Payments to Retired Partners as per Deed Are Prior Charges on Deloitte’s Gross Fees; Not Taxable as Income | ITAT

Case Details: Deloitte Haskins and Sells LLP vs. National E Assessment Centre - [2024] 163 taxmann.com 717 (Mumbai-Trib.)

Judiciary and Counsel Details

• • Girish Agrawal, Accountant Member & Sunil Kumar Singh, Judicial Member
  • J.D. Mistry & Niraj Sheth for the Appellant.
  • Ms Sanyogita Nagpal, CIT, DR for the Respondent.

Facts of the Case

The assessee is a limited liability partnership firm of chartered accountants that provides professional assurance and taxation services to domestic and international clients. The assessee follows a cash system of accounting. During the assessment proceedings, the Assessing Officer (AO) noticed certain payments were made to the retired partners.

For such payments, the assessee contended that income with respect to professional fees gets booked only on receipt of professional fees from the client. This practice results in a considerable amount of income, either unbilled or billed but not received, for which time was devoted and efforts were made when retired partners were active in the firm. Accordingly, the payments were made in terms of the clauses of the partnership deed and other relevant documents the assessee submitted by the assessee.

Unsatisfied by the reply, AO disallowed the expenses claimed by assessee and made additions to the income.

On appeal, CIT(A) upheld the AO’s order. Aggrieved by the order, the assessee filed an appeal before the Mumbai Tribunal.

ITAT Held

The Tribunal held that, in terms of the clauses of the partnership deed and other relevant documents, there was a prior charge in respect of payments due to the retired partners on the gross fees received by the continuing firm. Owing to the prior charge arising from the terms and provisions of the partnership deed, the sum payable to the retired partners is diverted by way of superior title.

The firm paid retired partners according to their partnership deed. The basis was that the partner would have rendered their professional services during their partner tenure but could not enjoy the fruits thereof because work had remained incomplete.

The identical issue was dealt by the co-ordinate Bench of ITAT wherein the addition so made was deleted because it was held to be an instance of the source of income being subject to an obligation. Thus, the outstanding fees paid to the retiring partners as per the terms of the deed of retirement were held and were not assessable as the firm’s income.

Considering the facts on record along with the documentary evidence, the assessee’s appeal was allowed.

List of Cases Referred to

• • CIT v. C.C. Chokshi & Co. ITA No.209 (para 7.6)
  • S.B. Billimoria & Co. v. Asstt. CIT [2010] 125 ITD 122 (Mumbai) (para 8)
  • ACIT v. Deloitte Haskins & Sells ITA No.2077/MDS/2016/ITA No. 1517/CHN/2017 (para 10)
  • C.C. Chokshi & Co. v. JCIT ITA No. 492-495/Mum/2003 (para 9.2)
  • CIT v. Mulla & Mulla & Craigie Blunt & Caroe [1990] 54 Taxman 192/190 ITR 198 (Bombay) (para 9.2)
  • CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) (para 9.3).