED BY THE LD. CIT(A). THE AO, THUS, DISALLOWED THE CLAIM OF DEPRECIATION ON TENAN CY RIGHTS. 6. BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED TH AT THOUGH TENANCY RIGHTS ARE NOT EXPRESSLY COVERED IN THE DEFINITION OF BLOCK OF ASSETS AS AN INTANGIBLE ASSET, IT IS A BUSINESS OR COMMERCIAL RI GHT SIMILAR IN NATURE TO AN INTANGIBLE ASSET AND IT IS, THEREFORE, COVERED BY THE PROVISIONS OF SECTION 2(11)(B) OF THE ACT. THE ASSESSEE CONTENDED THAT TE NANCY RIGHTS ARE INTANGIBLE ASSETS WITHIN THE MEANING OF SECTION 32 OF THE ACT AND WITHIN THE MEANING OF BLOCK OF ASSETS U/S 2(11)(B) OF THE A CT. IT WAS SUBMITTED THAT THE OWNERSHIP OF IMMOVABLE PROPERTY IS DIFFERENT F ROM THE OWNERSHIP OF TENANCY RIGHTS; THAT SINCE THE ASSESSEE HAD CLAIME D DEPRECIATION ON TENANCY RIGHTS AND NOT DEPRECIATION ON IMMOVABLE PROPERTY, WHAT WAS REQUIRED WAS ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 6 THE OWNERSHIP OF THE TENANCY RIGHTS AND NOT THE OW NERSHIP OF IMMOVABLE PROPERTY; THAT THE ASSESSEE WAS THE OWNER OF INTANG IBLE ASSETS BEING TENANCY RIGHTS, SINCE TENANCY RIGHTS ARE RECOGNIZED BY LAW AND THE ASSESSEE WAS FREE TO DEAL WITH THE TENANCY RIGHTS AS IT CHOSE, SUBJEC T TO THE PROVISIONS OF LAW; AND THAT THE DISALLOWANCE MADE ON THE SAME ACCOUNT FOR THE ASSESSMENT YEARS 2003-04 & 2004-05 STOOD CONTESTED BY THE ASS ESSEE BEFORE THE HONBLE HIGH COURT. 7. THE LD. CIT(A) CONFIRMED THE REJECTION OF THE A SSESSEES CLAIM FOR DEPRECIATION ON TENANCY RIGHTS. IT WAS OBSERVED THA T THE ISSUE STOOD DECIDED IN FAVOUR OF THE REVENUE BY THE TRIBUNAL IN THE ASS ESSEES OWN CASE FOR THE ASSESSMENT YEARS 2003-04 & 2004-05. 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY CONTENDED THAT THIS ISSUE STANDS DECIDED IN FAVOUR OF THE DEPARTME NT BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2006-0 7 & 2008-09 ALSO, I.E., FOR THE IMMEDIATELY PRECEDING AND THE IMMEDIATELY S UCCEEDING YEARS TOO. IT HAS, HOWEVER, BEEN CONTENDED THAT THE ASSESSEES AP PEALS STAND ADMITTED BEFORE THE HONBLE HIGH COURT ON THIS ISSUE. 9. THE LD. DR, ON THE OTHER HAND, HAS STRONGLY RELI ED ON THE IMPUGNED ORDER IN THIS REGARD. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 7 10. SINCE THE TRIBUNAL HAS CONSISTENTLY DECIDED TH IS ISSUE AGAINST THE ASSESSEE OVER THE YEARS AND NONE OF THE ORDERS OF T HE TRIBUNAL HAS BEEN SHOWN TO HAVE BEEN EITHER REVERSED OR STAYED ON APP EAL, RESPECTFULLY FOLLOWING THE SAID EARLIER TRIBUNAL ORDERS, THIS IS SUE IS DECIDED AGAINST THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. REFERENC E IN THIS REGARD IS MADE TO THE TRIBUNAL ORDER IN THE ASSESSEES CASE FOR THE A SSESSMENT YEARS 2006-07 & 2008-09 IN ITA NOS.7192 & 7193/MUM/2011, WHERE, VID E ORDER DATED 27.09.2012, THE TRIBUNAL HAS HELD AS FOLLOWS: 3. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. CO UNSEL FOR THE ASSESSEE HAS FAIRLY AND FRANKLY CONCEDED THAT THE C OMMON ISSUE INVOLVED IN THESE APPEALS IS SQUARELY COVERED AGAIN ST THE ASSESSEE AND IN FAVOUR OF THE REVENUE BY THE DECISION OF THE TRI BUNAL RENDERED IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2003-04 & 2004-05 VIDE ITS ORDER DATED 29 TH OCT., 2009 PASSED IN ITA NOS. 355 & 356/MUM/2008 WHEREIN THE ORDERS OF THE LEARNED CIT(APPEALS) CONF IRMING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF ASSESSEE S CLAIM FOR DEPRECIATION ON TENANCY RIGHTS WAS UPHELD BY THE TR IBUNAL. AS THE ISSUE INVOLVED IN THE YEARS UNDER CONSIDERATION AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE ADMITTEDLY SIMI LAR TO ASSESSMENT YEARS 2003-04 AND 2004-05, WE RESPECTFULLY FOLLOW T HE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEARS 2003-04 AND 2004-05 ( SUPRA) AND UPHOLD THE IMPUGNED ORDERS OF THE LEARNED CIT(APPEA LS) CONFIRMING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF DEPRE CIATION CLAIMED BY THE ASSESSEE ON TENANCY RIGHTS. 11. ACCORDINGLY GROUND NOS. 1 TO 3 ARE REJECTED. 12. COMING TO GROUND NOS. 4 TO 7, THE AO MADE ADDIT ION OF RS.3,69,45,176/-, BEING PAYMENT MADE TO A RETIRED P ARTNER. THE FACTS AS PER ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 8 RECORD ARE THAT ON VERIFICATION OF THE ASSESSEES I NCOME AND EXPENDITURE ACCOUNT, THE AO FOUND THE ASSESSEE HAVING DEBITED AN AMOUNT OF RS.3,69,45,176/-, BEING CONTRACTUAL PAYMENT MADE T O A RETIRED PARTNER, NAMELY, SH. NIHAR A. MODY, IN TERMS OF CLAUSE 22 O F THE PARTNERSHIP DEED, THE SAID PARTNER HAVING RETIRED PRIOR TO THE YEAR U NDER CONSIDERATION. ON QUERY, THE ASSESSEE FILED WRITTEN SUBMISSIONS DATE D 07.12.2007 BEFORE THE AO. THEREIN, IT WAS CONTENDED THAT THE AMOUNT PAID REPRESENTED COMPENSATION TO THE OUTGOING PARTNER IN RESPECT OF APPRECIATION IN THE VALUE OF THE IMMOVABLE PROPERTIES HELD BY THE ASSESSEE FI RM TO THE EXTENT OF HIS SHARE, AS PER CLAUSE 23.5 AND FOR WORK DONE DURING THE PERIOD OF PARTNERSHIP, WHICH WAS IN PROGRESS ON ACCOUNT OF THE FACT THAT T HE WORK HAD NOT REACHED A STAGE OF COMPLETION, WHERE THE CLIENT COULD BE CHAR GED FOR IT. THE ASSESSEE CONTENDED THAT THESE WERE ROUGH AND READY MEASURES TO COMPENSATE THE OUTGOING PARTNER FOR HIS SHARE OF THOSE PROFITS OF THE FIRM, RELATED TO THE PERIOD DURING WHICH HE WAS A PARTNER OF THE FIRM, WHICH PROFITS HAD NOT BEEN REALIZED BY THE FIRM ON ACCOUNT OF THE FACT THAT AS SETS HAD NOT BEEN SOLD, OR ON ACCOUNT OF CLIENTS NOT HAVING BEEN BILLED FOR TH E WORK-IN-PROGRESS. THE ASSESSEE SUBMITTED THAT IT WOULD BE PAYING TAXES ON THE ENTIRE FEES RECEIVED BY IT IN THAT YEAR AND IN THE SUBSEQUENT YEARS INCL UDING THE VALUE OF THE WORK-IN-PROGRESS COMPLETED, AS WELL AS ON THE CAPIT AL GAINS EARNED BY IT ON ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 9 THE SALE OF THE IMMOVABLE PROPERTIES, WITHOUT CLAIM ING ANY DEPRECIATION IN THOSE YEARS IN RESPECT OF SUCH PAYMENTS TO THE OUTG OING PARTNER; THAT FURTHER, THE OUTGOING PARTNER HAD PAID TAX ON SUCH AMOUNTS RECEIVED BY HIM FROM THE FIRM U/S 176(4) OF THE ACT, IN THE YEAR OF RECEIPT. IT WAS CONTENDED THAT IT WAS A CASE OF DIVERSION OF INCOME BY OVERRIDING TITLE, AS UNDER CLAUSE 23.10 OF THE PARTNERSHIP DEED, THE PAYMENT UNDER CLAUSE 23.5 WAS CHARGED ON THE ASSETS OF THE FIRM, WHILE THE PAYMENT UNDER CLAUSE 23.7 WAS A CHARGE ON THE RECEIPTS, PROFITS AND ASSETS OF THE FIRM. IT WAS PO INTED OUT THAT SUCH AMOUNT HAD ACCRUED AND WAS PAYABLE TO THE OUTGOING PARTNER ON THE DEATH OR RETIREMENT, IRRESPECTIVE OF WHETHER THE FIRM MADE A PROFIT OR NOT IN THE SUBSEQUENT YEARS AND WAS ON ABSOLUTE OBLIGATION, SU CH AMOUNT BEING PAYABLE, IRRESPECTIVE OF WHETHER THE CONTINUING PAR TNERS DESIRED TO SUBSEQUENTLY CONTINUE THE PROFESSION OF THE FIRM OR NOT. NUMEROUS CASE LAWS WERE RELIED ON, WHEREIN IT HAS BEEN HELD THAT SUCH PAYMENTS TO RETIRING PARTNERS OR TO THE HEIRS OF THE DECEASED PARTNERS A RE CASES OF DIVERSION OF INCOME BY OVERRIDING TITLE AND SUCH PAYMENTS ARE TO BE EXCLUDED FROM THE INCOME OF THE FIRM AND THAT WHERE THERE IS A LEGAL OBLIGATION IN TERMS OF THE DEED OF RETIREMENT TO PAY ERSTWHILE PARTNERS IN RES PECT OF FEES REALIZED AFTER THEIR RETIREMENT, IT IS A CASE OF THE SOURCE OF INC OME BEING SUBJECTED TO AN OBLIGATION AND PAYMENT OF SUCH FEES TO THE RETIRING PARTNERS IS NOT ASSESSABLE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 10 AS INCOME OF THE FIRM. IT WAS FURTHER POINTED OUT T HAT THE RATIO OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF S.B. BILLIMORIA & CO. VS. ACIT, 317 ITR (AT) 203 DID NOT APPLY TO THE FACTS OF THE ASSESSEES CASE AND IN THAT CASE, THE DECISION OF THE TRIBUNAL WAS BASED ON THE FINDINGS THAT THE DATES OF RETIREMENT OF THE PARTNERS STOOD ALREADY FIXED IN THE PARTNERSHIP DEED AND IT WAS, THEREFORE, A PRE-DETER MINED EVENT AND THAT THE AMOUNTS PAYABLE TO THE RETIRING PARTNERS WERE A PE RCENTAGE OF THE FIRMS PROFITS FOR THE SUBSEQUENT YEAR AND THEY WERE, THER EFORE, TO BE PAID FROM THE SUBSEQUENT PROFITS OF THE FIRM, IF ANY; AND THAT TH E AMOUNT PAYABLE ON RETIREMENT WAS, THUS, NOT FIXED ON RETIREMENT IN TH AT CASE, WHEREAS IN THE CASE OF THE PRESENT ASSESSEE, THE AMOUNT STOOD DETERMINE D AT THE TIME OF RETIREMENT OF THE PARTNER. IT WAS STATED THAT THE PAYMENT BY THE ASSESSEE TO THE RETIRING PARTNER WAS A CASE OF DIVERSION OF INC OME BY OVERRIDING TITLE, AND NOT OF SHARING OF FUTURE PROFITS AND IT WAS, THEREF ORE, NOT INCLUDIBLE IN THE INCOME OF THE FIRM. 13. HOWEVER, THE AO DID NOT AGREE WITH THE STAND TA KEN BY THE ASSESSEE. THE PAYMENT OF RS.3,69,45,176/- MADE BY THE ASSESSE E TO THE RETIRED PARTNER WAS DISALLOWED. WHILE DOING SO, THE AO OBSERVED THA T IN VIEW OF THE AMENDMENT BROUGHT IN W.E.F. 01.04.1993, IN SECTION 40(B) OF THE INCOME TAX