2008 (5) TMI 310 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of compensation and interest received by the assessee from the US Government.
2. Validity of reassessment proceedings initiated under section 147.
3. Taxability of compensation and interest received as capital or revenue receipt.
4. Addition of Rs. 76,38,650 over and above what the assessee received from the USA towards compensation and post-judgment interest.
5. Application of Article 18(4) of the Constitution of India.

Issue-wise Detailed Analysis:

1. Deletion of Addition by Assessing Officer:
The revenue was aggrieved by the deletion of the addition made by the Assessing Officer, who had treated the compensation and interest received by the assessee from the US Government as taxable income under the head 'Income from salary.' The CIT(A) observed that there was no employer-employee relationship, which is crucial for taxing a receipt under the salary head. The compensation was awarded for the injury caused by denying employment due to discriminatory practices, thus making it a capital receipt. The CIT(A) concluded that the compensation and pre-judgment interest were capital receipts and not taxable.

2. Validity of Reassessment Proceedings:
The assessee challenged the initiation of reassessment proceedings under section 147, arguing that the reasons recorded for issuing the notice were merely a reproduction of the information already provided in the income tax return. The CIT(A) upheld the validity of the reassessment, stating that there was adequate information to create a belief that income chargeable to tax had escaped assessment. The expression "reason to believe" was interpreted as requiring a bona fide belief based on reasonable grounds, not conclusive evidence at the stage of issuing the notice.

3. Taxability of Compensation and Interest:
The CIT(A) held that the compensation received was for the wrongful act of denying employment and was thus a capital receipt. The CIT(A) also treated the pre-judgment interest as part of the compensation, making it a capital receipt and not taxable. However, post-judgment interest and interest on refund by IRS USA were considered taxable as income from other sources. The ITAT agreed with this view, emphasizing that if the pre-judgment interest was part of the $508 million settlement fund, it retained the character of the principal amount of compensation and was not taxable.

4. Addition of Rs. 76,38,650:
The assessee contended that the income tax authorities had added Rs. 76,38,650 over and above what was actually received from the USA towards compensation and post-judgment interest. The CIT(A) did not pass any specific order on this issue. The ITAT restored this ground to the file of CIT(A) for a decision as per law after affording a reasonable opportunity of being heard to the assessee.

5. Application of Article 18(4) of the Constitution of India:
The assessee argued that the income tax authorities overlooked the provisions of Article 18(4) of the Constitution of India. The ITAT found this ground unsustainable, noting that the Assessing Officer had considered all relevant provisions of the Income-tax Act, 1961, and the CIT(A) had provided appropriate relief regarding the compensation received.

Conclusion:
The ITAT allowed the revenue's appeals in part for statistical purposes, restoring the issue of pre-judgment interest to the Assessing Officer for a fresh decision. The cross-objections for the assessment year 2003-04 were dismissed, while those for the assessment year 2004-05 were allowed in part, directing the CIT(A) to decide on the addition of Rs. 76,38,650 as per law. The reassessment proceedings were upheld as valid.