2019 (2) TMI 457 - HC - Income Tax

Revision u/s 263 - amount received by the partner after retirement from the partnership firms - assessee declared total income at Nil - CIT observed that not taxing the partner on the retirement compensation, is erroneous and prejudicial to the interest of the Revenue - Held that - Assessing Officer had made necessary enquiries with regard to the amounts received by the Respondent on its retirement in the context of taxability on account of capital gains of the amounts received on retirement by the Respondent. Thus, the contention of the Revenue that, no enquiry was done by the Assessing Officer with regard to the compensation received, stands negatived by the office note annexed to the Assessment Order dated 26th December, 2011. In any event, the issue on merits in our view, is covered by the decision of this Court in Prashant S. Joshi 2010 (2) TMI 271 - BOMBAY HIGH COURT , even though the order was in the context of reopening notices. It was in the above context, the Court examined the scope of Section 45(4) of the Act to hold that in terms thereof, on dissolution of the firm or otherwise, the capital gains arising from transfer of a capital asset, would be chargeable to tax as income of the firm. Revision order u/s 263 is not valid - Decided against the revenue.

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 regarding the taxability of amounts received by the Respondent on retirement from two partnership firms.

Analysis:
The main issue in this case was whether the amounts received by the Respondent on retirement from two partnership firms were taxable as capital gains under Section 45 of the Income Tax Act, 1961. The Respondent had retired from the firms after revaluation of business assets and introduction of a new partner. The Assessing Officer initially determined the Respondent's income as 'Nil' and accepted that the retirement amounts were not taxable. However, the Commissioner of Income Tax issued a notice under Section 263 seeking to revise this decision, arguing that the amounts received on retirement should be taxed as capital gains. The Commissioner relied on previous court decisions to support this position.

The Tribunal, in its impugned order, held that the Assessing Officer's decision not to tax the retirement amounts was in line with Supreme Court decisions and precedents. It noted that the Assessing Officer had considered the facts and applicable law before reaching the decision. The Tribunal also pointed out the conflicting views on the taxability of retirement amounts, emphasizing that the Assessing Officer had taken one of the permissible views. Therefore, the Tribunal set aside the Commissioner's order and restored the Assessing Officer's decision.

During the proceedings, the Revenue argued that the retirement amounts should be taxed as capital gains based on the relinquishment of the Respondent's interest in the firms. However, the Court found that the Assessing Officer had conducted necessary inquiries regarding the taxability of the retirement amounts, contrary to the Revenue's claim. The Court also highlighted that the reliance on a previous court decision by the Revenue was incorrect as it had been reversed by the Apex Court.

The Court further referenced a previous case to support its decision, emphasizing that there was no transfer of a capital asset in the present case. It also noted that the Commissioner had relied on a Tribunal decision that was based on a reversed court decision. Ultimately, the Court concluded that the Assessing Officer's decision was valid and not subject to revision under Section 263 of the Act.

In conclusion, the Court dismissed the appeal, stating that the Tribunal's decision to set aside the Commissioner's order and uphold the Assessing Officer's decision was appropriate. The Court found no substantial question of law arising from the case and rejected the appeal without costs.