ACT, ONLY THE WORKING PARTNERS OF THE FIRM ARE ENTITLED TO RECEIVE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 11 REMUNERATION AND INTEREST FOR THE SERVICES RENDERE D BY THEM DURING THE RELEVANT PREVIOUS YEAR. IT WAS OBSERVED THAT THEREF ORE, PAYMENT MADE TO A PERSON OTHER THAN WORKING PARTNERS IS NOT ELIGIBLE FOR DEDUCTION FROM THE INCOME OF A FIRM. IT WAS OBSERVED THAT BY INCORPORA TING THE CLAUSE IN THE PARTNERSHIP DEED, THE ASSESSEE-FIRM HAD CREATED A L IABILITY AND PAID CERTAIN AMOUNTS TO THE RETIRING PARTNER, WHICH WAS DEFEATIN G THE INTENTION OF THE LEGISLATURE AND AS SUCH, THE CLAUSE SUPERSEDED THE PROVISIONS OF THE INCOME TAX ACT ITSELF. IT WAS OBSERVED THAT SINCE THE PAYM ENT MADE TO THE RETIRED PARTNER OF THE FIRM WAS NOT WITHIN THE SCOPE OF ANY OF THE PROVISIONS OF THE ACT, SUCH PAYMENT COULD NOT BE SAID TO HAVE BEEN IN CURRED FOR EARNING INCOME OF THE PARTNER. IT WAS OBSERVED THAT THE PAY MENTS WERE PLANNED BY WAY OF INCENTIVES TO THE PARTNERS SO THAT THEY MAY CONTINUE IN THE FIRM, BUT THAT COULD NOT BE THE ONLY CRITERION TO DETERMINE A S TO WHETHER THE PAYMENT WAS AN APPLICATION OF THE FUND, OR A DIVERSION BY A N OVERRIDING CHARGE. IT WAS OBSERVED THAT THE ASSESSEE FAILED THE TEST OF PAYME NT ON ACCOUNT OF DIVERSION BY AN OVERRIDING CHARGE. IT WAS OBSERVED THAT THE ASSESSEE HAD MADE THE PAYMENTS FOR BUSINESS EXPEDIENCY IN ORDER TO RETAIN ITS PARTNERS, BY WAY OF INCENTIVES. IT WAS OBSERVED THAT THIS COULD NOT BE DIVERSION BY OVERRIDING CHARGE, BUT IT WAS A PURE CASE OF APPLICATION OF FU ND. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 12 14. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE. WHILE DOING SO, IT WAS OBSERVED AS FO LLOWS: A PERUSAL OF INCOME AND EXPENDITURE ACCOUNT INDICA TES THAT THE APPELLANT HAS DEBITED RS.3,69,45,176/- BEING CONTRA CTUAL RETIREMENT PAYMENT MADE TO A RETIRED PARTNER IN TERMS OF CLAUS E 22 OF THE PARTNERSHIP DEED, AS SHRI NIHAR A MODY RETIRED PRIO R TO THE YEAR UNDER CONSIDERATION. IN VIEW OF THE AMENDMENT W.E.F . 01/04/1993 ONLY THE WORKING PARTNERS OF THE FIRM ARE ENTITLED TO R ECEIVE REMUNERATION AND INTEREST FROM THE REGISTERED FIRM FOR THE SERVI CES RENDERED BY THEM DURING THE RELEVANT PREVIOUS YEAR. IT HAS BEEN HELD IN PADMASUNDRA RAO V. STATE OF TN 255 ITR 147 (SC); CIT V. RAM NARAIN 227 ITR 401; GOVT. OF INDIA V. JAGADISH 221 ITR 338 CF VANAJA V. CIT 208 ITR 161 THAT RELIANCE SHOULD NOT BE PLACED ON A DECISION WITHOUT DISCUSSING HOW THE FAC TUAL SITUATION FITS IN WITH THE FACTUAL SITUATION OF THE DECISION ON WH ICH RELIANCE IS PLACED. IT HAS ALSO BEEN HELD IN PADMASUNDRA RAO V. STATE OF TN THAT CIRCUMSTANTIAL FLEXIBILITY, E.G. ONE ADDITIONAL OR DIFFERENT FACT, MAY MAKE A WORLD OF DIFFERENCE BETWEEN CONCLUSION IN TW O CASES. ON A CONSPECTUS OF THE FACTUAL SCENARIO, THE CASE OF THE APPELLANT-COMPANY IS DISTINGUISHABLE FROM THE CASES RELIED ON BY THE LEARNED A/R. THEREFORE, THE PAYMENT MADE TO PERSONS OTHER THAN W ORKING PARTNER IS NOT ELIGIBLE FOR DEDUCTION FROM INCOME OF THE FIRM. BY INCORPORATING THE CLAUSE IN THE PARTNERSHIP DEED, THE FIRM HAS CR EATED A LIABILITY TO PAY CERTAIN AMOUNTS TO THE RETIRING PARTNERS WHICH IS IN CONFLICT WITH THE PROVISIONS OF I.T. ACT, 1961. THE CONTENTIONS O F THE APPELLANT OF THIS NATURE WOULD INDICATE APPLICATION OF FUND RATH ER THAN DIVERSION BY OVERRIDING CHARGE. RELIANCE IN THIS REGARD IS PLACE D ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SITALDAS THIRTHDASS (41 ITR 367). THE ASSESSEE HAS MADE THE PAYMENTS FOR BUSINESS EXPEDIENCY I.E. TO RETAIN ITS PARTNER AND THE PAYMENTS WERE IN THE NATURE OF INCENTIVE. THIS CANNOT BE AN EXAMPLE OF DIVERSION BY AN OVERRIDING CHARGE. IT IS CLEAR CASE OF APPLICATION OF FUND. IN VIEW OF THE ABOVE, THE DISALLOWANCE OF RS.3,69,45,176/- MAD E BY THE AO IN RESPECT OF PAYMENT TO THE RETIRED PARTNER IS CONFIR MED. 15. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS MAINTAINED THE STAND TAKEN BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW, CONTENDING THAT THE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 13 PAYMENT WAS PAID BY WAY OF REMUNERATION TO THE RETI RING PARTNER, SH. NIHAR MODY; THAT THE AMOUNT WAS COMPUTED U/S 40(B) OF THE INCOME-TAX ACT, 1961; THAT THIS AMOUNTED TO A SUM OF RS.5,90,41,084; THA T THE ACTUAL REMUNERATION PAID WAS THAT OF RS.37,00,500/-; THAT IF THIS AMOU NT IS REGARDED AS REMUNERATION, IT FALLS WITHIN THE LIMITS PRESCRIBED BY SECTION 40(B) OF THE ACT; THAT IT WAS AUTHORIZED BY THE PARTNERSHIP DEED; THA T IN CASE IT IS CONSIDERED THAT THE AMOUNT BECAME PAYABLE ONLY ON THE RETIREM ENT OF THE PARTNER AFTER HE CEASED TO BE A WORKING PARTNER, THE PROVISIONS O F SECTION 40(B) OF THE ACT DO NOT APPLY, THE PARTNER NO LONGER BEING ONE WHEN THE AMOUNT BECAME DUE TO HIM; THAT THE PAYMENT IS A CASE OF DIVERSION OF INCOME BY OVERRIDING TITLE BY VIRTUE OF PRE-FIXED STIPULATION IN THE PARTNERSH IP DEED; THAT IT IS NOT A CASE OF APPLICATION OF FUNDS; THAT THE PAYMENT WAS PRIMA RILY MADE IN ORDER TO COMPENSATE THE RETIRING PARTNER FOR THE WORK IN PRO GRESS, WHICH COULD BE COMPLETED ONLY AFTER HIS RETIREMENT AND, THEREFORE , BILLED LATER; THAT HENCE, THE AMOUNT WAS NOT INCLUDIBLE IN THE INCOME OF THE ASSESSEE FIRM; THAT IT HAD BEEN CONTENDED THAT THE AMOUNT OF RS.4.16 LAKHS WA S REGARDING INCREASE IN THE VALUE OF THE PROPERTY; THAT THIS WAS ALSO PAID TO THE RETIRING PARTNER, WHICH IS NOT BEING PRESSED, THOUGH IT WAS ENTERED I N THE ACCOUNTS, SINCE THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING; THAT DUE TAX STANDS PAID ON THE GROSS AMOUNT RECEIVED FROM THE C LIENTS; THAT THE TAX WAS ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 14 PAID BY THE RECIPIENTS ON THE SAME AMOUNT; THAT EVE N AS PER CIT VS. SUBRAMANIAM BROTHERS, 236 ITR 148 (MAD), WHERE THE PAYMENT IS AN OBLIGATION AS PER THE RELEVANT CLAUSES OF THE PARTN ERSHIP DEED, THE AMOUNT PAID IS NOT ASSESSABLE IN THE HANDS OF THE FIRM, IT HAVING BEEN DIVERTED BY OVERRIDING TITLE BEFORE IT REACHED THE FIRM; THAT T HE AO HAS HIMSELF OBSERVED THAT THE PAYMENT WAS MADE FOR BUSINESS PURPOSES; TH AT IF IT IS SO, IT NEEDS TO BE ALLOWED SUBJECT TO THE LIMIT OF SECTION 40(B) OF THE ACT; THAT AS PER THE AO, ONLY WORKING PARTNERS OF THE ASSESSEE FIRM ARE ENTITLED TO RECEIVE REMUNERATIONS FOR THE SERVICES RENDERED; THAT THIS IS ONE OF THE BASIS ON WHICH THE DISALLOWANCE HAS BEEN MADE; THAT THE LD. CIT(A) HAS CONFIRMED THE DISALLOWANCE WITHOUT TAKING INTO CONSIDERATION THE FACT THAT TILL THE TIME OF HIS RETIREMENT, SH. NIHAR MODY WAS, IN FACT, A W ORKING PARTNER OF THE ASSESSEE FIRM; THAT THE AOS OBSERVATION TO THE EFF ECT THAT THE CLAUSE OF THE PARTNERSHIP DEED CREATING LIABILITY TO PAY CERTAIN AMOUNT TO THE RETIRING PARTNER IS DEFEATING THE INTENTION OF THE LEGISLAT URE AND THUS, THE CLAUSE SUPERSEDES THE PROVISIONS OF THE INCOMETAX ACT ITS ELF, IS NOT ONLY WHIMSICAL, BUT ALSO FANCIFUL; AND THAT THERE IS NO BASIS FOR THIS WIDE SWEEPING, BUT WRONG OBSERVATION. 16. PER CONTRA, RELYING ON THE IMPUGNED ORDER ON TH IS ISSUE, THE LD. DR HAS CONTENDED THAT THE ASSESSEE HAS MISERABLY FAILED TO PROVE ON RECORD ANY ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 15 SERVICES RENDERED BY THE OUTGOING PARTNER; THAT UN DER THE PROVISIONS OF SEC. 40(B) OF THE ACT, AS APPLICABLE POST AMENDMENT BRO UGHT IN W.E.F. 01.04,1993, ONLY THE WORKING PARTNERS OF A FIRM ARE ENTITLED TO RECEIVE REMUNERATION AND INTEREST FROM THE REGISTERED FIRM FOR THE SERVICES RENDERED BY THEM DURING THE RELEVANT PREVIOUS YEAR; THAT THE CASE LAWS RELIED ON BY THE ASSESSEE PERTAIN AN ERA PRE-AMENDMENT OF THE PR OVISIONS OF SEC. 40(B) OF THE ACT AND SO, THEY ARE NOT APPLICABLE; THAT THE D ECISION IN V.G. BHUTA (SUPRA), HAS BEEN RENDERED BY THE HONBLE BOMBAY H IGH COURT, I.E., THE JURISDICTIONAL HIGH COURT SO FAR AS REGARDS THE AS SESSEE; THAT THEREFORE, THE PAYMENT IS OF CAPITAL NATURE; THAT THE PAYMENT IS A N APPLICATION OF INCOME AND NOT EXPENDITURE DIVERTED BY ANY OVERRIDING CHAR GE; AND THAT IT IS ONLY A GRATUITOUS PAYMENT. 