2023 (11) TMI 545 - HC - Income Tax

Validity of the reassessment proceedings - assessment of a sum receivable by appellant pursuant to an arbitration award as in the nature of income - receipt was towards appellant s retirement from the partnership Firm - HELD THAT - A bare perusal of the reasons shows that there was no mention as to whether and how the amount as per the arbitration Award was in the nature of income. The information reveals that the said receipt was towards appellant s retirement from the said Firm. Therefore, justification given by respondent no. 1 in the order for taxability of the said receipt as not relating to appellant s retirement from the said Firm was contrary to the information/material available with him. The law is very settled in as much as the belief formed by the AO has to be based on the information/material available with him at the time of formation of the belief. There was no material whatsoever available with respondent no. 1 at that point of time to show that the said receipt of Rs. 7 Crores by appellant as referred to in the reasons did not relate to her retirement from the said Firm. In the absence of any statement in the reasons recorded for reopening the assessment regarding taxability of the said receipt and in view of non-sustainability of the justification provided by respondent no. 1 in the order dated 21st August 2014, the reassessment proceedings initiated u/s 148 of the Act, in our view, will be bad in law. It is also well settled that for the purposes of adjudicating the validity of assumption of jurisdiction under Section 148 of the Act, one has to only look at the reasons recorded by the Assessing Officer before reopening the assessment. Such reason cannot be supplemented or improved subsequently. For Assessment Year 2008-2009 also appellant had received similar amounts from the said Firm. After scrutinising the character of such receipt, it was held by the predecessor of respondent no. 1 that the receipt was not taxable in nature. Therefore, the formation of the belief that the amount received for the current year was taxable, in our view, tantamounts to a change of opinion which is not permissible in law. Having considered the consent terms with the arbitration award and the statement of claim, it is clear, the amount of Rs. 28 Crores was receivable by appellant in terms of the arbitration award dated 25th September 2009. As per the award, appellant has relinquished all her claims against the partnership firm . as well as the partners. Real dispute between the parties related to the termination of appellant s partnership interest in the said Firm. The consent terms were arrived at between the parties with a view to settle this dispute. It goes without saying that when appellant's rights and claims in the said Firm were settled by the consent terms and the arbitration award, there could not be her continuance as a partner with the said Firm. Therefore, the arbitration award was receivable by appellant in respect of her retirement from the said Firm. As held by the Apex Court in Mohanbhai Pamabhai 1987 (2) TMI 59 - SC ORDER and this Court in Prashant S. Joshi 2010 (2) TMI 271 - BOMBAY HIGH COURT amount receivable upon retirement from the said Firm could not be of an income nature. In our opinion, the Tribunal was not correct in holding that the amount of arbitration award receivable by appellant was not relatable to her retirement from the said Firm. The Tribunal has failed to appreciate that there was a dispute between appellant and her brothers with respect to her wrongful retirement from the said Firm. For invocation of arbitration proceedings the matter was carried right upto the Hon'ble Supreme Court. The settlement amount was receivable by appellant for relinquishment of her rights and claims as a partner of the said Firm. In these circumstances, though there may be no mention of her retirement from the said Firm in the consent terms or the arbitration award, the only inference possible would be that she no longer continued as a partner of the said Firm after such settlement. It is also not anybody s case that appellant has not played any role in the said Firm or received any share from the said Firm after the settlement. Even if we go alongwith the Tribunal that appellant had received the amount of Rs. 28 Crores under the arbitration award for transfer of a composite bundle of rights, it was not open to assess the entire amount of the award as income from other sources. The dominant component in the settlement was appellant s separation from the said Firm. The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by appellant and bifurcated the amount of arbitration award between each of such rights and claims. Instead of doing this exercise and considering whether the amount was capital or revenue in nature, the ITAT has simplicitor accepted the conclusion reached by the CIT (A) to the effect that such receipt is of an income nature chargeable to tax as income from other sources. The Tribunal has failed to consider this issue in a proper perspective. The Tribunal interestingly holds that it is judicially settled that the amount should be considered as special income and it must be considered in its wider sense. The Tribunal failed to appreciate that a receipt on capital account cannot be assessed as income unless it was specifically brought within the scope of the definition of the term income in Section 2(24) of the Act as held by the Apex Court in CIT V/s. D. P. Sandhu Bros. 2005 (1) TMI 13 - SUPREME COURT The Tribunal erred in evolving a concept of special income when no such concept exists either in the Act or in the jurisprudence and saying that the same is judicially settled. Thus we answer the substantial questions of law as framed in favour of appellant. The Tribunal ought to have held respondent no. 1 had assumed jurisdiction u/s 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction. Further, on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount Crores received by appellant as per the arbitration award was not chargeable to tax.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Taxability of the amount received by the appellant as per the arbitration award.

Summary:

Issue 1: Validity of Reassessment Proceedings

The appellant challenged the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, arguing that the jurisdictional pre-conditions were not fulfilled. The High Court agreed, stating that the Assessing Officer (AO) must have a belief based on fresh tangible material that the income has escaped assessment. The reasons recorded by the AO for reopening the assessment did not mention whether and how the amount received as per the arbitration award was in the nature of income, rendering the reasons vague and incomplete. The AO's belief was based on the same material available during the original assessment, indicating a change of opinion, which is not permissible in law. Therefore, the reassessment proceedings were held to be without jurisdiction.

Issue 2: Taxability of the Arbitration Award

The appellant received Rs. 28 Crores pursuant to an arbitration award, which she claimed was not chargeable to tax as it was received upon her retirement from the partnership firm and for relinquishing her rights under her father's Will. The High Court held that the amount received was primarily for the settlement of her rights and claims as a partner in the firm, and as per established legal precedents, such amounts are not of an income nature and hence not chargeable to tax. The Tribunal's conclusion that the amount was special income and taxable was incorrect. The High Court further noted that even if the amount related to inheritance rights or was received as part of a family arrangement, it would still not be chargeable to tax under the Act.

Conclusion:

The High Court concluded that the reassessment proceedings were without jurisdiction and the amount received by the appellant as per the arbitration award was not chargeable to tax. The appeal was disposed of accordingly, with no order as to costs.