2018 (4) TMI 1640 - AT - Income Tax

Reopening of assessment - assessee has received an arbitration award upon relinquishment of her rights in the partnership - Held that - Undoubtedly there is a live link between the information received and the escapement of income. Such reopening of assessment also cannot be said to be on account of change of opinion as the return of income and assessee was processed only u/s. 143(1) wherein the issue of taxability of arbitration award was not considered. A mention in the fine prints can by no stretch of imagination be considered sufficient information given in the original return. Hence there can be no question of change of opinion when no option on the issue was formed in the first place. In our considered opinion CIT (Appeals) has passed a reasonable order by appreciating the facts and law in this regard. Thus we are of the considered opinion that the ld. Commissioner of Income Tax (Appeals) has passed a reasonable order upholding the validity of the reopening. Hence we do not find any infirmity in the same. Hence the assessee s challenge to the reopening fails. On merits of case when the arbitration award was given in consideration of the assessee giving certain rights and interests in assets which included rights and interests in assets which have not even a remote connection with her interest in the firm or the assets of the firm the Arbitration Award cannot be said to be given on account of her retirement from the firm. As rightly observed by the authorities below the accepted practices upon retirement from the firm is that the share in the partnership ship is worked out by drawing of accounts in the manner prescribed by the relevant provision of the partnership law. His/her share in net partnership asset after deduction of liabilities and prior charges is determined and the same is given to him. In the present case no such determination regarding the share of the assessee in the partnership firm has been done. The assessee despite request made in this regard by the AO has not been able to provide the working of the share in the net asset of the firm and has generally stated that it was based on the market value of the asset of the firm. Before the CIT (Appeals) also no detail working has been given except for submitting the valuation report of the assets by way of additional evidence. It is clear that neither the Arbitration award nor the concerned terms made any mention or a declaration or a decision for a finding that the assessee retired from the firm in the year 1997. Neither does the Arbitration Award or Consent Terms anywhere specify that the sum of Rs. 28 crores represents the payment to the assessee for her retirement from P.N.Writer & Co. As a matter of fact the basis of the Arbitration Award was never given. As rightly observed by the CIT(Appeals) that the retirement of a partner from the firm has to be an evident fact and is not required to be indirectly inferred or to be guessed in substance. The assessee has received a consideration in lieu of a composite bundle of conditions which included giving up her rights and interests in assets which have no connection with her interest in the firm or its assets and also for withdrawal of all suits/legal proceedings filed by her against the other persons and against firms and entities owned or controlled by them. Hence we agree with the CIT (Appeals) that it is judicially settled that the special income must be considered in its wider sense. The definition of income is an inclusive one having a wide amplitude. Section 56(1) provides that income of every kind which is not to be excluded from the total income in this Act shall be chargeable to tax income under the head income from other sources if it is not chargeable to income tax under any of the head as specified in section 14. Except for making the claim no detail has been furnished whatsoever by the assessee as to how the receipt from the arbitration award amount to a family settlement. There is no mention whatsoever in the arbitration award as to how the said amount has been determined or that it is a family arrangement. In the absence of any detail thereof the amount received cannot be held to be a receipt on account of family arrangements. Accordingly no infirmity in the order of the ld. Commissioner of Income Tax (Appeals). Accordingly we uphold the same. - decided against assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Taxability of Rs. 28,00,00,000 received under arbitration award.
3. Principles of natural justice and cross-examination rights.
4. Consideration of valuation reports and nature of the received amount.
5. Taxability under section 28(iv) and section 56(1) of the Income Tax Act.
6. Alternative claim of the amount being a family settlement.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee challenged the validity of the reassessment initiated by the Assessing Officer (AO) on the grounds that there was no new material or information to conclude that income had escaped assessment. The Commissioner of Income Tax (Appeals) upheld the reassessment, stating that the AO had reason to believe that income chargeable to tax had escaped assessment based on the information received about the arbitration award. It was noted that the reopening was not due to a change of opinion as the return was processed under section 143(1) without scrutiny. The Hon'ble Supreme Court's decisions in DCIT vs Zuari Estate Development & Investment Co. Ltd and Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd. supported the validity of the reopening.

2. Taxability of Rs. 28,00,00,000 Received Under Arbitration Award:
The assessee contended that the amount received was on account of her retirement from the partnership firm and thus not taxable. The AO and Commissioner (Appeals) disagreed, noting that the arbitration award was a composite settlement for relinquishing various rights, including withdrawal of suits and claims against the firm and related entities, and not specifically for retirement. The award did not mention retirement, and there was no positive balance in the assessee's capital account in the firm, indicating the amount was not for retirement.

3. Principles of Natural Justice and Cross-Examination Rights:
The assessee argued that the AO relied on the statement of Shri Denzil D'Souza without providing an opportunity for cross-examination, violating principles of natural justice. The Commissioner (Appeals) found that the assessee was given a copy of the statement and that the statement merely affirmed facts already gathered by the AO. Thus, the contention was dismissed.

4. Consideration of Valuation Reports and Nature of the Received Amount:
The assessee presented valuation reports of the firm's assets, claiming the award was based on the market value of these assets. The Commissioner (Appeals) noted that no specific working of the assessee's share in the firm's net assets was provided, and the award included consideration for relinquishing rights in unrelated assets. Thus, the amount could not be attributed solely to retirement from the firm.

5. Taxability Under Section 28(iv) and Section 56(1) of the Income Tax Act:
The AO initially held the amount taxable under section 28(iv) but alternatively under capital gains. The Commissioner (Appeals) ruled that section 28(iv) did not apply as the amount was received in cash, referencing the Bombay High Court decision in Mahindra & Mahindra Limited v CIT. However, the amount was held taxable under section 56(1) as "Income from other sources," given the wide definition of income and the nature of the settlement.

6. Alternative Claim of the Amount Being a Family Settlement:
The assessee alternatively claimed the amount was received under a family settlement and thus not taxable. The Commissioner (Appeals) found no evidence or details supporting this claim in the arbitration award or consent terms. The claim was dismissed as it did not arise from the grounds raised and lacked substantiation.

Conclusion:
The appeal was dismissed, upholding the reassessment proceedings' validity and the taxability of the Rs. 28,00,00,000 received under the arbitration award as "Income from other sources" under section 56(1) of the Income Tax Act. The principles of natural justice were deemed followed, and the alternative claim of a family settlement was rejected due to lack of evidence.