17. IN THIS REGARD, APROPOS THE APPLICABILITY OR OTHERWISE OF SECTION 40(B) OF THE ACT TO THE FACTS OF THE YEAR UNDER CONSIDERA TION, IT CANNOT BE DISPUTED THAT THE AMOUNT IN QUESTION IS NOT AT ALL INCOME OF THE FIRM, HAVING BEEN DIVERTED BY THE OVERRIDING TITLE OF THE CHARGE STIP ULATED BY THE RELEVANT CLAUSES OF THE PARTNERSHIP DEED [DISCUSSED IN DETAI L WHILE DEALING WITH THIS ISSUE IN ITA NO.1014/M/2013 (INFRA)]. THEREFORE, TH E CONDITION OF RENDERING OF SERVICES, AS ENVISAGED BY THE PROVISIONS OF SECT ION 40(B) OF THE ACT, DOES NOT COME INTO PLAY AS THE COMMON LAW CONCEPT OF D IVERSION OF INCOME BY ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 16 OVERRIDING TITLE EXISTS REGARDLESS OF THE AMENDMENT BROUGHT IN BY THE LEGISLATURE IN THE PROVISIONS OF SECTION 40(B) OF T HE ACT. MOREOVER, IN V.G. BHUTA (SUPRA),THE PAYMENT WAS OPTIONAL, WHICH IS N OT SO HEREIN, HAVING BEEN CIRCUMSCRIBED BY THE MANDATORY CLAUSES OF THE PARTNERSHIP DEED. 18. FOR THE ABOVE DISCUSSION, WE DO NOT FIND THE ORDER OF THE LD. CIT(A) ON THIS ISSUE TO BE SUSTAINABLE IN THE EYE OF LAW. THE SAME IS, AS SUCH, SET ASIDE. GROUND NOS. 4 TO 7 TAKEN BY THE ASSESSEE ARE , ACCORDINGLY, ACCEPTED. 19. NOW TURNING TO GROUND NOS. 8 & 9, THE LD. CIT(A ) UPHELD THE DISALLOWANCE OF RS.1,21,915/-, MADE U/S 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES. THE ASSESSEE WAS ASKED TO SUBMIT DETAILS IN RESPECT OF EXPENDITURE INCURRED FOR EARNING TAX-FREE INCOME. T HE ASSESSEE DID SO. THE AO MADE THE DISALLOWANCE, WHICH WAS CONFIRMED BY TH E LD. CIT(A). 20. ACCORDING TO THE ASSESSEE, RULE 8D OF THE RULES HAS BEEN WRONGLY APPLIED TO THE YEAR UNDER CONSIDERATION, I.E., 2007 -08. ON MERIT, IT HAS BEEN CONTENDED THAT IN EARLIER YEARS, THE ASSESSEE HAD INVESTED AN AMOUNT OF RS.6,50,750/- IN TAX-FREE BONDS OF A GOVERNMENT COM PANY; THAT THESE BONDS MATURED DURING THE YEAR UNDER CONSIDERATION AND AN AMOUNT OF RS.1,00,69,821/- WAS INVESTED IN THE MONTH OF MARCH , 2007 IN UNITS OF LIQUID SCHEME OF MUTUAL FUNDS; THAT THIS WAS A TEM PORARY DEPLOYMENT OF ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 17 SURPLUS FUNDS TILL SUCH TIME AS THE FUNDS WERE REQ UIRED FOR MEETING EXPENSES; THAT DURING THE YEAR, THE ASSESSEE EARNED INTEREST INCOME OF RS.55,519/- ON THE TAX-FREE BONDS AND RS.69,821/- AS INCOME ON MUTUAL FUND UNITS; THAT NO EXPENDITURE WAS INCURRED DIRECT LY FOR EARNING SUCH INCOME; AND THAT ALTERNATIVELY, THE DISALLOWANCE M ADE IS EXCESSIVE, CONSIDERING THAT NEGLIGIBLE EXPENSES, IF ANY AT ALL , WERE INCURRED FOR EARNING SUCH INCOME. 21. THE LD. DR HAS RELIED ON THE IMPUGNED ORDER. 22. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISS UE. THE ASSESSEES ARGUMENT OF NON-APPLICABILITY OF RULE 8D OF THE RUL ES TO THE YEAR UNDER CONSIDERATION NOTWITHSTANDING, IT CANNOT BE GAIN-SA ID THAT THE AO HAS REASONABLY CALCULATED THE DISALLOWANCE. FINDING NO ERROR THEREIN, THE ACTION OF THE LD. CIT(A) IN CONFIRMING THIS DISALLOWANCE I S UPHELD. ACCORDINGLY, GROUND NOS. 8 & 9 ARE REJECTED. 23. GROUND NO.10 STANDS ANSWERED BY OUR FINDINGS O N GROUND NOS. 1 TO 3, 4 TO 7 AND 8 TO 9. 24. THE GROUNDS OF APPEAL IN ITA NO.7324/M/2013 FO R A.Y.2007-08 ARE, THEREFORE, PARTLY ACCEPTED, AS ABOVE. ITA NO.1014/MUM/2013 FOR THE ASSESSMENT YEAR 2009-1 0 ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 18 25. GROUND NOS. 1 TO 3 PERTAIN TO THE ASSESSEES C LAIM OF DEPRECIATION OF RS.11,46,525/- ON THE BLOCK OF TANGIBLE ASSETS/TEN ANCY RIGHTS. THIS MATTER HAS BEEN DECIDED BY US IN FAVOUR OF THE DEPARTMEN T FOR THE ASSESSMENT YEAR 2007-08, FOLLOWING ITAT ORDERS IN ASSESSEES CASES FOR THE ASSESSMENT YEARS 2006-07 AND 2008-09. THE FACTS REMAINING, MUT ATIS MUTANDIS, THE SAME FOR THE ASSESSMENT YEAR 2009-10 ALSO, GROUND NOS. 1 TO 3 ARE REJECTED. 26. COMING TO GROUND NOS. 4 TO 7, THE AO MADE ADDIT ION OF RS.10,74,36,715/-, BEING PAYMENT MADE TO THE LEGAL HEIRS OF A DECEASED PARTNER, SH. ANAND BHATT. THE FACTS AS PER RECORD A RE THAT ON QUERY, THE ASSESSEE SUBMITTED BEFORE THE AO AS FOLLOWS: A) THE AMOUNT PAID IS RS.10,86,62,744/- PAID TO LEG AL HEIRS OF A DECEASED PARTNER SH. ANAND BHATT, LESS RS.12,26,029 /- WHICH IS REDUCTION OF AMOUNT PAYABLE TO RETIRE PARTNER SHRI NIHAR MODY ON ACCOUNT OF WRITE-OFF OF OUTSTANDING CLIENT ACCOUNTS . B) ON 26 NOVEMBER, 2008, SH. ANAND BHAT, ONE OF THE MAIN PARTNERS OF THE FIRM, LOST HIS LIFE IN THE TERRORIS T ATTACK ON OBEROI HOTEL. THE AMOUNT PAYABLE TO THE LEGAL HEIRS OF THE DECEASED PARTNER OVER AND ABOVE CAPITAL ACCOUNT, CURRENT ACCOUNT AND LOAN BALANCES OF SH. ANAND BHATT. IT CONSISTS OF 2 AMOUNTS RS.10,4 8,16,510/- PAYABLE IN ACCORDANCE WITH CLAUSE 23:7 OF THE PARTNERSHIP DEED DATED 2 ND JANUARY, 2007 AS AMENDED BY SUPPLEMENTARY DEED DATE D 2 ND MAY, 2008; AND RS.38,46,234/- PAYABLE IN ACCORDANCE WITH CLAUSE 23:5 OF THE AFORESAID DEED. C) AMOUNT PAYABLE UNDER CLAUSE 23:5 IS TO COMPENSA TE THE OUTGOING PARTNER IN RESPECT OF APPRECIATION IN THE VALUE OF IMMOVABLE PROPERTIES HELD BY THE FIRM TO THE EXTENT OF HIS SH ARE, WHERE A ROUGH ESTIMATE IS MADE OF THE MARKET VALUE OF THE IMMOVAB LE PROPERTIES, THE APPRECIATION IS DISCOUNTED BY 50%. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 19 D) CLAUSE 23:7 FOR PAYMENTS TO RETIRED PARTNERS; LE GAL HEIRS OF DECEASED PARTNER HAS BEEN MADE IN ORDER TO COMPENSA TE THE OUTGOING PARTNER FOR WORK DONE DURING THE PERIOD OF PARTNERS HIP WHICH HAS NOT ACCRUED TO THE FIRM DURING THAT PERIODTHE PAYMENT IS FOR THE VALUE OF WORK-IN-PROGRESS AS ON THE DATE OF RETIREMENT OR D EATHEQUIVALENT TO 1.5 TIMES THE SHARE OF PROFIT AND REMUNERATION EARN ED BY THE PARTNER FROM THE FIRM IN THE YEAR IMMEDIATELY PRECEDING THE DATE OF HIS RETIREMENT/DEATH. E) FIRM IS PAYING TAXES ON THE ENTIRE FEES RECEIVED BY IT IN THAT YEAR AND IN SUBSEQUENT EARS, INCLUDING THE VALUE OF WORK-IN-PROGRESS COMPLETED AS WELL AS ON THE CAPITAL GAINS EARNED BY IT ON SALE OF IMMOVEABLE PROPERTIESTHE LEGAL HEIRS OF DECEASED P ARTNER PAY TAX ON SUCH AMOUNTS RECEIVED BY THEM FROM THE FIRM U/S 176(4) OF THE YEAR OF RECEIPT. F) LEGAL HEIR OF MR. ANAND BHATT, MRS. MEENA BHATT HAS PAID TAXES ON THE AMOUNTS RECEIVED BY HER IN THE YEARS I N WHICH SUCH AMOUNTS WERE RECEIVED BY HER. WE ENCLOSE A COPY OF COMPUTATION OF INCOME OF MRS. MEENA BHATT FOR AY 2011-12 ALONGWITH ACKNOWLEDGMENT OF RETURN OF INCOME.BALANCE AMOUNT IS LIKELY TO BE RECEIVED BY HER DURING THE CURRENT FINANCIAL YEAR A ND THE FOLLOWING YEAR. G) IT IS A CASE OF DIVERSION OF INCOME BY OVERRIDIN G TITLE, AS UNDER CLAUSE 23:10 OF THE PARTNERSHIP DEED, THE PAYMENT U NDER CLAUSE 23:5 IS A CHARGE ON THE ASSETS OF THE FIRM, WHILE THE PA YMENT UNDER CLAUSE 23:7 IS A CHARGE ON THE RECEIPTS, PROFITS AND ASSET S OF THE FIRM. H) SUCH AMOUNT HAS ACCRUED AND IS PAYABLE TO THE OU TGOING PARTNER ON HIS DEATH OR RETIREMENT, IRRESPECTIVE OF WHETHER THE FIRM MAKES A PROFIT OR NOT IN THE SUBSEQUENT YEARS, AND IS AN ABSOLUTE OBLIGATION. 27. HOWEVER, THE AO DID NOT AGREE WITH THE STAND TA KEN BY THE ASSESSEE. THE PAYMENT MADE BY THE ASSESSEE WAS DISALLOWED. W HILE DOING SO, THE AO ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 20 OBSERVED FROM THE FACTS AVAILABLE ON RECORD IN THE ASSESSEES CASE, IT WAS QUITE MANIFEST THAT ALL INCOME BY WAY OF PROFESSION OR OTHERWISE HAD REACHED IT WITHOUT INTERRUPTION AND THE ASSESSEE HAD APPLIE D THE SAME FOR THE PAYMENT IN QUESTION, AFTER HAVING RECEIVED SUCH INCOME; THA T AS REGARDS THE ASSESSEES RELIANCE ON THE DECISION OF THE HONBLE HIGH COURT IN THE CASES OF MULLA & MULLA AND CRAIGIE BLUNT AND CAROE, CRAWFORD BAILEY AND C.N. PATUCK, THE DEPARTMENT HAD NOT ACCEPTED THE SAME IN PRINCIPLE; THAT IN THE CASE OF C.C. CHOKSHI ALSO, WHICH HAD THE SAME FACTS AND CIRCUMST ANCES, THE DEPARTMENT HAS FILED SLP BEFORE THE HONBLE SUPREME COURT; THA T AS REGARDS THE ASSESSEES CONTENTION ABOUT DIVERSION OF INCOME BY OVERRIDING TITLE, A STAND TAKEN BY THE ASSESSEE IN EARLIER YEARS ALSO, IT HAD BEEN HELD THAT THE ASSESSEES OBLIGATION TO APPLY INCOME WHICH HAD ACC RUED OR ARISEN, OR HAD BEEN RECEIVED, AMOUNTED MERELY TO THE APPORTIONMENT OF THE INCOME, AND NOT DIVERSION; THAT THIS PRINCIPLE HAS BEEN LAID DOWN I N THE CASES OF RAJA BEJOY SINGH DADHURIA V/S. CIT (1993) [ITR 135 (PC)], P.C. MULLICK VS. CIT (1938) [6 ITR206 (PC)], CIT VS. SITALDAS TIRATHDAS (1961 [41 ITR 367 (SC)], CIT VS IMPERIAL CHEMICALS INDUSTRIES (1996) [74 ITR 17 (SC)] AND CIT V/S TRAVANCORE SUGARS & CHEMICALS LTD. (1973)[ 90 ITR 3 07 (KER)]; THAT THUS, WHERE INCOME ACCRUES TO THE ASSESSEE DIRECTLY AND I S MERELY APPLIED, UPON SUCH ACCRUAL, TO DISCHARGE AN OBLIGATION OF THE ASS ESSEE, IT IS A CASE OF MERE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 21 APPLICATION OF THE INCOME OF THE ASSESSEE [VIBHUTI GLASS WORKS V/S CIT (1989) 177 ITR 439, 442(SC)]; THAT INCOME ON ITS CO MING INTO EXISTENCE, ATTRACTS TAX AT THAT POINT AND THE REVENUE IS NOT C ONCERNED WITH THE SUBSEQUENT APPLICATION OF SUCH INCOME (LORD MACMILL AN INN PONDICHERY RAILWAY CO. LTD. VS. CIT AIR 1931 PC 166, 170]; THA T INCOME IS LIABLE TO BE TAXED REGARDLESS OF ITS DESTINATION OR DISPOSAL, OR WHAT HAPPENS AFTERWARDS; THAT NO TREATMENT METED OUT TO AN INCOM E AFTER IT HAS ACCRUED OR