2022 (6) TMI 1270 - AT - Income Tax

Correct head of income - arbitration award received by the assessee - Special income - as per AO arbitration award was not awarded only with reference to the retirement of the assessee from the partnership firm but was in lieu of relinquishment of all her rights, claim and demand of any nature whatsoever against the partnership firm M/s P.N.Writer Co. and all other entities owned and controlled by the firm and partners and for withdrawing all the Suits against all the entities - As per AO assessee's rights and claims were converted into money terms through mutually agreed consent terms of Arbitration award and, hence, the amount was held as taxable u/s 28(iv) - CIT(A) deleted the addition made by A.O under the head 'Income From Other Sources' - HELD THAT - We observed that exactly similar issue was considered and decided by the Coordinate Bench in assessee s own case 2018 (4) TMI 1640 - ITAT MUMBAI 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 ld. Commissioner of Income Tax (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. We agree with the ld. Commissioner of Income Tax (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. Accordingly, in the background of the aforesaid discussion and precedent, we uphold the order of the ld. Commissioner of Income Tax (Appeals). - Decided against revenue.

Issues Involved
1. Validity of the reopening of the assessment.
2. Taxability of the arbitration award under Section 28(iv) of the Income Tax Act.
3. Alternative taxability of the arbitration award as capital gains.
4. Tax treatment of the arbitration award under Section 56(1) as income from other sources.

Detailed Analysis

1. Validity of the Reopening of the Assessment
The Assessing Officer (AO) received information that an amount of ?28,00,00,000 was agreed to be paid to the assessee as a settlement through an arbitration award by M/s. P.N. Writer & Co., out of which ?3,00,00,000 was paid in the A.Y. 2011-12. The AO observed that income had escaped assessment and issued a notice under Section 148 of the Income Tax Act on 20.03.2014. The assessee filed objections, which were disposed of, and a writ petition against this order was withdrawn, leading to the completion of the reassessment under Section 143(3) r.w.s. 147 of the Act.

2. Taxability of the Arbitration Award under Section 28(iv)
The AO held that the arbitration award of ?28 crores was not solely for the retirement of the assessee from the partnership firm but was for relinquishing all rights, claims, and demands against the firm and its entities. The AO concluded that the arbitration award was taxable under Section 28(iv) of the Act, as it converted the assessee’s rights and claims into money terms through mutually agreed consent terms.

3. Alternative Taxability as Capital Gains
The AO also considered the arbitration award alternatively taxable as capital gains under Sections 2(47) and 45(4) of the Act, citing various judicial pronouncements. The AO issued a detailed show cause notice, but the assessee reiterated that the award was received on account of her retirement, which was not taxable. The AO, however, found the assessee’s submissions untenable and added the arbitration award to the income of the assessee.

4. Tax Treatment under Section 56(1)
The Income Tax Appellate Tribunal (ITAT) noted that a similar issue was adjudicated in the assessee’s own case for A.Y. 2010-11, where it was held that the arbitration award was not for retirement but for relinquishing all rights and claims against the firm and its entities. The ITAT observed that the award included conditions unrelated to the assessee’s retirement and involved assets held by the assessee and her husband. The Tribunal upheld that the award was not taxable under Section 28(iv) as it was in cash but was taxable under Section 56(1) as income from other sources. The ITAT dismissed the revenue’s appeal, following the earlier decision.

Conclusion
The ITAT concluded that the arbitration award received by the assessee was not solely for retirement from the partnership firm but for relinquishing all rights, claims, and demands against the firm and its entities. The award was not taxable under Section 28(iv) but was taxable under Section 56(1) as income from other sources. The appeal filed by the revenue was dismissed.

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