2010 (2) TMI 271 - HC - Income Tax

Reassessment- The petitioner retired from the partnership consisted of developing of real estate. The petitioner retired from the partnership on March 11, 2005. under the deed of dissolution the petitioner agreed to receive a sum of Rs. 50 lakhs, in addition to the balance lying to his credit on the capital or current account as reflected in the books of account as on March 8, 2005, in null and final settlement in respect of dues on account of retirement. The petitioner received two notice u/s 148 for the year 2005-06 and 2006-07. The only reason recorded by the Assessing officer was that the Commissioner of Income tax (Appeals) by his order dated Sept. 17, 2008, in the case of the firm for assessment year 2005-06 allowed a claim for treating the payment of Rs. 1 crore to the two retiring partners as revenue expenditure. Since the assessee claimed the payment to be exempt by treating it as a capital receipt, it was stated that there was reason to believe that the receipts under the deed of retirement had escaped assessment within the meaning of section 147. held that-there was absolutely no basis for the Assessing Officer to form a belief that any income chargeable to tax had escaped assessment within the meaning of substantive provisions of section 147. The notices were not valid and liable to be quashed. Appeal is allowed.

Issues Involved:
1. Validity of reassessment notices issued under Section 148 of the Income-tax Act, 1961.
2. Whether the amounts received by the petitioners on retirement from the partnership firm are chargeable to tax.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Notices Issued Under Section 148:

The principal challenge in these proceedings is to the notices issued by the first respondent under section 148 of the Income-tax Act, 1961, proposing to assess the income of the petitioner for the assessment years 2005-06 and 2006-07 on the ground that there is reason to believe that income chargeable to tax had escaped assessment within the meaning of section 147. The petitioners argued that the validity of reassessment has to be determined on the basis of reasons recorded. The reasons recorded only refer to the fact that the payment made by the partnership firm to the retiring partners has been treated as revenue expenditure. From this, it does not follow that the amount becomes a revenue receipt in the hands of the assessee.

The court emphasized that the reasons recorded by the Assessing Officer for reopening an assessment are the only reasons that can be considered when the formation of the belief is impugned. The recording of reasons is a check against arbitrary exercise of power. The reasons recorded must be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose the mind of the Assessing Officer and should be self-explanatory. The court cited previous judgments to support this principle, such as N. D. Bhatt, IAC of I.T. v. I. B. M. World Trade Corporation and Hindustan Lever Ltd. v. R. B. Wadkar, Asst. CIT (No. 1).

The court found that the only reason recorded by the Assessing Officer was that the Commissioner of Income-tax (Appeals) had allowed a claim for treating the payment to the retiring partners as revenue expenditure. The court held that this could not reasonably lead to the belief that the receipts had escaped assessment within the meaning of section 147.

2. Whether the Amounts Received by the Petitioners on Retirement from the Partnership Firm are Chargeable to Tax:

The petitioners argued that assuming the stand of the Department is that the amount is chargeable as capital gains, this would be contrary to the law laid down by the Supreme Court in successive decisions that an amount paid to a retiring partner in a partnership firm does not amount to a transfer within the meaning of section 2(47). The court referenced several judgments, including CIT v. Mohanbhai Pamabhai and Addl. CIT v. Mohanbhai Pamabhai, where it was held that an amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities, does not involve an element of transfer within the meaning of section 2(47).

The court also noted that the reliance on clauses (iv) and (v) of section 28 to sustain the belief was misplaced. Section 28(iv) specifies the value of any benefit or perquisite arising from business or the exercise of profession, which does not apply to benefits paid in cash or money. Clause (v) refers to any interest, salary, bonus, commission, or remuneration received by a partner from the firm, which does not include payments made to a partner in realization of his share in the net value of the assets upon his retirement from a firm.

The court concluded that there was no basis for the first respondent to form a belief that any income chargeable to tax had escaped assessment within the meaning of section 147. The reasons recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147.

Conclusion:

The court allowed Writ Petition No. 2287 of 2009 by quashing and setting aside the notice dated January 19, 2009, and Writ Petition No. 59 of 2010 by quashing and setting aside the notices dated January 23, 2009, and February 9, 2009. The rule was made absolute with no order as to costs.

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