ARISEN CAN AFFECT ITS LIABILITY TO BE TAXED [MK BRO THERS P. LTD, V/S CIT (1967) [63 ITR 28, 34 (ALL)], AFFIRMED IN (1972) [8 6 ITR 38 (SC)]; THAT IN ORDER TO DECIDE WHETHER A PARTICULAR DISBURSEMENT A MOUNTS TO DIVERSION OR APPLICATION OF INCOME, THE TRUE TEST IS TO PROBE IN TO, AND DECIDE, WHETHER THE AMOUNT SOUGHT TO BE DEDUCTED, IN TRUTH, DID NOT OR DID REACH THE ASSESSEE AS HIS OWN INCOME; AND THAT OLIGATIONS THERE ARE IN EV ERY CASE, BUT IT IS THE NATURE OF THE OBLIGATION WHICH IS THE DECISIVE FACT . THE FURTHER OBSERVATIONS OF THE AO ARE AS FOLLOWS: ANY ARRANGEMENT LIKE PAYMENT TO RETIRED/DECEASED P ARTNERS, WHO ARE NOT RENDERING ANY PROFESSIONAL SERVICES, CA NNOT BE CONSIDERED AS A CHARGE AGAINST PROFESSIONAL FEES RECEIVED BY T HE ASSESSEE, OR ALLOWED AS A BUSINESS EXPENDITURE U/S 37(1). AT THE MOST, IT IS A GRATUITOUS PAYMENT, WHICH CANNOT BE TREATED AS BUSI NESS EXPENDITURE BY ANY STRETCH OF IMAGINATION. THE PAYMENT MADE TO RETIRED/ DECEASED PARTNERS WAS NOT BUSINESS EXPENDITURE. THE ASSESSEE IS NOT ENTITLED TO ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 22 ENTER INTO CONTRACT OR AGREEMENT THAT ARTIFICIALLY REDUCES ITS TAXABLE INCOME. THE DECISION OF MUMBAI HIGH COURT IN THE CASE OF V. G. KRISHNAMURTHY (203 ITR 249) IS SQUARELY APPLICABLE IN THIS CASE. FURTHER, IN VIEW OF THE AMENDMENT WITH EFFECT FROM 1.4.1993, ONLY THE WORKING PARTNERS OF THE FIRM ARE ENTITLED TO RECEIVE REMUNERATION AND INTEREST FROM THE REGISTERED FIRM FOR THE SERVICES RENDERED BY THEM DURING THE RELEVANT PREVIOUS YEAR UNDER CONSIDERATION. THEREFORE, THE PAYMENT MADE TO PERSO NS OTHER THAN WORKING PARTNERS IS NOT ELIGIBLE FOR DEDUCTION FROM INCOME OF THE FIRM. ALSO, IT IS PERTINENT TO NOTE THAT BY INCORPORATING THE RELEVANT CLAUSE IN THE PARTNERSHIP DEED, THE FIRM HAS CREATE D LIABILITY TO PAY CERTAIN AMOUNTS TO THE RETIRING PARTNER/LEGAL HEIRS OF DECEASED PARTNERS WHICH IS DEFEATING THE INTENTION OF THE LEGISLATURE AND THUS THE SAID CLAUSE SUPERCEDES THE PROVISIONS OF THE I.T. ACT, 1961 ITSELF. SINCE THE PAYMENT MADE TO THE RETIRED/LEGAL HEIRS TO DECEASED PARTNERS OF THE FIRM IS NOT WITHIN THE SCOPE OF ANY PROVISIONS OF I -T ACT, THE SAME CANNOT BE CLAIMED AS AN EXPENSE. IN THIS RESPECT, R ELIANCE IS PLACED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE CIT V/S. BHUTTA (203 ITR 249) WHEREIN IT IS HELD THAT PAYMEN T RELATING TO PERIOD PRIOR TO THE ACCOUNTING YEAR IS NOT DEDUCTIB LE IN ANY CASE. FURTHER, PARTNERSHIP IS A RELATIONSHIP FORMED T O SHARE PROFITS OF BUSINESS CARRIED OUT BY ALL OR ANYONE OF THEM AC TING FOR ALL. DURING THE COURSE OF PARTNERSHIP, THE PROFIT SHARING RATIO MAY EVEN CHANGE BY AGREEMENT WHEN THE OLDER PARTNERS MAY GIVE GREATER SHARE TO YOUNGER PARTNERS. HENCE, CHANGE IN PROFIT SHARING RATIO AND CONSEQUENT PAYMENT TO RETIRING PARTNER/LEGAL HEIR OF A DECEASE D PARTNER IS ONLY A CAPITAL ACCOUNT TRANSACTION BETWEEN THE PARTNERS AN D NOT A CHARGE AGAINST PROFIT EARNED. IT CAN ALSO BE LOOKED AT IN ANOTHER WAY. RETIREMENT OF PARTNER LEADS TO CHANGE IN PROFIT SHA RING RATION. THE PROFIT, WHICH CAN BE SHARED, IS ONLY A POST TAX PRO FIT. HENCE, PAYMENT TO RETIRING PARTNER/LEGAL HEIR OF A DECEASED PARTNE R CANNOT BE SET UP AS AN EXPENSE AGAINST THE PROFITS OF THE FIRM. BASICALLY WHAT CAN BE EXPENSED TO FIND OUT PR OFIT ARE THE AMOUNTS WHICH WERE EXPENDED TO EARN THE GROSS INCO ME FROM WHICH ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 23 THE DEDUCTION IS NOW CLAIMED. THAT THE PAYMENT TO RETIRING PARTNER/LEGAL HEIR OF A DECEASED PARTNER IS AS PER AN AGREEMENT IS OF NO BENEFIT TO THE ASSESSEE AS IT GIVES ONLY THE MODE O F COMPUTATION OF AMOUNTS TO BE PAID. THIS CAN BE A FIXED AMOUNT, SAY RS.20 LACS FOR THE NEXT FIVE YEARS OR EVEN 1.5 CRORE PAID LUMP SUM, BU T AFTER FIVE YEARS. IT WOULD NOT BE OPEN TO AN ASSESSEE TO CLAIM LUMP SUM PAYMENT TO BE PAID AFTER FIVE YEARS AS A CHARGE AGAINST PROFITS O F CURRENT YEAR. ALSO A CERTAIN CONTRACTUAL EXPENSE CANNOT BE TREATED AS CH ARGE ON PROFITS WHEN IT IS COMPUTED WITH REFERENCE TO AN UNCERTAIN FUTURE EVENT. THE CASE OF CIT VS. AN NAIK & OTHERS, 265 ITR 346 (BOM) DEALS WITH DISTRIBUTION OF CAPITAL ASSETS TO RETIRING PARTNERS/LEGAL HEIR OF A DECEASED PARTNER, WHICH IS TREATED AS BEING ELIGIBLE TO CAPITAL GAINS IN THE HANDS OF THE FIRM. THE CASE OF CIT VS. MULLA & MULLA & CARIGIE BLUNT & CORE REPORTED IN 190 ITR 198 (MOM) ON WHICH THE ASSESSEE HAS RELIED UPON PERTAINS TO A.Y. 1969-70 MUCH BEFORE THE AMENDMENT EFFECTIVE FROM 01.04.1993. THIS CASE IS ILLUSTRATIVE OF PAYMENTS MADE OF SHARE OF PROFITS OF ERSTWHILE PARTNERS AND WERE TREATED AS D IVERTED AT SOURCE ITSELF. FURTHER, THE DEPARTMENT HAD FILED AN APPEAL TO TH E HONBLE SUPREME COURT OF INDIA AGAINST THIS RATIO. THE HON BLE SUPREME COURT HAD RULED THE APPEAL AS INFRUCTUOUS AS THE ASSESSE E HAD GONE IN FOR KVSS. THE ASSESSEES CONTENTION THAT CONSEQUENTLY T HE ORDER OF THE BOMBAY HIGH COURT STANDS ACCEPTED IS MISPLACED BEC AUSE THE HONBLE SUPREME COURT HAD NOT DECIDED THE APPEAL BE FORE IT ON MERITS. THOUGH A FIRM IS EXPECTED TO FUNCTION ON TH E BASIS OF THE PARTNERSHIP ACT, BUT AS FAR AS TAXABILITY IS CONCER NED, THE PROVISIONS OF I.T. ACT WOULD TAKE PRECEDENCE. THE ISSUE IN HAND IS TO DETERMINE WHETHER IT WAS AN APPLICATION OF FUND OR A DIVERSION BY AN OVERRIDING CHARGE SO FAR AS TAXATION IS CONCERNED. THE HONBLE SUPREME COURT HA D SET THE LAW CLEAR IN THIS REGARD IN THE CASE OF CIT VS. SITALD AS TIRATHDAS 41 ITR 367. THE PAYMENTS TO PARTNERS ARE GOVERNED UNDER THE PARTNERSHIP ACT READ WITH THE INCOME-TAX ACT. THE INCOME-TAX AC T HAS CLEAR PROVISIONS WITH REGARD TO PAYMENT TO WORKING PARTNE RS. THE ASSESSEE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 24 IS NOT ENTITLED TO MAKE A FURTHER CLAIM OVER AND AB OVE WHAT HAS BEEN PAID TO PARTNERS IN TERMS OF THE INCOME-TAX ACT, AN D THE AMENDMENT W.E.F. 1.4.93 (SUPRA) IS RELEVANT IN THIS CONTEXT. IT IS ALSO OBSERVED THAT THE SAID OVERRIDING TITL E HAS BEEN CREATED VOLUNTARILY BY THE ASSESSEE ITSELF. AS PER LAW, AN OVERRIDING TITLE CANNOT BE CREATED SUO MOTO OR VOLUNTARILY BY THE ASSESSEE. THEREFORE, ON THIS COUNT ALSO, THE ASSESSEES CONTE NTION IS REJECTED. THEREFORE, ON CONSIDERATION OF SUCH FACTS AND CIR CUMSTANCES, THE PAYMENT OF RS.10,74,36,715/- MADE TO THE RETIRE D/DECEASED PARTNERS IS DISALLOWED AND ADDED TO THE INCOME. 28. THE LD. CIT(A) CONFIRMED THE ADDITION. 29. BEFORE US, ON BEHALF OF THE ASSESSEE, IT HAS BE EN CONTENDED THAT THE PAYMENT IN QUESTION WAS ENTIRELY IN ACCORDANCE WIT H THE PARTNERSHIP DEED, AS PER WHICH, ONCE A PARTNER DIES OR RETIRES, THE P AYMENT IS AN OBLIGATION OF THE FIRM BEFORE IT RECEIVES ITS INCOME AND SO, THE OBSERVATION OF THE LD. CIT(A) TO THE EFFECT THAT THE INCOME OF THE FIRM AC CRUES IN THE HANDS OF THE FIRM AND THE EXPENDITURE IS MET AFTER THE ACCRUAL O F THE INCOME, IS INCORRECT. IT HAS BEEN CONTENDED THAT THE LD. CIT(A) HAS FAILE D TO APPRECIATE THAT THE BILLS ARE RAISED BY THE ASSESSEE MUCH LATER AND RE CEIPT COMES EVEN THEREAFTER, WHEREAS THE PAYMENT TO THE OUTGOING PARTNER BECOME S DUE ON HIS RETIREMENT OR DEMISE AND IT IS NOT CORRECT TO SAY THAT IT IS AFTER ACCRUAL OF THE INCOME THAT THE EXPENDITURE IS MET BY THE ASSESSEE. IT HAS FURTHER BEEN CONTENDED THAT THE LD. CIT(A) HAS ALSO ERRED IN OBSERVING THA T THE PAYMENTS MADE TO THE LEGAL HEIRS OF THE DECEASED PARTNER HAVE NOTHING TO DO WITH THE SERVICES ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 25 RENDERED TO THE CLIENT; THAT IN FACT, THE PAYMENTS MADE ARE IN RESPECT OF WORK DONE WHICH HAS NOT YET REACHED A STAGE OF BILLING; AND THAT THE PAYMENT DEFINITELY IS IN RESPECT OF THE SERVICES RENDERED T O THE CLIENTS. IT HAS BEEN SUBMITTED THAT THE LD. CIT(A) HAS GONE WRONG IN OBS ERVING THAT THE EXPENDITURE IS SELF IMPOSED AS GRATUITOUS. IN THI S REGARD, IT HAS BEEN SUBMITTED THAT THE PAYMENT IS CONTRACTUAL AND NOT G RATUITOUS AND CAN BE CLAIMED BY THE OUTGOING PARTNER/LEGAL HEIRS OF THE DECEASED PARTNER, BY WAY OF RIGHT. IT HAS BEEN ARGUED THAT THE LD. CIT(A) HA S FURTHER ERRED IN OBSERVING THAT THE PAYMENT IN QUESTION IS A COMPENSATION FOR TAKING OVER THE SHARE OF THE DECEASED PARTNER BY THE SURVIVING PARTNER OF TH E ASSESSEE-FIRM, WHEREAS, IN FACT, THE OUTGOING PARTNER WAS SEPARATELY PAID TOWARDS THE BALANCES IN HIS CAPITAL ACCOUNT, CURRENT ACCOUNT, LOAN ACCOUNT, APP RECIATION IN IMMOVABLE PROPERTY AND GOODWILL. IT HAS BEEN CONTENDED THAT THE LEGAL HEIRS OF THE DECEASED PARTNER WERE PAID WHAT WAS DUE TO THE DEC EASED PARTNER AND NO PAYMENT WAS MADE FOR TAKING OVER HIS SHARE. THE CAS E LAWS RELIED ON BY THE LD. CIT(A) HAVE BEEN DISTINGUISHED. 