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4.1 By virtue of an agreement dt. 1st Jan., 1978 between Deloitte Haskins & Sells International and Gupta Choudhary & Ghosh, Calcutta, the partners of Gupta Choudhary & Ghosh were allowed to practice in the name of Deloitte Haskins & Sells in India. Accordingly, partners of Gupta Choudhary & Ghosh formed a partnership in the name of Deloitte Haskins & Sells in India (DH&S). Consequent upon the merger of practices of DH&S and Touche & Ross internationally, a regional meeting of Deloitte Ross & Tohmatsu (DRT) International was held on 5th April, 1990 in Hong Kong where the representatives of DRT International, DH&S and TR firms in India were present. At the said meeting, DRT International representatives proposed the merger of DH&S and TR firms in India in keeping with the international trend. In view of the fact that the Indian laws permitted formation of a firm with not more than twenty partners, total merger was not considered feasible. In the circumstances, an 'Umberalla Firm' was formed with the representative partners of DH&S and TR firms. It was decided that the respective firms joining the Urnberalla Firm would nominate partners to the other firms.

4.2 KA became partner of DHS on 4th Sept., 1991 along with two other firms namely GCG and PCH. Later on the partners of FR, one of the TR firms also agreed to join the said merger. A Memorandum of understanding (MoU) was then executed on 1st June, 1992 between the constituent firms namely KA, FR, GCG, PCH and the firm DHS was reconstituted. This MolJ postulated nomination of partners by member firms as under:

  GCG    5 Partners
PCH    4 Partners
KA     3 Partners
FR     3 Partners

The Mou contains clauses for rendering professional services in the name of DHS which inter alia, provided that for services rendered by the respective constituent firms for the work of DHS India, these would be entitled to fees commensurate with the work done as mutually agreed.

11. Shri Anoop Sharma, the learned advocate for the assessee also made detailed submissions. He reiterated the submissions made before the AO as well as the learned CIT(A). The DTTI itself does not practice as a chartered accountant firm. It is more like a federation constituted by principal firms practicing in various countries of the world including India. This is the usual pattern followed by other being accounting firms world over. DHS is a firm of chartered accountants duly registered with Institute of Chartered Accountants of India. DHS is a permanent member of DTTI. By arrangement between four Indian concurrent member firms of DTTI, they joined together to form a single partnership firm in the name of DHS wherein three of the existing partners of KA were nominated as the partners of DHS. All the foreign clients referred by various DTTI member firms were serviced by DHS which collected the fee from them for the services rendered. However, since DHS did not have any infrastructure of its own, the services were provided by four Indian firms and out of the gross fees collected by DHS almost 80 to 90 per cent was paid to the respective firms who were providing the actual services. In a way the assessee herein had two distinct sources of income i.e. (1) from its own clients services since 1952 and (2) the services rendered to international clients referred by DTTI. It is an usual practice with the international accounting firms to refer clients in their countries to DTTI member linns when the international companies decide to set up operations in other countries. The requirement of services to be rendered to international companies was in a many way different than that rendered to the Indian clients. Such international clients were required to be serviced in the specialized field like foreign taxation, tax treaties, FERA regulations etc. KA created separate infrastructure to serve foreign clients and two partners were fully deployed to serve them exclusively. Even the audit managers were sent to USA to work with DTTI members for specialized training in the field of audit.

12. We have considered the rival submissions, facts of the case and the case law cited are perused. The only question is to be decided is whether the amount received by the assessee from DTTI in terms of release agreement with DTTI is capital or revenue receipt chargeable to tax. As per the facts noted earlier the assessee is a firm of chartered accountants practicing the profession of accountancy. The assessee firm joined DTTI as concurrent member of DTTI. Three of the assessee's partners were nominated as partners of DHS. Pursuant to this arrangement DTTI referred their international clients for the work to be carried in India or elsewhere to the assessee herein. This boosted the Revenue of the assessee. Due to reorganization of DTTI worldwide its representative firm in India namely DHS was also to be reorganized. However, the assessee was not keen to lose its identity and to transfer its clients to DHS and merge into one big firm since there was no understanding in this regard. DTTI therefore, wrote to the assessee to withdraw from DHS partnership. The letter issued in this regard is extracted hereunder: