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TMI Blog2023 (11) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, tant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inant 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 The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by appellant and bifurcated the amount of arbitration award between each of such rights and claims.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 25th February 2019 on the following substantial questions of law : (i) Whether the Tribunal ought to have held the Respondent No. 1 had assumed jurisdiction under section 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount of Rs. 28 crores received by the Appellant as per the arbitration Award was not chargeable to tax? 3. A partnership firm by name M/s. P. N. Writer Co. (the said Firm) was established in or about the year 1954 between appellant's late father Mr. Charles D'Souza and one Mr. P. N. Writer. The said Firm was reconstituted from time to time and the last partnership deed in this regard, according to appellant, was executed on 18th January 1979. As per the partnership deed, appellant alongwith her late father and brothers were the partners in the said Firm. Appellant was entitled to a share of 20% in the profits or losses made by the said Firm. 4. Appellant's father Mr. Charles D'Souza expired on 24th November 1997 leaving behind his last Will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2008-2009. In the course of assessment proceedings, respondent no. 1 issued a show cause notice for assessment of the said receipt wherein appellant contended that the receipt was related to her retirement from the said Firm and was, therefore, not chargeable to tax under the Act. Being satisfied with the submissions as made by appellant before him, no addition in respect of the said receipt was made in the assessment order dated 26th November 2010 passed under Section 143(3) of the Act. 9. As per the consent terms, during the previous year ending 31st March 2010, appellant received an amount of Rs. 7 Crores. Appellant filed return of income for Assessment Year 2010-2011 on 16th July 2010 offering to tax a total income of Rs. 18,91,589/-. In the note annexed to the return of income, appellant referred to the receipt of Rs. 7 Crores pursuant to the arbitration award. Reference was also made to Rs. 4,82,258/- received during the Financial Year 2009-2010 pursuant to the interim order dated 20th July 2007 passed by the Apex Court. Appellant claimed that as the amounts were received upon her retirement from the said Firm, the same were not chargeable to tax under the Act. Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 28 Crores was to be received for separation from the said Firm. Therefore, the information/material available with respondent no. 1 at the time of formation of his belief that appellant s income chargeable to tax has escaped assessment was information received from the Assessing Officer of the said Firm and the note placed by appellant in her return of income. It is appellant s case that both sources of information revealed that the receipt was in respect of her retirement from the partnership firm of P. N. Writer Co. In the order disposing objections, it was also alleged that the copy of the arbitration award, Will of appellant s father, calculation on how appellant was awarded Rs. 28 Crores were not available and, therefore, there was nothing which would conclusively prove that the amount received was not income. 14. This order was challenged by filing a writ petition in this Court being Writ Petition No. 2668 of 2014. The petition was allowed to be withdrawn by an order dated 13th February 2015 with a clarification that all contentions of the parties are kept open to be urged before the authorities under the Act. 15. Pursuant thereto, respondent no. 1 resumed the reassessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount had been received for settlement of a composite bundle of rights. For holding that the amount was not received in respect of retirement from the said Firm, CIT(A) observed that the consent terms did not mention about appellant s retirement and also made a reference to settlement of rights under the father's Will and also other assets being equity shares in two private companies which had no connection with the said Firm, shares of which have to be transferred by appellant and her husband to the other group. It was also mentioned that the manner in which the accounts were taken for the retirement of appellant from the said Firm were not explained and there was also no basis for the manner in which the amount of Rs. 28 Crores had been arrived at in the consent terms. It is appellant s case that the CIT(A) failed to appreciate that the dispute between appellant and her brothers was primarily in respect to her wrongful retirement from the said Firm and as reference was also made to the inheritance from the father which also mainly comprised of further partnership interest of 5% in the said Firm being given to her, even assuming that any part of the said award also related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belief was formed was that received from the Assessing Officer of the said Firm, P. N. Writer Co., which clearly revealed that appellant had retired from the said Firm and in settlement thereof it was agreed that she will receive an amount of Rs. 28 Crores, which information was already in possession of respondent no. 1. Thus, there was no fresh tangible material available to the Assessing Officer. In any event, as the said amount was not of an income nature, the live link or rational nexus between the information and the belief as formed by respondent no. 1 was missing. Since the issue relating to taxability of the amount received by appellant as per the interim order dated 20th July 2007 was considered by respondent no. 1 in the Assessment Year 2008-2009, wherein, he had accepted that the said amount was not chargeable to tax, initiation of reassessment proceedings for the Assessment Year 2010-2011 was a clear case of change of opinion which was not permissible in law. (c) The Act does not provide that whatever is received by a person must be regarded as