30. ON THE OTHER HAND, THE LD. DR HAS SOUGHT TO PLA CE STRONG RELIANCE ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED THAT AS C ORRECTLY OBSERVED BY THE LD. CIT(A), BY INCORPORATING THE RELEVANT CLAUSE IN THE PARTNERSHIP DEED, THE ASSESSEE FIRM HAS CREATED A LIABILITY TO PAY CERTAI N AMOUNTS TO THE RETIRING ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 26 PARTNERS; THAT THIS HAD CORRECTLY BEEN FOUND TO BE CONFLICTING WITH THE PROVISIONS OF THE INCOME TAX ACT; THAT AS PER THE D ECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SITALDAS TIRA THDAS, REPORTED AT 41 ITR 367 (SC), THE PAYMENT OF THE NATURE OF THE ONE UNDER CONSIDERATION IS AN APPLICATION OF FUND AND NOT OF DIVERSION BY OVER RIDING CHARGE. IT HAS BEEN CONTENDED THAT EVEN OTHERWISE, THE PAYMENT HAVING B EEN MADE BY THE ASSESSEE FOR BUSINESS EXPEDIENCY, IT IS NOT AN INST ANCE OF DIVERSION BY OVERRIDING CHARGE. 31. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD WITH REGARD TO THIS ISSUE. COMING STRAIGHTWA Y TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SITAL DAS TIRATHDAS REPORTED AT 41 ITR 367(SC), IN THAT CASE, THE ASSESSEE, WAS AN INDIVIDUAL. HE WAS REQUIRED, UNDER A CONSENT DECREE, TO PAY CERTAIN SU MS AS MAINTENANCE TO HIS WIFE AND CHILDREN. THE ASSESSEE CLAIMED THE AMOUNTS PAID, AS A DEDUCTION, RELYING ON THE DECISION OF THE PRIVY COUNCIL IN RA JA BEJOY SINGH DADHURIA VS. CIT, (1933) 1 ITR 135 (PC). THIS CLAIM WAS DIS ALLOWED BY THE ITO AND THE AAC. THE TRIBUNAL HELD THAT IT WAS A CASE OF T HE ASSESSEE BEING COMPELLED TO APPLY A PORTION OF HIS INCOME FOR THE MAINTENANCE OF PERS ONS WHOM HE WAS UNDER A PERSONAL AND LEGAL OBLIGATION T O MAINTAIN; AND THAT THE INCOME TAX ACT DOES NOT PERMIT OF ANY DEDUCTION FRO M THE TOTAL INCOME IN ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 27 SUCH CASES. ON A REFERENCE, RELYING ON SETH MOTILA L MANEKCHAND VS. CIT, (1957) 31 ITR 735 (BOM) AND PRINCE KHANDERAO GAEK WAR OF BARODA VS. CIT, (1948) 16 ITR 294 (BOM.), THE HONBLE HIGH CO URT HELD THAT AS THERE WAS AN OBLIGATION ON THE ASSESSEE TO PAY, EVEN THOU GH THERE WAS NO SPECIFIC CHARGE ON THE PROPERTY, IT COULD BE ENFORCED IN A C OURT OF LAW. IT WAS OBSERVED THAT IN THE CASE OF RAJA BEJOY SINGH DAD HURIA VS. CIT (SUPRA), THERE WAS A CHARGE FOR MAINTENANCE CREATED AGAINST THE HUSBAND AND THE PRIVY COUNCIL HAD OBSERVED THAT INCOME MUST BE DEE MED TO HAVE NEVER REACHED WITH ASSESSEE, HAVING BEEN DIVERTED TO THE MAINTENANCE HOLDER. THE HONBLE HIGH COURT OBSERVED THAT INCOME TO THE EXTENT OF THE DECREE MUST BE TAKEN TO HAVE BEEN DIVERTED TO THE WIFE AND CHILDREN OF THE ASSESSEE AND IT NEVER BECAME INCOME IN HIS HANDS. THE DEPART MENT CARRIED THE MATTER IN AN APPEAL BEFORE THE HONBLE SUPREME COURT. IT A LSO CHALLENGED THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN SETH MOTILAL MANEKCHAND VS. CIT (SUPRA) AND PRINCE KHANDERAO GAEKWAR OF BARODA VS. CIT (SUPRA). 32. THEIR LORDSHIPS OF THE HONBLE SUPREME COURT, AFTER NOTICING NUMEROUS DECISIONS ON THE ISSUE, INCLUDING THOSE NA MED HEREINABOVE, OBSERVED THAT THE TRUE TEST FOR THE APPLICATION OF THE RULE OF DIVERSION OF INCOME BY WAY OF AN OVERRIDING CHARGE, IS WHETHER T HE AMOUNT SOUGHT TO BE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 28 DEDUCTED, IN TRUTH, NEVER REACHED THE ASSESSEE AS H IS INCOME. IT WAS OBSERVED THAT THOUGH THERE ARE OBLIGATIONS IN EVERY CASE, TH E DECISIVE TEST IS THE NATURE OF THE OBLIGATION. IT WAS OBSERVED THAT THERE IS A DIFFERENCE BETWEEN AN AMOUNT WHICH A PERSON IS OBLIGED TO APPLY OUT OF HI S INCOME AND AN AMOUNT WHICH BY THE NATURE OF THE OBLIGATION CANNOT BE SAI D TO BE A PART OF THE INCOME OF THE ASSESSEE. IT WAS OBSERVED THAT WHERE BY THE OBLIGATION, INCOME IS DIVERTED BEFORE IT REACHES THE ASSESSEE, IT IS DEDUCTIBLE, BUT WHERE THE INCOME IS REQUIRED TO BE APPLIED TO DISCHARGE AN OB LIGATION AFTER SUCH INCOME REACHES THE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT FOLLOW. IT WAS OBSERVED THAT IT IS THE PAYMENT OF FIRST KIND, I.E. , PAYMENT MADE UNDER OBLIGATION, AND NOT OF THE SECOND, WHICH CAN BE EX CUSED. IT WAS OBSERVED THAT THE SECOND PAYMENT IS MERELY AN OBLIGATION TO PAY ANOTHER PORTION OF ONES OWN INCOME, WHICH HAS BEEN RECEIVED AND IS SI NCE APPLIED. IT WAS OBSERVED THAT THE FIRST IS A CASE IN WHICH THE INCO ME NEVER REACHES THE ASSESSEE WHO, EVEN IF HE WAS TO COLLECT IT, DOES S O, NOT AS PART OF HIS INCOME, BUT FOR AND ON BEHALF OF THE PERSON TO WHOM IT IS PAYABLE. ON THE FACTS OF THE CASE, IT WAS OBSERVED THAT THE WIFE AN D CHILDREN OF THE ASSESSEE CONTINUED TO BE MEMBERS OF THE FAMILY AND THEY RECE IVED A PORTION OF THE INCOME OF THE ASSESSEE AFTER THE ASSESSEE HAD RECEI VED THE INCOME AS HIS OWN. IT WAS OBSERVED THAT THE CASE WAS THAT OF APP LICATION OF A PORTION OF THE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 29 INCOME TO DISCHARGE AN OBLIGATION AND NOT A CASE IN WHICH BY AN OVERRIDING CHARGE, THE ASSESSEE BECAME ONLY A COLLECTOR OF ANO THERS INCOME. IT WAS OBSERVED THAT THE MATTER WOULD HAVE BEEN DIFFERENT, IF SUCH AN OVERRIDING CHARGE HAD EXISTED EITHER ON THE PROPERTY, OR ON IT S INCOME, BUT IT WAS NOT SO. IT WAS HELD THAT THE CASE FELL OUTSIDE THE RULE IN RAJA BEJOY SINGH DADHURIA VS. CIT (SUPRA), AS PER WHICH, THERE WAS A CHARG E FOR MAINTENANCE CREATED AGAINST THE ASSESSEE AND THE PRIVY COUNCIL HAD OBSE RVED THAT INCOME MUST BE DEEMED TO HAVE NEVER REACHED THE ASSESSEE, HAVING B EEN DIVERTED TO THE MAINTENANCE HOLDER. IT WAS HELD THAT THE CASE RAT HER FELL WITHIN RULE OF THE JUDICIAL COMMITTEE IN THE CASE OF P.C.MULLICK AND ANOTHER VS. CIT, (1938) 6 ITR 206 (SC). IN THAT CASE, UNDER DIRECTIO NS FROM THE TESTATOR, WHO HAD APPOINTED THEM, THE EXECUTORS APPOINTED PAID EX PENSES ON THE OCCASION OF ADDYA SRADH OF THE DECEASED AND SOUGHT TO DEDUCT THE AMOUNT FROM THE ASSESSABLE INCOME. THE JUDICIAL COMMITTEE CONFIRMED THE DECISION OF THE HONBLE CALCUTTA HIGH COURT DISALLOWING THE DEDUCTI ON. IT WAS OBSERVED THAT THE PAYMENTS WERE MADE OUT OF THE INCOME OF THE EST ATE COMING TO THE HANDS OF THE EXECUTORS AND IN PURSUANCE OF AN OBLIGATION IMPOSED UPON THEM BY THE TESTATOR. IT WAS OBSERVED THAT IT WAS NOT A CAS E IN WHICH A PORTION OF THE INCOME HAD BEEN DIVERTED BY AN OVERRIDING TITLE FR OM THE PERSON WHO WOULD HAVE RECEIVED IT OTHERWISE. THUS, THOUGH THE ASSES SEE CLAIMED SO, THE RULE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 30 IN RAJA BEJOY SINGH DADHURIA VS. CIT (SUPRA), I.E., WHERE, BY THE OBLIGATION, INCOME IS DIVERTED BEFORE IT REACHES TH E ASSESSEE, IT IS DEDUCTIBLE, WAS HELD NOT TO APPLY AND THE RULE IN THE CASE OF P.C.MULLICK AND ANOTHER VS. CIT (SUPRA), ACCORDING TO WHICH, WHERE THE IN COME IS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATION AFTER SUCH INCOM E REACHES THE ASSESSEE, IT IS NOT DEDUCTIBLE, WAS HELD TO BE THE APPLICABLE RU LE. 33. NOW, IN THE PRESENT CASE, AS PER THE STATEMENT OF FACTS FILED BEFORE THE LD. CIT(A), CLAUSE 23:1 TO 23:4 OF THE RELEVANT PAR TNERSHIP DEED READ AS FOLLOWS: 23:1 THE PARTNER WHOSE SHARE IS DETERMINED UNDER CL AUSE 22 HEREINABOVE IS HEREINAFTER REFERRED TO AS SUCH PAR TNER. THE DETERMINATION UNDER CLAUSE 22 HEREINABOVE SHALL NO T DISSOLVE THE PARTNERSHIP. THE DETERMINATION SHALL BE WITHOUT PRE JUDICE TO THE REMEDIES, IF ANY, OF THE CONTINUING PARTNERS FOR AN Y BREACH OR BREACHES OF COVENANTS BY SUCH PARTNER BEFORE THE DE TERMINATION OF HIS/HER SHARE. 23:2 SUCH PARTNER WHOSE SHARE IS SO DETERMINED UNDE R CLAUSE 22 OR HIS/HER REPRESENTATIVES, AS THE CASE MAY BE, SHALL ACCEPT AS CORRECT THE ACCOUNTS AS CERTIFIED OR HIS/HER REPRESENTATIVE S, AS THE CASE MAY BE. 23:3 NO SUCH PARTNER SHALL BE ENTITLED TO CLAIM AN Y SHARE IN RESPECT OF OUTSTANDING OF THE FIRM ON ACCRUAL OR OTHER BASI S ON DETERMINATION OF HIS/HER SHARE IN THE FIRM. 23:4 THE CONTINUING PARTNERS SHALL BE LIABLE TO PA Y AND SHALL PAY TO AND SHALL BE ENTITLED TO RECEIVE AND SHALL RECEIVE FROM SUCH PARTNER OR HIS/HER REPRESENTATIVES, AS THE CASE MAY BE, THE FO LLOWING AMOUNTS: A) THE FIXED CAPITALS STANDING TO THE CREDIT/DEBIT OF SUCH PARTNER. B) THE AMOUNT STANDING TO THE CREDIT/DEBIT OF HIS/H ER CURRENT ACCOUNT AFTER ADJUSTING HIS/HER SHARE IN THE PROFIT S OF THE PARTNERSHIP ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 31 UP TO THE DATE OF DETERMINATION OF HIS SHARE AFTER DEDUCTING TAX LIABILITY PAYABLE BY THE FIRM AND TAKING INTO ACCOU NT DRAWINGS OF WITHDRAWALS MADE BY SUCH PARTNER AS ENTERED IN THE CURRENT ACCOUNT OF SUCH PARTNER, AND C) THE AMOUNT STANDING TO THE CREDIT/DEBIT OF SUCH PARTNER. 