Allowability of pension payment to retiring partner in CA Firm. SC refuses to entertain SLP of the ITD against High Court order quashing reopening
ABCAUS Case Law Citation:
ABCAUS 3046 (2019) (07) SC
The petitioner was a partnership firm of Chartered Accountants. For the Assessment Year in question, the return of the assessee was taken in scrutiny.
During such scrutiny assessment, the Assessing Officer (AO) issued Notice and called upon the petitioner to supply various details which were supplied by the petitioner. These details included a copy of Partnership Deed of the petitioner-partnership firm.
Subsequently, the AO issued notice u/s 148 of the Income Tax Act, 1961 (the Act) to reopen the assessment. As per the reasons recorded, the only reason for reopening was that the assessee had directly deducted payment of pension to the retiring partners from Gross Professional receipts reducing its income to the above extent.
The AO recorded that as per partnership deed there was provision for payment for pension to the retiring partners. However, payments to retired partners could not be considered for current business or profession. Further, the AO was of the view that the partners was not employee of the firm but owner of the firm. Therefore, the partners were not entitled to receive pension because, pension was payable only to the employee.
Further the AO recorded that by making provision in partnership deed, the entitlement of income could not be proved because any provision made in partnership deed should have legal entitlement as per the provision of Income Tax Act. Any excess provisions in partnership deed are not allowed in view of provision of section 40(b).
The assessee raised objections to the notice of reopening taking mainly two grounds – one was that there was no failure on the part of the assessee to disclose truly and fully, all material facts. It was highlighted that all facts necessary for assessment were already on record and the notice for reopening, which was issued beyond the period of four years was therefore not valid.
The second ground raised by the petitioner was that even on merits, the objection was not sustainable. The partnership deed had a clause for paying pension to the retiring partners. The payment would depend on nature of work already done by the retiring partner for which payments may not have been received from the clients. It was pointed out that such practice is being followed in similar other firms.
The decisions of several High Courts were cited in support of the contention that the payment was a recognized expenditure and there was diversion of income at source.
The Assessing Officer, however, rejected the objections raised by the assessee against which the petitioner filed petition before the Hon’ble High Court.
The Hon’ble High Court observed that the Assessing Officer had not referred to any material outside the assessment proceedings on the basis of which it could be said that income chargeable to tax had escaped assessment.
The Hon’ble High Court noted that the information on which the Assessing Officer proceeded to form a belief that the said payment was not a recognized deduction, the said payment could not have been allowed to be deduced from the income, was already on the record. The Hon’ble High Court pointed out that this would assume importance in the context of the fact that the impugned notice came to be issued beyond the period of four years from the end of relevant assessment year and the element of true and full disclosure on the part of the assessee would be important.
The Hon’ble High Court further noted that the partnership deed which was on record contained detailed clauses for pension to the retiring partners. Annexure to the deed contained precise details of payments made to one of the retiring partners.
The Hon’ble High Court opined that the Revenue had completely failed in satisfying it that there was any failure on the part of the assessee in disclosing truly and fully, all material facts. From the reasons recorded by the Assessing Officer as well as material produced, it was completely visible that all necessary facts were already on record, duly disclosing and that there was no failure on the part of the assessee in this regard.
The Hon’ble High Court pointed out that if the Assessing Officer had any dispute about deduction of the said sum from the profit of the firm, he could have and ought to have raised such objection during the original assessment. At any rate, on such ground, the assessment framed after scrutiny cannot be reopened beyond the period of four years from the end of relevant assessment year.
In the result, the impugned Notices are set-aside. Petitions are allowed and disposed of.
The Hon’ble High Court clarified that presently it was concerned with the limited issue of reopening of the assessment beyond period of four years from the end of relevant assessment year.
Accordingly, the Hon’ble High Court set aside the impugned Notices and allowed the Petition.
Aggrieved by the judgment of the Hon’ble High Court the assessee had filed a Special Leave Petition (SLP) under Article 136 of the Constitution of India. However, their Lordships declined to entertain the SLP and dismissed it.