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01-03-2019, K.Venkatachalam, Section 37, Tribunal Cochin

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2 months 2 weeks ago #8722 by amit
Section - 37
Order Date - 01-03-2019
Favouring - Assessee
Court - Tribunal Cochin
Appellant - K.Venkatachalam Aiyer & Co.
Respondent - DCIT
Justice - Chandra Poojari, AM & George George K, JM
Citation - 219Taxpundit152
Appeal No. - ITA No.90/Coch/2018
Asstt. Year - 2010-2011


PER : George George K, JM

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 01.02.2018. The relevant assessment year is 2010-2011.

2. The solitary issue that is raised is whether the CIT(A) is right in confirming the assessment order, wherein an amount of Rs.19,45,455 paid to the legal heirs of one of the deceased partners was disallowed.

3. The brief facts of case are as follows:-

The assessee is a firm of Chartered Accountants. For the assessment year 2010-2011, the return of income was filed on 30.09.2010 disclosing a total income of Rs.29,06,860. The return of income was processed u/s 143(1) of the I.T.Act on 18.05.2011 accepting the total income disclosed. Subsequently, notice was issued u/s 143(2) of the I.T.Act was issued on 29.08.2011. In the course of assessment proceedings, it was noticed that the assessee-firm had debited a sum of Rs.19,45,455, towards the sum paid to the legal heirs of one of the deceased partners, Shri K.L.Kulathu. The Assessing Officer while completing the assessment u/s 143(3) of the I.T.Act (order dated 19.12.2012) held that the above said payment is a diversion of income. Further, the A.O. held that payment cannot be stated to be for the purpose of business of the assessee-firm and added back to the total income a sum of Rs.19,45 455

4. Aggrieved by the assessment order, the assessee preferred appeal to the first appellate authority. The CIT(A) confirmed the disallowance made by the Assessing Officer. The CIT(A) held that the case laws relied on by the assesseefirm is distinguishable on facts since in those cases the payments were made to the ex-partners and not to the legal heirs of the deceased partners. Further, the learned CIT(A) by relying on clause 24 of the partnership deed dated 31.12.2007 was of the view that there was no necessity of payment of Rs.19,45,455 to legal heirs of the deceased partners. It was further concluded by the learned CIT(A) that the payment of Rs.19,45,455 to the legal heirs of one of the deceased partners is not a business expenditure of the assessee-firm. The relevant finding of the learned CIT(A) reads as follows:-

“3. I carefully examined the facts of the case and also gone through the decisions relied on by the assessee. The decisions relied on by the assessee are not applicable to the case of the assessee since the Hon'ble ITAT decisions are on partners who retired but not on legal heirs as in the case of the assessee. Hence, the reliance is totally misplaced. The other argument of the assessee that the legal heirs were paid as per the Partnership Deed If this is what the fact then clause 24 of the Partnership Deed only is applicable to the assessee as per which the legal heirs are entitled only for a sum of Rs.3,000/- per month for a period of 3 years from the date of death of the deceased partner. As per this clause, the assessee may claim a sum of Rs.36,000/- only for the year under consideration and this is subject to the maximum period of 3 years and the partner dies during his continuation as a partner in the firm. This apart, whatever the payment the assessee claimed to have made to the legal heirs of the deceased partner, the same should necessarily be paid in accordance with the provisions of section 37 of the Act. As per section 37, the amount which is to be debited to the profit & loss account should have been incurred wholly and exclusively for the purpose of business and towards earning of income during the course of business carried out during the year under consideration. The amount which was paid to the legal heirs in the instant case literally fails to fulfill both the important conditions contemplated in the Act and thereby disentitle the assessee to make the claim. To my understanding of the whole issue, the assessee still pay the amount to the legal heirs but after paying tax on the gross earning. The assessee could have paid to the legal heirs from the amount still left with but after paying the tax. Resorting to making the payment prior to paying the tax had resulted in a condition wherein neither the provisions

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