34. CLAUSE 23:5 OF THE PARTNERSHIP DEED RUNS THUS: 23:5 THE CONTINUING PARTNERS SHALL ALSO PAY SUCH P ARTNER OR HIS/HER REPRESENTATIVES, AS THE CASE MAY BE ( PROVIDED SUCH PARTNER IS ENTITLED TO A SHARE IN THE IMMOVABLE ASSETS DESCRIBED IN SCH EDULE 1 AND/OR SCHEDULE II HERETO, UNDER CLAUSE 13:15, AND/OR CLAU SE 13:16 AS THE CASE MAY BE) A SUM DETERMINED IN THE MANNER FOLLOWI NG: (A) THE AGGREGATE OF THE DIFFERENCE BETWEEN THE MAR KET VALUES AND BOOK VALUES OF ALL THE IMMOVABLE PROPERTIES OF THE FIRM DESCRIBED IN SCHEDULE I AND/OR SCHEDULE II HERETO SHALL BE DETER MINED. IN DETERMINING SUCH DIFFERENCE, THE VALUES ARRIVED AT BY THE PRINCIPAL PARTNERS SHALL BE CONCLUSIVE AND BINDING ON SUCH PA RTNER, HIS/HER REPRESENTATIVES AND ALL THE OTHER PARTNERS. (B) THE AMOUNT COMPUTED UNDER SUB-CLAUSE (A) SHALL BE D ISCOUNTED BY 50%. (C) SUCH PARTNER OR HIS/HER REPRESENTATIVE SHALL BE ENT ITLED TO RECEIVE HIS/HER SHARE IN THE AMOUNT ARRIVED AT UNDE R CLAUSE (B) ABOVE, COMPUTED IN ACCORDANCE WITH THE RATIO SET O UT IN, CLAUSE 13:15 OR CLAUSE 13:16 HEREIN AS THE CASE MAY BE. 5C 35. CLAUSES 23:6 TO 23:11 OF THE PARTNERSHIP DEED A RE AS UNDER: 23:6. NONE OF THE PARTNERS HAVING A SHARE IN THE I MMOVABLE PROPERTIES DESCRIBED IN SCHEDULE 1 AND/OR SCHEDULE II HERETO HAVE OR SHALL BE ENTITLED TO AN INTEREST IN SPECIE IN ANY O F THE SAID IMMOVABLE PROPERTIES DESCRIBED IN SCHEDULE 1 AND/OR SCHEDULE II. IT IS FURTHER EXPRESSLY AGREED, DECLARED AND CONFIRMED THAT ON DE TERMINATION OF THE SHARE OF ANY SUCH PARTNER UNDER THE PROVISIONS OF C LAUSE 22, THAT SUCH PARTNER SHALL BE ONLY ENTITLED TO BE PAID SUCH AMOU NT AS MAY BE DETERMINED UNDER THE PROVISIONS OF CLAUSE 23:5 AND NOT CLAIM A DISTRIBUTION/PARTITION OF ANY OF THE SAID IMMOVABLE PROPERTIES. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 32 23:7 NASHIR, HAMID, ANAND, NIHAR, ASHOK AND DJENA, AS THE CASE MAY BE, WHOSE SHARE IS DETERMINED ON ACCOUNT OF RES IGNATION RETIREMENT OR DEATH SHALL ALSO BE PAID BY THE CONTI NUING PARTNERS A SUM EQUIVALENT TO ONE AND A HALF TIMES THE SHARE OF PROFITS AND REMUNERATION RECEIVED BY HIM IN THE LAST ACCOUNTING YEAR IMMEDIATELY PRECEDING THE DATE OF DETERMINATION OF HIS SHARE. P ROVIDED THAT IN THE CASE OF NASHIR, HAMID AND ANAND, SUCH SHARE OF PROF IT SHALL NOT INCLUDE SUCH PARTNERS SPECIAL PROFITS REFERRED TO IN CLAUSE 7.5 AND PROVIDED FURTHER THAT IN THE CASE OF DJENA, THE BEN EFIT UNDER THIS CLAUSE 23:7, SHALL NOT BE AVAILABLE UNLESS DJENA HA S COMPLETED AT LEAST 12 YEARS AS A PARTNER OF THE FIRM AT THE TIME OF HER RESIGNATION OR RETIREMENT OR DEATH AS THE CASE MAY BE. 23:8. SUCH PARTNER {OTHER THAN PRINCIPAL PARTNERS, ASHOK AND DJENA, IF SHE HAS RECEIVED PAYMENT UNDER CLAUSE 23:7} OR H IS REPRESENTATIVE, AS THE CASE MAY BE, WHOSE SHARE IS DETERMINED ON AC COUNT OF DEATH OR PERMANENT INCAPACITY SHALL ALSO BE ENTITLED TO A SU M WHICH AS NEAR AS POSSIBLE TO THE SHARE OF PROFIT OF AND REMUNERATION RECEIVED BY HIM/HER IN THE LAST ACCOUNTING YEAR. IN ORDER TO EN ABLE THE FIRM TO MAKE SUCH PAYMENT, THE FIRM WILL TAKE AN APPROPRIAT E INSURANCE POLICY AND THE PREMIUM IN RESPECT OF SUCH POLICY WI LL BE PAID BY THE FIRM. 23:9 IN ADDITION TO THE SUMS PAYABLE UNDER CLAUSES 23:4, 23:5 AND 23:7, THE CONTINUING PARTNERS SHALL BE LIABLE TO PA Y AND SHALL PAY TO THE SAID NOSHIR , HAMID AND ANAND OR THEIR RESPECT IVE REPRESENTATIVES, ON DETERMINATION OF THEIR SHARES, THE AMOUNTS PROVIDED FOR IN CLAUSES 7.8 OF THIS DEED. 23:10 THE SUMS PAYABLE UNDER CLAUSES 23:4, 23:5 A ND 23:7, THE CONTINUING PARTNERS TO SUCH PARTNER OR HIS REPRESEN TATIVES IN SUCH INSTALMENTS AND OVER SUCH PERIOD AS MAY BE MUTUALLY AGREED UPON, AND FAILING SUCH AGREEMENT, BETWEEN TWELVE AND THIR TY-SIX MONTHS FROM THE DATE OF DETERMINATION OF THE SHARE OF SUCH PARTER. 23:10 THE PAYMENTS TO BE MADE UNDER CLAUSES 7.8, 23 :5, 23:7 AND 23:8 SHALL AND CONSTITUTE A CHARGE ON THE RECEIPTS, PROFITS AND ASSETS OF THE FIRM, WHILE THE PAYMENT TO BE MADE UNDER CLA USE 23:4 AND 23:5 SHALL CONSTITUTE A CHARGE ON THE ASSETS OF THE FIR M. FURTHER, THE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 33 PAYMENTS TO BE MADE UNDER CLAUSES 7;8, 23:7 AND 23: 8 SHALL BE DIVERTED BY OVERRIDING TITLE TO SUCH PARTNER OR HIS REPRESENTATIVES. 23:11 PROVIDED HOWEVER THAT THE PAYMENTS UNDER THIS CLAUSE TO SUCH PARTNER WHOSE SHARE HAS BEEN DETERMINED SHALL BE MA DE ONLY AFTER HE HAS FULLY AND COMPLETELY HANDED OVER TO THE PRINCIP AL PARTNERS OR ANY OTHER PARTNER AS THE PRINCIPAL PARTNERS MAY DIRECT ALL MATTERS, PROCEEDINGS, SUITS HANDED BY HIM AND DOCUMENTS AND PAPERS IN RESPECT THEREOF TO THE SATISFACTION OF THE PRINCIPA L PARTNERS. 36. THUS, AS PER CLAUSE 23:4 OF THE PARTNERSHIP DEE D, ON THE DETERMINATION OF THE SHARE OF A PARTNER UNDER CLAUSE 22, THE CON TINUING PARTNERS OF THE FIRM SHALL, INTER-ALIA, PAY TO SUCH PARTNER OR HIS/HER R EPRESENTATIVES, BESIDES THE FIXED CAPITAL STANDING TO THE CREDIT OF SUCH PARTNE R, THE AMOUNT STANDING TO THE CREDIT OF HIS/HER CURRENT ACCOUNT AFTER ADJUSTI NG HIS/HER SHARE IN THE PROFITS OF THE PARTNERSHIP UPTO THE DATE OF DETERMI NATION OF HIS/HER SHARE, AFTER DEDUCTING THE TAX LIABILITY PAYABLE BY THE FI RM AND TAKING INTO ACCOUNT THE DRAWINGS OR WITHDRAWALS MADE BY SUCH PARTNERS, AS ENTERED IN THE CURRENT ACCOUNT OF SUCH PARTNERS, AND THE AMOUNT STANDING T O THE CREDIT OF THE LOAN ACCOUNT OF SUCH PARTNERS. UNDER CLAUSE 23:5, THE PA YMENT MADE REPRESENTS COMPENSATION TO THE OUTGOING PARTNER, NIHAR, IN RES PECT OF APPRECIATION IN THE VALUE OF THE IMMOVABLE PROPERTY HELD BY THE FIRM, T O THE EXTENT OF HIS SHARE. CLAUSE 23:6 SPECIFICALLY PROVIDES THAT ON DETERMINA TION OF THE SHARE OF SUCH PARTNER UNDER THE PROVISIONS OF CLAUSE 22, SUCH PA RTNER SHALL BE ENTITLED TO BE PAID ONLY SUCH AMOUNT AS MAY BE DETERMINED. UNDER C LAUSE 23:5, HE/SHE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 34 SHALL NOT CLAIM A DISTRIBUTION/PARTITION OF THE IMM OVABLE PROPERTIES/ASSETS DESCRIBED IN SCHEDULE-I OR SCHEDULE II TO THE PART NERSHIP DEED, BELONGING TO THE FIRM. CLAUSE 23:7 OF THE DEED PROVIDES THAT THE PARTNER WHOSE SHARE IS DETERMINED ON ACCOUNT OF RESIGNATION, RETIREMENT OR DEATH, SHALL ALSO BE PAID BY THE CONTINUING PARTNERS OF THE FIRM, A SUM EQUIV ALENT TO ONE AND A HALF TIMES THE SHARE OF THE PROFITS AND REMUNERATION R ECEIVED BY HIM IN THE LAST ACCOUNTING YEAR IMMEDIATELY PRECEDING THE DATE OF DETERMINATION OF HIS SHARE ( IN THE CASE OF NIHAR). CLAUSE 23:10 LAYS D OWN THAT THE SUMS PAYABLE UNDER CLAUSES 23:4, 23:5 AND 23:7 SHALL BE PAID BY THE CONTINUING PARTNERS OF THE FIRM TO SUCH PARTNER OR HIS/HER REPRESENTATIVE S IN SUCH INSTALMENTS AND OVER SUCH PERIOD AS MAY BE MUTUALLY AGREED UPON AND FAILING SUCH AGREEMENT, BETWEEN TWELVE AND THIRTY SIX MONTHS FRO M THE DATE OF DETERMINATION OF THE SHARE OF SUCH PARTNER. THE PAY MENTS, INTER-ALIA, UNDER CLAUSES 23:5 & 23:7 SHALL BE AND CONSTITUTE A CHARG E ON THE RECEIPTS, PROFITS AND ASSETS OF THE FIRM. FURTHER, PAYMENTS TO BE MAD E UNDER, INTER-ALIA, CLAUSE 23:7 SHALL BE DIVERTED BY OVERRIDING TITLE TO SUCH PARTNER OR HIS/HER REPRESENTATIVES. 37. NOW, IN KEEPING WITH SITALDAS TIRATHDAS (SUPR A), IT IS TO BE SEEN WHETHER THE PRESENT CASE IS ONE OF AN OVERRIDING CH ARGE, SO THAT THE PAYMENT CAN BE SAID TO BE A DIVERSION OF INCOME BY WAY OF S UCH OVERRIDING CHARGE, ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 35 THE AMOUNT HAVING NEVER REACHED THE ASSESSEE AT ALL , AS ITS INCOME. FOR THIS, AS OBSERVED BY THEIR LORDSHIPS OF THE HONBLE SUPRE ME COURT, THE DECISIVE TEST IS THE NATURE OF THE OBLIGATION. IN THE PRESEN T CASE, THE TOTAL AMOUNT PAYABLE TO NIHAR A MODY ON HIS RETIREMENT, WAS DETE RMINED AND SET OUT IN THE DEED OF RETIREMENT DATED 30.09.2009. THE AMOUNT OF RS.3,69,45,176/- REPRESENTED THE SUM PAYABLE AS AN AMOUNT OVER AND A BOVE THE BALANCES OF THE CAPITAL ACCOUNT, THE CURRENT ACCOUNT AND THE LO AN ACCOUNT. THIS PAYMENT CONSISTED OF TWO AMOUNTS, TOTALING TO RS.3,73,000,8 99/-, LESS A DEDUCTION FOR RECOVERY TOWARDS HIS SHARE OF HIS CLIENTS BALANCES WRITTEN OFF, OF RS.3,55,728/-. THE BREAK-UP THEREOF IS AS FOLLOWS: A) AN AGGREGATE OF THE DIFFERENCES BETWEEN THE MARK ET VALUE AND BOOK VALUE OF ALL THE IMMOVABLE PROPERTIES OF THE F IRM, AS DISCOUNTED BY 50% (UNDER CLAUSE 23:5) RS.4,16,715/- AND B) A SUM EQUIVALENT TO ONE AND A HALF TIMES THE SHA RE OF THE PROFITS AND REMUNERATION RECEIVED BY NIHAR A MODY IN THE LA ST ACCOUNTING YEAR IMMEDIATELY PRECEDING THE DATE OF DETERMINATIO N OF HIS SHARE UNDER CLAUSE 22, OF RS.3,68,84,184/-. 