While granting tax relief to a leading law firm in India, the Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the payment made by the assessee-firm to retiring partners and legal heirs of the deceased partners in terms of the Partnership Deed is excludable from the total income of the firm.
The assessee, Mulla & Mulla & Craigie Blunt & Caroe, is a reputed law firm in India. During the year under consideration, the firm claimed a deduction of Rs. 19,58,337/- on account of payment made to retiring partners and legal heirs of the deceased partners.
The Assessing Officer observed that these payments should not be allowed since the overriding title had been created voluntarily by the assessee firm itself and an overriding title cannot be created suo-moto or voluntarily as per law.
The assessee claimed that this payment was made in terms of a Partnership Deed and was in the nature of diversion of income by overriding title as income to that extent never accrued to the assessee-firm but always belonged to the retiring partners and legal heirs of the deceased partners.
On appeal, Tribunal held that in sum and substance the only difference is that in old agreement amounts payable to the retiring partners and legal heirs were not quantified and it only prescribed a method for quantification of amount, whereas in the new agreement the amount to be paid to the partners on retirement and otherwise is duly quantified.
“The new agreement clearly spells out that the liability to pay income tax on the 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 beneficiaries 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 was to be set-aside at the threshold from the receipts of the firm and will, thus, not reach the hands of the other partners of the firm and, therefore, cannot be treated as income of the assessee-firm who has merely acted as a pass-through entity for this payment. We, accordingly, set aside the order of CIT(A) and direct the Assessing Officer to allow the exclusion of Rs.19,58,337/-on account of payment made to retiring partners and legal heirs of the deceased partners,” the Tribunal said.
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