ITAT, MUMABI BENCHES ‘F’, Deductibility of payments made to retiring partners

Deductibility of payments made to retiring partners



The payments made to the retiring partners is not allowable as a deduction while computing the profits of the firm being the payments made on capital account.



ITAT, MUMABI BENCHES ‘F’, MUMBAI

S. B. Billimoria & Co.

v.

ACIT

ITA No. 2897/Mum/2006

December 19, 2008

RELEVANT EXTRACTS:

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18. The question to be decided is whether the payment to such retiring partners have been made on capital account or the same is a charge on the income of the firm being diverted by overriding charge. Reading the terms of the agreement entered into between the parties on 30-03-2000, in continuation with the agreement entered into on 30-3-2001, it transpires that certain events were taken care of as certainty by the parties. The retirement of Mr. Philp, Mr. Merchant was a certainty as provided in clause 24(b) of the deed dated 30-3-2000. Special terms were agreed between the parties in connection with the retirement of certain partners and in connection with the retirement of other partners of the firm. In respect of Mr. Philp and Mr. Merchant, as per clause 21(b) &(c), the maximum annual payments were provided as is evident from the perusal of our observations in the paras hereinabove. In the circumstances, where the assessee has by its own motion acted on certain terms and conditions with regard to the payments to be made to specified persons on the happening of an event on a particular date, cannot be held to be a charge of its income. The parties cannot pre-determine every event and then claim that one of this event creates overriding charges, especially so when such events were within their control. In the facts and circumstances of the case we are of the view that the payments made to the retiring partners in consensus with the terms and conditions agreed upon between the parties to the agreement are in the nature of an obligation voluntarily agreed to and such an obligation cannot be diversion by an overriding charge. Accordingly, we hold that the payments made to retiring partners is not allowable as a deduction while computing the profits of the firm being payments made on capital account.

19. The Learned AR for the assessee had relied on the decision of the co-ordinate bench of the Tribunal in the case of M/s. C. C. Chokshi & Co. vs. JCIT (supra). From the perusal of the facts in para 9 wherein clause 22 of the partnership deed has been incorporated it transpires that the amounts have been paid to the retiring partners on account of the following:

(a) (i) amounts billed, but not received

  (ii) work completed, but not billed, and

(iii) Work partly completed and not billed as at the date of death of retirement, as the case may be, having regard to the facts that the partnership follows the cash system of accounting, and

(b) (i) in consideration of the retiring partner or the legal representative of the deceased partner, as the cas may be, permitting the continuing partners the use of the firm name of C. C. Chokshi & Co. to carry on the profession, along with the clientele and the attendant rights of the firm.

(ii) the contribution made by the surviving partner or the deceased partner as the case may be during his association with the Firm, in increasing the future income earning potential of the Firm, the benefits thereof are likely to be reflected in the receipt of the firm for a reasonable number of years immediately following the retirement or death of the partner, and

  (iii) the restrictive covenants contained in clause 26 hereof from engaging in any gainful occupation or in the practice of the profession of accountancy in India after such retirement.

20. However, the covenants of the agreement between the parties before us though there is no embargo on continuation of the profession but the same clause provides that the parties are entitled to carry on business subject to approval of the majority of the partners. In any case, there is an ambiguity with reference to embargo in the clauses of the agreement where in under one clause the parties can not carry on the professional activities in Mumbai and in another clause the parties are restricted from carrying on the professional work in India. However, under both the clauses, the parties can be exempted from such embargo in case of sanction being granted by the majority of the partners. The ratio laid down by the co-ordinate Bench in the case of M/s. C.C. Chokshi & Co. vs. JCIT (supra) is not applicable to the facts of the present case. The expenditure incurred by the assessee by way of payments to the retiring partners is only an application of its income, which is on capital account and not allowable as a deduction. There is no merit in the claim of assessee that it is diversion of income by overriding the charge. We find support from the judgment of Apex Court in CIT v. Sitaldas Tirathdas (supra), wherein it has been held that only such payments ‘ where the obligation to pay flows out of an antecedent and independent title in the former, it would be a case of diversion of income. But, where the obligation is self imposed as gratuitous, it is a case of application of income’. The payment made by assessee to its retiring partners in the facts of the case before us is a self imposed obligation being gratuitous and hence application of income. Accordingly, we disallow the claim of the assessee in respect of the payments made to the retired partners. The ground of appeal raised by the assessee is thus dismissed.

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