38. NOW, AS NOTED, CLAUSE 23:10 OF THE PARTNERSHIP DEED PROVIDES THAT PAYMENT UNDER CLAUSE 23:5 IS A CHARGE ON THE ASSETS OF THE FIRM AND PAYMENT UNDER CLAUSE 23:7 IS A CHARGE ON ITS RECEIPTS, PROF ITS AND ASSETS. ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 36 39. WHAT IS NOTICEABLE FROM THE ABOVE IS, THAT IT I S EXPLICIT FROM THESE CLAUSES OF THE PARTNERSHIP DEED, AS WELL AS THOSE O F THE DEED OF RETIREMENT DATED 30.09.2009, THAT THE ASSESSEE FIRM WAS NEVER OBLIGED TO APPLY THE AMOUNT TO BE PAID TO NIHAR A MODY, OUT OF ITS INCOM E. RATHER, THE NATURE OF THE OBLIGATION IS SUCH THAT IT CANNOT AT ALL BE SAI D TO BE A PART OF THE INCOME OF THE FIRM. IN FACT, IT IS NOT AT ALL A CASE WHERE TH E INCOME OF THE ASSESSEE WAS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATION AFTER THE INCOME REACHED THE ASSESSEE. 40. AN CONTRAIRE, BY VIRTUE OF THE OBLIGATION CONT AINED IN THE PARTNERSHIP DEED, AS ABOVE, THE INCOME WAS DIVERTED BEFORE IT REACHED THE ASSESSEE. AND CLEARLY, AS PER SITALDAS TIRATHDAS (SUPRA), SUCH A PAYMENT IS ENTITLED TO BE EXCUSED, THE INCOME NEVER HAVING REACHED THE ASSESSEE AND EVEN IF THE ASSESSEE WERE TO COLLECT IT, IT WOULD HAVE BEEN SO COLLECTED NOT AS PART OF THE ASSESSEES INCOME, BUT FOR AND ON BEHALF OF THE OUTGOING PARTNER , TO WHOM IT WAS PAYABLE. HEREIN, IT HAS BEEN MAINTAINED BY THE ASSESSEE AND NOT REBUTTED BY EITHER OF THE TAXING AUTHORITIES, OR EVEN BY THE LD. DR, THAT THE BILLS WERE RAISED BY THE ASSESSEE-FIRM MUCH LATER AND THE RECE IPT WITH REGARD THERETO CAME BY EVEN THEREAFTER. THE EXPENDITURE WAS NOT ME T OUT AFTER ACCRUAL OF THE INCOME. IT IS FURTHER NOTE-WORTHY THAT THE AMOU NT WAS PAYABLE, IRRESPECTIVE OF WHETHER THE ASSESSEE FIRM MADE A PR OFIT OR NOT AND WHETHER ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 37 OR NOT THE CONTINUING PARTNERS, OF THE FIRM DESIRED TO SUBSEQUENTLY CONTINUE THE PROFESSION OF PRACTICING ADVOCATES AND SOLICITO RS. 41. MOREOVER, IN THE CASE OF RAJA BEJOY SINGH DAD HURIA (SUPRA), CONSIDERED IN SITALDAS TIRATHDAS (SUPRA), THERE W AS A CHARGE FOR MAINTENANCE CREATED AGAINST THE ASSESSEE. IN THE CA SE BEFORE US TOO, AS EVIDENT FROM THE ABOVE DISCUSSION, THE CHARGE HAVIN G BEEN FIXED BY VIRTUE OF THE ABOVE CLAUSES OF THE PARTNERSHIP DEED, IT STOOD PRE-CREATED AGAINST THE ASSESSEE-FIRM AND IN KEEPING WITH THE ENUNCIATION B Y THE PRIVY COUNCIL IN RAJA BEJOY SINGH DADHURIA (SUPRA), THE INCOME MU ST NOT BE DEEMED TO HAVE REACHED THE ASSESSEE, SINCE IT WAS DIVERTED TO THE RETIRING PARTNER. THEREFORE, THE CASE OF THE PRESENT ASSESSEE FALLS S QUARELY WITHIN RATIO OF RAJA BEJOY SINGH DADHURIA (SUPRA), AS CONSIDERED IN SITALDAS TIRATHDAS (SUPRA). 42. THE LD. CIT(A), WHILE DECIDING THE MATTER AGAIN ST THE ASSESSEE, HAS SOUGHT TO PLACE RELIANCE ON SITALDAS TIRATHDAS (S UPRA). NOW, THIS IS EVIDENTLY IN OBLIVION OF THE OBSERVATIONS MADE BY T HEIR LORDSHIPS OF THE HONBLE SUPREME COURT, THEREIN, AS DISCUSSED HEREIN ABOVE. THE LD. CIT(A) HAS OBSERVED THAT THE INCOME OF THE ASSESSEE-FIRM A CCRUES IN ITS HANDS AND IT IS AFTER SUCH ACCRUAL, THAT THE EXPENDITURE IS MET OUT. THIS, HOWEVER, AS SEEN, IS NOT AT ALL THE CASE. THE CLAUSES OF THE PARTNER SHIP DEED ARE SPECIFIC AND ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 38 CATEGORICAL AND THEY AMPLY EVIDENCE THE FACT THAT O NCE A PARTNER DIES OR RETIRES, THE PAYMENT TO BE MADE IS AN OBLIGATION OF THE FIRM BEFORE IT RECEIVES ITS INCOME. TO REITERATE, IT REMAINS UNDISPUTED THAT THE BILLS WERE RAISED BY THE ASSESSEE MUCH AFTER THE PAYMENT WAS MADE TO THE OUTGOING PARTNER AND, OBVIOUSLY, THE RECEIPT CAME EVEN LATER. 43. THERE IS NO DENIAL/REBUTTAL TO THE FACT, BY EIT HER OF THE TAXING AUTHORITIES, OR EVEN THE LD. DR, THAT AS PER THE P ARTNERSHIP DEED, THE PAYMENT BECOMES DUE TO THE OUTGOING PARTNER AT THE EVENT O F HIS RETIREMENT/DEMISE. 44. THE LD. CIT(A) MADE AN OBSERVATION THAT THE PAY MENT HAD NOTHING TO DO WITH THE SERVICES RENDERED TO THE CLIENTS. IN TH IS REGARD, THE ASSESSEE HAS EVER MAINTAINED THAT THE PAYMENT MADE WAS IN RESPEC T OF THE WORK DONE, WHICH HAD NOT HITHERTO ATTAINED THE STAGE OF BILLI NG AND THAT THE PAYMENT WAS DEFINITELY WITH REGARD TO THE SERVICES RENDERED TO THE CLIENTS. THIS STAND OF THE ASSESSEE ALSO REMAINS UNREBUTTED. 45. ANOTHER OBSERVATION OF THE LD. CIT(A) IS THAT T HE EXPENDITURE IN QUESTION IS SELF IMPOSED AS GRATITUITOUS. HOWEVER , NOTHING HAS BEEN BROUGHT ON RECORD BY THE LD. CIT(A) TO BOLSTER SUC H AN OBSERVATION. A BARE PERUSAL OF THE RELEVANT CLAUSES OF THE PARTNERSHIP DEED, AS DISCUSSED IN THE FOREGOING PARAGRAPHS, LAYS IT BARE THAT THE PAYMENT IN QUESTION IS A CONTRACTUAL PAYMENT AND NOT AT ALL A GRATUITOUS ONE . IT REMAINS UNDISPUTED ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 39 THAT THE OUTGOING PARTNER CAN CLAIM THE AMOUNT AS A MATTER OF RIGHT. IN THIS REGARD, IN CIT VS. CRAWFORD BAYLEY & CO., 106 IT R 884 (BOM.), SIMILAR PAYMENTS, AS THE ONE INVOLVED HEREIN, WERE MADE TO THE WIDOWS OF THE DECEASED PARTNERS OF THE ASSESSEE FIRM. THE ITO REJ ECTED THE CLAIM MADE OF CORRESPONDING DEDUCTIONS, HOLDING, INTER-ALIA, THAT THE WIDOWS OF THE DECEASED PARTNERS WERE NOT PARTIES TO THE AGREEMENT BY WAY OF THE PARTNERSHIP DEED, AND THAT THEY HAD NO RIGHTS AGAIN ST THE FIRM. THE HONBLE BOMBAY HIGH COURT HELD THAT EVEN THOUGH THE CESTUI QUE TRUST MAY NOT BE A PARTY TO THE CONTRACT, THEY CAN ENFORCE THEIR RIGHT UNDER THE CONTRACT BY ADOPTING APPROPRIATE LEGAL PROCEEDINGS. BESIDES, EV EN OTHERWISE, AS CORRECTLY CONTENDED ON BEHALF OF THE ASSESSEE, LAW NOWHERE PR OVIDES THAT SOMETHING SELF IMPOSED OR GRATITUITOUS IS NOT ALLOWABLE. T HE ORDER UNDER APPEAL DOES NOT ADVERT TO AND DILATE UPON THIS ASPECT OF THE MA TTER. 46. THE LD. CIT(A) ALSO OBSERVED THAT THE PAYMENT I N QUESTION WAS A COMPENSATION FOR TAKING OVER THE SHARE OF THE OUTGO ING PARTNER BY THE SURVIVING PARTNERS. THIS, DESPITE THE FACT THAT AS PER THE RELEVANT CLAUSES OF THE PARTNERSHIP DEED, THE OUTGOING PARTNER WAS SEPA RATELY PAID TOWARDS THE BALANCES IN HIS CAPITAL ACCOUNT, CURRENT ACCOUNT, LOAN ACCOUNT, THE APPRECIATION IN THE IMMOVABLE PROPERTY AND THE GOO DWILL. THAT BEING SO, THERE IS NO QUESTION OF THE PAYMENT BEING A COMPENS ATION FOR TAKING OVER THE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 40 SHARE OF THE RETIRING PARTNER BY THE SURVIVING PART NERS OF THE FIRM. THIS OBSERVATION OF THE LD. CIT(A), AS SUCH, HAS NO LEGS TO STAND ON. NOTHING CONTRARY HAS BEEN BROUGHT OUT IN THE ORDER BY THE L D. CIT(A) TO BUTTRESS THIS OBSERVATION. IT IS JUST THAT THE LD. CIT(A) HAS ERR ONEOUSLY VIEWED THE PAYMENT UNDER CONSIDERATION IN THE LIGHT OF THE DEC ISION IN CIT VS. V.G. BHUTA, 203 ITR 249 (BOM.), AS RELIED ON BY THE AO. 47. IN V.G. BHUTA (SUPRA), THE ASSESSEE WAS A PAR TNER IN A FIRM. CLAUSE 18 OF THE PARTNERSHIP DEED PROVIDED THAT THE FIRM W OULD NOT STAND DISSOLVED ON THE DEATH OF A PARTNER BUT THE SURVIVING PARTNER OR PARTNERS WOULD SUCCEED TO THE SHARES OF THE DECEASED PARTNER. THIS CLAUSE REQUIRED THE SURVIVING PARTNERS TO PAY TO THE LEGAL REPRESENTATIVE OF THE DECEASED PARTNER, AS THE PRICE OF SUCH SHARE, THE FOLLOWING AMOUNTS: A) THE AMOUNT, IF ANY, STANDING TO HIS CREDIT IN TH E BOOKS OF THE PARTNERSHIP; B) THE AMOUNT OF HIS SHARE IN THE NET PROFITS ACCRU ED UPTO THE DATE OF HIS DEATH; C) THE AMOUNT OF HIS SHARE IN THE NET PROFITS ACCRU ED DUE FOR A PERIOD OF ONE YEAR FROM THE DATE OF HIS DEATH, IF T HE PARTNERSHIP SUBSISTED FOR SUCH PERIOD; AND D) THE AMOUNT OF HIS SHARE IN THE RESERVE FUND WITH ALL ACCUMULATIONS OF INTEREST, IF ANY, UPTO THE DATE OF HIS DEATH. THIS CLAUSE 18 OF THE PARTNERSHIP DEED ALSO PROVI DED, INTER-ALIA, THAT THE FIRM WOULD STAND DISSOLVED IF THE SURVIVING PARTNE RS DID NOT DESIRE TO TAKE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 41 OVER THE SHARE OF THE DECEASED PARTNER AND TO CONTI NUE THE BUSINESSES. THE CONDITIONS CONTAINED IN THIS CLAUSE 18 OF THE DEED WERE SIMILAR TO THOSE OF CLAUSE 15 OF A LATER PARTNERSHIP DEED DRAWN UP, ON THE DEATH OF THE PARTNER. THE CONDITION OF PAYMENT OF AMOUNT OF THE SHARE OF THE DECEASED PARTNER IN THE NET PROFITS ACCRUED DUE FOR A PERIOD OF ONE YEA R FROM THE DATE OF HIS DEATH, UNDER CLAUSE 18(C) OF THE ERSTWHILE DEED, W AS THE SAME AS THAT ENVISAGED UNDER CLAUSE 15(C) OF THE FRESH DEED. THIS WAS THE AMOUNT PAYABLE TO THE LEGAL HEIRS AS THE PRICE OF THE SHARE OF THE DECEASED PARTNER. 48. IT IS PERTINENT TO NOTE THAT NEITHER OF THE PARTNERSHIP DEEDS MADE IT OBLIGATORY FOR THE SURVIVING PARTNERS TO PAY THE AM OUNT. IT WAS TO BE PAID ONLY IN CASE THEY WANTED TO TAKE OVER THE SHARE OF THE DECEASED PARTNER AND TO CONTINUE THE PARTNERSHIP BUSINESS. 