income liable to tax and in all cases, in which a receipt is sought to be taxed as income, the burden lies upon the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Estate Duty or a similar tax, no tax is chargeable in respect of the same. In any event, the same would be on the Estate and not on a legatee. Even the provisions of Section 56(2)(vii) which seek to tax an amount received without consideration specifically excludes from the ambit of the charge any amount received pursuant to a bequest. (f) A perusal of the statement of Mr. Denzil D'souza recorded by respondent no. 1 in the course of the assessment proceedings, reveals that the amount received by appellant is pursuant to a family arrangement. Assuming without admitting that the said receipt is relatable to a family arrangement, it will still not be chargeable to tax as such arrangement is an agreement between the members of the same family for the benefit of the family either by compromising doubtful or disputed rights or for preserving the peace, honour, security and property of the family by avoiding litigation and the amounts so received are not exigible to tax. ( CIT V/s. AL. Ramanathan (2000) 245 ITR 494 (Mad) , CIT V/s. Sachin P. Ambulkar (2014) 42 taxman.com 22 (Bom) and CIT V/s. R. Nagaraja Rao (2013) 352 ITR 565 (Karn) ). 20. Mr. Chandrashekhar submitted as under : (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment as held in P.H. Divecha V/s. Commissioner of Income Tax (1963) 48 ITR 222 (SC). Since the consent terms does not clearly spell out that it was for relinquishing the rights under the partnership firm, the Tribunal was justified in arriving at its conclusion. So also the intention of the parties has to be ascertained on the facts of each case as held in Rajah Manyam Meenakshamma V/s. Commissioner of Income Tax (1956) 30 ITR 286 (AP). (c) On 25th November 1997 the partnership firm was reconstituted after the demise of appellant's father and there were only two partners in the said Firm viz., appellant and her brother Mr. Denzil D'souza. Since appellant has retired from the said Firm, it will tantamount to a dissolution of the said Firm which would make the amount of Rs. 28 Crores received upon dissolution of the said Firm as chargeable to tax. The Apex Court in Erach F. D. Mehta V/s. Minoo F. D. Mehta 1970 (2) SCC 724 supports the view that when there are only two partners in a partnership, if one of them retires, it will amount to dissolution of the firm. (d) the amount received/receivable by appellant would be chargeable to tax as Income from other sources . Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) on 20.03.2012. Information is received that the Supreme Court vide its order dated 21.07.2007 has ordered partners of P.N. Writers and Co. to pay Rs. 50,000/- every month beginning from the month of July 2007. As per the settlement in arbitration proceedings which concluded on 25.09.2009 assessee had received Rs. 7,00,00,000/- during F.Y. 2009-10 corresponding to A.Y. 2010-11. The assessee in her return of income filed for A.Y. 2010-11 has not offered this amount of Rs. 7,00,00,000/-. In view of the above, I am satisfied that income of Rs. 7,00,00,000/- has escaped assessment for A.Y 2010-11. The assessment for A.Y. 2010-11 is therefore required to be reopened. 23. 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. Apart from referring to the fact that there was a decision of the Supreme Court as well as arbitration award pursuant to which appellant had received the amount of Rs. 7 Crores, nothing else has been mentioned in the reasons. The belief formed by respondent no. 1 without any statement on whether and how the receipt was of an income nature would render the reasons as va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the amount received for the current year was taxable, in our view, tantamounts to a change of opinion which is not permissible in law. 25. One of the reasons given by respondent no. 1 in the order dated 21st August 2014 disposing the objections was that a copy of the arbitration award, Will of appellant's father, calculation of how she was awarded Rs. 28 Crores as per the award and conclusive proof that the amount received was not a capital receipt has not been provided by her or does not form part of the record. Such a reason for justification of the validity of assumption of jurisdiction under Section 148 of the Act indicates that proceedings have been initiated only with a view to make enquiries or investigate into the facts of appellant's case. It is well settled in law that reassessment proceedings could be initiated by an Assessing Officer if he has reason to believe that assessee's income chargeable to tax has escaped assessment. However, such proceeding cannot be initiated with a view to enquire or investigate on the aspect of whether any income chargeable to tax had escaped assessment. In the present case, as respondent no. 1 has initiated reassessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 (Supra) and this Court in Prashant S. Joshi (Supra) 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. For this purpose, the Tribunal relied upon the following aspects : (i) The consent terms did not speak anything about her retirement from the said firm. (ii) The consent terms also nowhere mentioned that the amount of Rs. 28 Crores was awarded to the Appellant for her retirement from the firm. (iii) The arbitration Award was also for withdrawal of her rights under her father's will; (iv) By the consent terms and the arbitration award, the Appellant had withdrawn all claims and right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to a payment of Rs. 28 Crores fits in with this value. Further, the said Firm had also transferred its business on a going concern basis to a private limited company by name P. N. Writer Co. Pvt. Ltd., in Financial Year 1992-1993. Balance Sheet of the said company as on 31st March 2006 revealed that there were substantial reserves which showed that the business of the said Firm was extremely profitable. Therefore, the Tribunal was not correct in holding that the amount of arbitration award was not relatable to appellant's retirement from the said Firm. 29. Moreover, the amount of arbitration