The Income Tax Appellate Tribunal (ITAT), Mumbai has held that the payment made to the legal heirs of deceased partners towards share in goodwill is allowable as a deduction under the Income Tax Act, 1961 since the revenue, in the earlier years, had allowed the same.
During the course of the assessment proceedings, the Assessing Officer observed that the assessee-Firm has claimed a deduction of an amount of Rs. 1,57,32,275, towards payment made to legal heirs of deceased partners called upon the assessee to explain why the deduction claimed, should not be disallowed.
The assessee claimed that as per the terms of the partnership deed, the assessee has to pay 5% of the net profit to the retired partners or the legal heirs of the deceased partners on account of the goodwill of the partners. It was submitted since the payment made was for the purpose of business it has to be allowed as an expenditure.
However, the Assessing Officer did not find merit in the submissions of the assessee and disallowed the deduction claimed.
The Tribunal held that the allowability of payment made to the legal heirs of deceased partners towards share in goodwill is a recurring issue between the parties continuing from the preceding assessment years.
“Though the Assessing Officer in the preceding assessment years has made similar disallowance, however, when the issue came up for consideration before the Tribunal, it was held that the payment made to the legal heirs of the deceased partners is allowable as a deduction. In the latest order passed for the assessment year 2011–12 cited supra, the Tribunal following its earlier orders has upheld the decision of learned Commissioner (Appeals) in allowing assessee’s claim of deduction,” the Tribunal said.
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