49. THEIR LORDSHIPS OF THE HONBLE BOMBAY HIGH COUR T OBSERVED THAT THESE FACTS CLEARLY INDICATED, THAT WHAT WAS PAID U NDER CLAUSE 18(C) OF THE FIRST PARTNERSHIP DEED AND CLAUSE 15 OF THE SECOND PARTNERSHIP DEED WAS BY WAY OF PRICE OF THE SHARE OF THE DECEASED PARTNER. IT WAS HELD, INTER-ALIA, THAT CLAUSES 18(C) AND 15 OF THE TWO PARTNERSHIP DEEDS R ESPECTIVELY PUT AN OBLIGATION ON THE SURVIVING PARTNERS TO PAY CERTAIN AMOUNTS BY WAY OF PRICE OF THE SHARE OF THE DECEASED PARTNER TO HIS LEGAL R EPRESENTATIVE (PAGE 203, PLACITUM A OF THE REPORT). ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 42 50. IT WAS ON THE BASIS OF THE ABOVE AND ON THE BAS IS OF THE FACT THAT IN ACCORDANCE WITH EVEN CLAUSE 18 OF THE FIRST DEED, T HE PAYMENT WAS NOT TO BE MADE IMMEDIATELY AND IT COULD BE DEFERRED, THAT APP LYING SITALDAS TIRATHDAS (SUPRA), THEIR LORDSHIPS HELD THAT IT WAS A CASE OF APPLICATION OR APPORTIONMENT OF INCOME AND NOT OF DIVERSION BY OVE RRIDING TITLE, AND THAT THE FACT THAT THE APPLICATION WAS DONE SO AS TO DIS CHARGE AN OBLIGATION UNDERTAKEN BY THE ASSESSEE MADE NO DIFFERENCE. 51. NOW, AS DISCUSSED, IN THE PRESENT CASE, THE PA RTNERSHIP DEED NOWHERE STIPULATED THAT THE AMOUNT TO BE PAID WAS TO BE PAI D BY WAY OF THE PRICE OF THE SHARE OF THE OUTGOING PARTNER IN THE PARTNERSHI P. THIS IS THE MATERIAL POINT OF DIFFERENCE BETWEEN THE FACTS HEREIN AND TH OSE ATTENDING V.G. BHUTA (SUPRA). TO REITERATE, IN SITALDAS TIRATHD AS (SUPRA), THE HONBLE SUPREME COURT HAS ENUNCIATED THAT THE TRUE TEST FO R THE APPLICATION OF THE RULE OF DIVERSION OF INCOME BY OVERRIDING CHARGE, IS THE NATURE OF THE OBLIGATION. WHERE THE AMOUNT IS OBLIGATED TO BE A PPLIED OUT OF INCOME, THE PAYMENT CANNOT BE EXCUSED FROM BEING TAXED. IT IS PRECISELY SUCH AN OBLIGATION IN V.G. BHUTA (SUPRA), AS DISCUSSED AB OVE, WHICH, IF WE ARE PERMITTED TO SAY SO IN THE HIGHER WISDOM OF THEIR L ORDSHIPS, THAT ELICITED THE DECISION THEREIN. WE LEAVE THIS ASPECT OF THE MATTE R AT THAT, REITERATING, ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 43 HOWEVER, THAT THE CASE BEFORE US FULLY PASSES THE T EST LAID DOWN IN SITALDAS TIRATHDAS (SUPRA). 52. THE LD. CIT(A) HAS FURTHER PLACED RELIANCE ON T HE DECISION OF THE MUMBAI BENCH TRIBUNAL DECISION IN S.B.BILLIMORIA A ND CO. VS. ACIT, 125 ITD 122 (MUM). IN THAT CASE, THE DECISION OF THE TR IBUNAL WAS BASED ON THE FINDING THAT THE DATES OF RETIREMENT OF THE PARTNER S HAD ALREADY BEEN FIXED IN THE PARTNERSHIP DEED AND THAT THE RETIREMENT WAS, T HEREFORE, A PRE-DETERMINED EVENT. THE AMOUNTS PAYABLE TO THE RETIRING PARTNERS WERE A PERCENTAGE OF THE SUBSEQUENT YEAR PROFITS OF THE FIRM. AS SUCH, THE PAYMENTS WERE TO BE MADE FROM THE SUBSEQUENT PROFITS OF THE FIRM, IF ANY. TH E AMOUNT PAYABLE ON RETIREMENT WAS, HENCE, NOT FIXED ON THE RETIREMENT OF THE PARTNER. THESE FACTS OF S. B. BILLIMORIA & CO. (SUPRA), ARE NOT AT PARITY WITH THOSE OF THE PRESENT CASE. HEREIN, AS NOTED, THE AMOUNT WAS DETE RMINED AT THE TIME OF RETIREMENT. THUS, IN THE PRESENT CASE, THERE IS NO SHARING OF FUTURE PROFITS. RATHER, IT IS A CASE OF DIVERSION OF INCOME BY OVER RIDING TITLE. 53. FURTHER, IN RSM & CO. VS. ADDL. CIT, 125 IT D 243 (MUM), THE ASSESSEE WAS A FIRM OF CHARTERED ACCOUNTANTS. IN TE RMS OF THE PARTNERSHIP DEED, THERE WAS OBLIGATION ON THE ASSESSEE-FIRM TO PAY RETIREMENT BENEFITS TO RETIRING PARTNERS FOR A PERIOD OF FIVE YEARS. DURIN G THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE MADE CERTAIN PAYMENTS TO RETIRIN G PARTNERS AND CLAIMED ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 44 DEDUCTION FOR THE SAME. IT WAS HELD THAT THERE WAS A DIVERSION OF INCOME TO THE EXTENT OF THE RETIREMENT BENEFITS PAID TO THE RETIRED PARTNERS AND, THEREFORE, THE AMOUNT SO PAID WAS NOT INCLUDIBLE I N THE TAXABLE INCOME OF THE ASSESSEE. 54. IN ACIT VS. CC CHOKSHI & CO., 2010 TIOL 328 ( MUM), THE ASSESSEE PAID CERTAIN AMOUNTS TO EX-PARTNERS AND TO THE WIVES OF DECEASED PARTNERS. HOWEVER, THESE AMOUNTS WERE NOT INCLUDED IN THE PROFITS OF THE FIRM. BEFORE THE AO, THE ASSESSEE SUBMITTED THAT I N VIEW OF THE STIPULATIONS OF THE PARTNERSHIP DEED, THE EX-PARTNERS AND THE WI VES OF THE DECEASED PARTNERS HAD AN OVERRIDING TITLE OVER THE INCOME OF THE FIRM. THE TRIBUNAL FOLLOWED THE EARLIER TRIBUNAL DECISION IN ASSESSEE S OWN CASE, WHEREIN SITALDAS TIRATHDAS (SUPRA) WAS RELIED ON, TO HOLD THAT IN CASE BY SOME OBLIGATION, INCOME IS DIVERTED BEFORE IT REACHES TH E ASSESSEE, THE AMOUNT IS TAXABLE; AND THAT AS PER THE RELEVANT CLAUSES OF TH E PARTNERSHIP DEED, THERE WAS AN OBLIGATION AND INCOME HAD BEEN DIVERTED BEFO RE IT REACHED THE ASSESSEE AND IT WAS NOT A CASE OF APPLICATION OF IN COME, AS IN SITALDAS TIRATHDAS. THE DEPARTMENTS APPEAL WAS DISMISSED B Y THE HONBLE HIGH COURT. 55 IN A.F. FERGUSON & CO. VS. ACIT, 2011 TIOL 60 4 (ITAT-MUM) ALSO, IT WAS HELD THAT PAYMENTS MADE TO THE WIVES OF THE DECEASED PARTNERS ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 45 IN TERMS OF THE PARTNERSHIP DEED, HAS AN OVERRIDIN G EFFECT OVER THE INCOME OF THE FIRM AND HENCE, IT IS A CASE OF DIVERSION OF INCOME BY OVERRIDING TITLE, ALLOWABLE AS A DEDUCTION AND NOT ONE OF APPLICATION OF INCOME, AS IN SITALDAS TIRATHDAS. 56. IT HAS RIGHTLY BEEN POINTED OUT THAT ALL THE TH REE LAST MENTIONED CASES ARE POST S.B. BILLIMORIA AND CO. (SUPRA). 57. APROPOS CIT VS. IMPERIAL CHEMICALS INDUSTRIES (INDIA) PVT. LTD, 74 ITR 17 (SC), WHICH WAS RELIED ON BY THE AO, AT THE OUTSET, THE SAME IS NOT APPLICABLE. THEREIN, THE TRIBUNAL HAD FOUND THA T THERE WAS NO EVIDENCE OF ANY AGREEMENT REGARDING THE PAYMENT IN QUESTION. IT WAS, THEREFORE, THAT THE CLAIM WAS DISALLOWED. 58. CIT VS. TRAVANCORE SUGARS & CHEMICALS LTD., 9 0 ITR 307 (KER), WAS, OBVIOUSLY, WRONGLY RELIED ON BY THE AO. IN THA T CASE, THE ASSESSEE, A PUBLIC LIMITED COMPANY, CARRIED ON THE BUSINESS OF MANUFACTURING SUGAR, RUNNING SUGAR, RUNNING A DISTILLERY AND A TINCTURE FACTORY IN THE STATE OF KERALA. IT ENTERED INTO AN AGREEMENT WITH THE GOVER NMENT OF TRAVANCORE, WHEREBY THE GOVERNMENT AGREED TO SELL CERTAIN OF IT S BUSINESS ASSETS TO THE ASSESSEE. CLAUSE-7 OF THE AGREEMENT PROVIDED THAT T HE GOVERNMENT WOULD BE ENTITLED TO TEN PERCENT OF THE NET PROFITS OF THE C OMPANY EVERY YEAR. FOR THE PURPOSES OF THE CLAUSE, NET PROFITS WOULD MEAN THE AMOUNT FOR WHICH THE ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 46 COMPANYS AUDITED PROFITS IN ANY YEAR WERE ASSESS ED TO INCOME-TAX IN THE STATE OF TRAVANCORE. IN ACCORDANCE WITH THE TERMS O F THE AGREEMENT, THE ASSESSEE PAID CERTAIN SUMS TO THE GOVERNMENT AND CLAIMED TO DEDUCT THEM. IT WAS HELD THAT THE EXPRESSION NET PROFITS REFER RED TO IN CLAUSE-7 OF THE AGREEMENT WAS NOT PROFITS AND GAINS OF BUSINESS WITHIN THE MEANING OF THE INDIAN INCOME-TAX ACT, 1922, OR THE INCOME-TAX ACT, 1961, BUT ONLY FOR THE PURPOSE OF DETERMINING THE AMOUNT PAYABLE TO THE GO VERNMENT TO ENABLE THE ASSESSEE TO EARN THE NET PROFITS. IT WAS HELD THAT THE EFFECT OF CLAUSE -7 WAS TO PROVIDE FOR A PARAMOUNT CONTRACTUAL CHARGE OVER TH E NET PROFITS OF THE COMPANY ASCERTAINED IN ACCORDANCE WITH ITS TERMS. A CCORDINGLY, THE PAYMENTS WERE HELD LIABLE TO BE DEDUCTED. THE AO H AS NOT SHOWN AS TO HOW THIS DECISION RUNS COUNTER TO THE CASE OF THE PRESE NT ASSESSEE. 59. IN VIBHUTI GLASS WORKS VS. CIT, 177 ITR 439 ( SC), THERE WAS AN ARRANGEMENT WHEREBY THE STATE GOVERNMENT RAN BUSINE SS AS A MANAGER. ONE HALF SHARE OF THE PROFIT WAS TO GO TO THE GOVERNMEN T, IN CASE PROFITS EXCEEDED THE PRESCRIBED LIMIT. THE SAID PRESCRIBED LIMIT HAV ING NOT REACHED, IT WAS HELD THAT THE ENTIRE PROFIT WAS TO BE TAXED IN THE HANDS OF THE ASSESSEE PUBLIC COMPANY. IT WAS HELD THAT THERE WAS NO QUESTION OF ANY DIVERSION OF THE WHOLE OR ANY PART OF THE PROFIT. AGAIN, THE AO HAS FAILED TO RECORD ANY ITA NO.7324/MUM/2013 & ITA NO.1014/MUM/2013 47 PARITY BETWEEN THE FACTS OF THAT CASE AND THOSE DOI NG THE ROUNDS IN THE PRESENT ONE. 60. FOR THE ABOVE DISCUSSION, WE DO NOT FIND THE O RDER OF THE LD. CIT(A) ON THIS ISSUE TO BE SUSTAINABLE IN THE EYE OF LAW. THE SAME IS, AS SUCH, SET ASIDE AND CANCELLED. 61. ACCORDINGLY, FOR ASSESSMENT YEAR 2009-10 ALSO, GROUND NOS. 4 TO 7 ARE ACCEPTED. 62. GROUND NO.8 STANDS ANSWERED BY OUR FINDINGS ON GROUND NOS. 1 TO 3 AND 4 TO 7. 63. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH OCTOBER, 2015. SD/- SD/- (N.K. BILLAIYA) (A.D. JAIN) ACCOUNTANT MEMEBR JUDICIAL MEMBER DATED: 07/09/2015 COPY OF THE ORDER, FORWARDED TO : 1. THE ASSESSE :M/S. WADIA GHANDY & CO. MUMBAI. 2. THE ADDL. CIT, R-11(3), MUMBAI 3. THE CIT(A), MUMBAI-7 & 2 4. THE CIT, MUMBAI 5. THE SR DR ITAT, MMBAI TRUE COPY FIR FOR PUBLICATION (AM) (JM)