2005 (4) TMI 535 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of Rs. 100 lakhs received by the assessee under a settlement agreement.
2. Inclusion of Rs. 20 lakhs payable to the assessee's wife in the settlement amount.
3. Tax treatment of Rs. 23 lakhs already withdrawn by the assessee.
4. Taxability of Rs. 77 lakhs in dispute under the settlement agreement.

Detailed Analysis:

1. Taxability of Rs. 100 lakhs Received by the Assessee:
The core issue revolves around the taxability of Rs. 100 lakhs received by the assessee under a settlement agreement with Mrs. Sundari Ramachandran, one of the partners of M/s. Electronics and Controls. The assessee contended that out of the total sum, Rs. 20 lakhs was agreed to be received towards the retirement of his wife from the group partnership firm, and the balance of Rs. 80 lakhs should be considered as a capital receipt, not liable for taxation. The Assessing Officer, however, treated the entire sum of Rs. 100 lakhs as accruing to the assessee alone and brought it to tax.

2. Inclusion of Rs. 20 lakhs Payable to the Assessee's Wife:
The CIT(A) held that Rs. 20 lakhs receivable by Smt. Srilakshmi Subbaraya, the wife of the assessee, on her retirement from the group partnership firm was not part of the Rs. 100 lakhs settlement. However, the Tribunal disagreed, noting that clause 7 of the settlement agreement explicitly included the amount payable to Smt. Srilakshmi Subbaraya as part of the Rs. 100 lakhs compensation. Therefore, the Tribunal concluded that the sum of Rs. 20 lakhs was indeed part of the settlement agreement.

3. Tax Treatment of Rs. 23 lakhs Already Withdrawn:
The Assessing Officer treated the amount of Rs. 23 lakhs already withdrawn by the assessee as taxable, considering it as an amount in lieu of salary. The CIT(A) upheld this view, treating Rs. 23 lakhs as profit in lieu of salary under section 17(3). However, the Tribunal found that since the entire settlement was still in dispute and subjudice, the amount of Rs. 23 lakhs could not be brought to tax during the year under consideration. The Tribunal applied the principle from the Supreme Court case of Hindustan Housing & Land Development Trust Ltd., which stated that an amount in dispute cannot be treated as income.

4. Taxability of Rs. 77 lakhs in Dispute:
The Assessing Officer had assessed the balance sum of Rs. 77 lakhs on a protective basis, given the ongoing litigation. The CIT(A) held that since the amount was in dispute, it was not taxable during the year under consideration, relying on the Supreme Court decision in CIT v. Hindustan Housing & Land Development Trust Ltd. The Tribunal upheld this view, noting that the entire settlement agreement was in jeopardy, and the right of the assessee to the amount was inchoate.

Conclusion:
The Tribunal concluded that the sum of Rs. 77 lakhs could not be brought to tax during the year under consideration due to the ongoing dispute. Similarly, the amount of Rs. 23 lakhs already withdrawn by the assessee was also not taxable during the year as the right to this amount was still in dispute. Consequently, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed.