2011 (4) TMI 878 - HC - Income Tax

Relinquishment of tenancy rights - whether a Capital receipt? - reopening of assessment -Held that - As decided in Commissioner of Income Tax versus D P Sandu Bros. Chembur P. Ltd. 2005 (1) TMI 13 - SUPREME COURT the money or income derived from relinquishment of tenancy right is capital receipt and cannot, therefore, be subjected to payment of income tax. In view of the foregoing discussion, quashing the order of assessment, the impugned notice u/s 148 has become infructuous and has to be quashed - Appeal decided in the favour of assessee

Summary

Issues:
Taxation of income from relinquishment of tenancy rights under the Income Tax Act 1961.

Analysis:

Issue 1: Taxation of income from relinquishment of tenancy rights

The case involved a partnership firm engaged in the business of manufacturing tiles and other cement products, which had relinquished its tenancy rights in exchange for a sum of money. The firm had initially declared the income from the relinquishment of tenancy rights as a capital receipt in its income tax return. The assessing officer, commissioner, and tribunal had all accepted this declaration. However, the firm received a notice under section 148 of the Income Tax Act, leading to a challenge in the High Court. The petitioner argued that the income in question should not be taxed based on relevant legal judgments, including a Division Bench judgment and a Supreme Court judgment. The court examined the agreement between the partnership firms and the Samiti, concluding that the income derived from relinquishment of tenancy rights constituted a capital receipt and was not liable to income tax. The court relied on previous judgments to support its decision, ultimately setting aside the order of assessment and quashing the notice issued under section 148 of the Act.

Issue 2: Validity of the impugned order of assessment

The court considered the validity of the impugned order of assessment, which was challenged by the petitioner. The Senior Standing Counsel for the Department argued that the petitioner's declaration in the income tax return was vague and had escaped the attention of the authorities. Additionally, it was contended that the order of the Settlement Commission would only bind the parties before the Commission. The court examined the issues framed by the Supreme Court and the substantial questions of law raised in the case. After reviewing the submissions and the materials on record, the court found that the income from relinquishment of tenancy rights was a capital receipt, in line with previous judgments. Consequently, the impugned order of assessment was set aside, and the notice issued under section 148 was quashed.

Conclusion:

The High Court ruled in favor of the petitioners, holding that the income derived from relinquishment of tenancy rights was a capital receipt and not subject to income tax. The court set aside the order of assessment and quashed the notice issued under section 148 of the Income Tax Act. The judgment provided a detailed analysis of the legal principles involved and relied on relevant precedents to support its decision. As a result, the petitioners succeeded in their challenge against the tax assessment on the income from relinquishment of tenancy rights.