award was also related to the settlement of the inheritance rights which appellant was entitled to under her father's Will. An amount received in satisfaction of the inheritance rights also cannot be regarded as of an income nature chargeable to tax under the Act. The Tribunal failed to appreciate that the relevant details formed part of the arbitration proceedings and appellant had raised this as an alternative claim in view of the stand taken by respondent no. 1 in the assessment order and the CIT(A) in the appellate order. As regards the reference by the Tribunal to the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved for retirement from the said Firm is clear from the statement of claim filed before the Arbitrator, the consent terms, the arbitral award and information relating to reconstitution of the Firm being filed with the Registrar of Firms. The valuation of the properties of the said Firm also supported this position. As held in Mohanbhai Pamabhai (Supra) and Tribhuvandas G. Patel (Supra) the amount received by a partner upon retirement from the Firm is not chargeable to tax. Section 45(4) of the Act, as initially introduced and as in force in the assessment year concerned brings to tax any distribution of capital assets upon, inter alia, retirement of a partner, where, the tax liability is imposed on the partnership firm and not on the retiring partner. The said provision will not result in imposing of any tax liability on appellant as first of all there was no distribution of capital assets but receipt of a monetary amount. In any event, the liability to pay tax, if any, under the said provision will be on the Firm and not the retiring partner. [Prashant S. Joshi (Supra)]. Even if the portion of the arbitration award relates to the inheritance by appellant under the Will of her late ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haracter of the receipt cannot justify a conclusion being reached by an Assessing Officer that the amount is of an income nature. 37. Reliance by Mr. Chandrashekhar on P. H. Divecha (Supra) does not help the Revenue because in that case the assessee had received compensation in respect of termination of the agreement giving exclusive right to sell a product in a particular territory to appellant. It has been held therein that such compensation was for loss of a source of income and hence, will not be chargeable to tax. 38. Even the judgment of the Hon ble Andhra Pradesh High Court in Rajah Manyam Meenakshamma (Supra) relied upon by Mr. Chandrashekhar won t help the Revenue. Though, the proposition that the nomenclature given by the parties is not decisive and the substance of the transaction ought to be considered cannot be disputed, it is not shown what, according to the Revenue, is the correct nature of the receipt so as to make the same as chargeable to tax under the Act. We are also not able to accept Mr. Chandrashekhar s submissions that on 25th November 1997, i.e., when the partnership firm is reconstituted after the demise of appellant's father, there were only two partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt as taxable in nature. There is no such concept of special income. The said term is defined in Section 2(24) of the Act and the Revenue has not established as to how the receipt of Rs. 28 Crores falls either within any of the sub clauses thereof or even under the general connotation of income as elucidated by this Court in Mehboob Productions (Supra) as being a return for either capital or labour. 40. The consent terms entered into between the parties, which formed part of the arbitral award, reads as under : 1. In full and final settlement of all disputes and claims raised by the Claimant against the Respondents in present arbitration and/or against the family partnership firm of P. N. Writer Company, and all counter claims made by the Respondents against the Claimant, Respondent No. 1 in the first instance, and failing him, Respondent Nos. 2 to 6 (Respondent Nos. 1 to 6 are hereinafter collectively referred to as the Respondents ) do pay to the Claimant a sum of Rs. 28,00,00,000/- (Rupees Twenty Eight Crores Only) in the manner set forth hereinafter : xxxxxxxxxxxxxxxxxxx 2. In consideration of payment of Rs. 28,00,00,000/- (Rupees Twenty Eight Crores Only) with interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 filed in the Hon'ble Bombay High Court; and (iii) Contempt Petition No. 70 of 2006 in Arbitration Petition No. 428 of 2005 filed in the Hon'ble Bombay High Court. 6. On the aforesaid legal proceedings being withdrawn, the Claimant will not make any further claims either against the Defendants/Respondents arrayed as parties to the aforesaid proceedings and/or against any firm and/or entity owned and/or controlled by the Respondents. 7. The Respondents do withdraw Suit No. 3187 of 2006 filed by them before the Hon'ble Bombay High Court; inter alia against the Claimant abovenamed and on withdrawal of the same will not make any further claims either against the Claimant and/or against any property belonging to her and her husband. xxxxxxxxxxxxxxxxxxx 9. The Claimant and her husband Mr. Etienne Pinto have no interest in the properties/shares mentioned below (a-f) and will execute all necessary documents to facilitate transfer of the properties which presently stand in their names, either to the names of the Respondents and/or to persons nominated by them against receipt of entire sum of Rs. 28,00,00,000/- (Rupees Twenty Light Crores Only) with interest thereon, if any. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect to the said partnership, its business and assets in favour of the parties thereto; (d) that this Hon'ble Tribunal direct the Respondents to deliver up the following documents for cancellation. and that the same be cancelled by this Hon'ble Tribunal. (i) the purported Supplementary Deed Partnership dated 1st April 1992; (ii) the purported partnership deed dated 25th November 1997; and (iii) the purported partnership deed dated 12th April 2003; (e) that this Hon'ble Tribunal appoint an independent valuer to ascertain the loss caused to the said partnership firm, and the Claimant, on account of the transfer of the business and assets of the said partnership firm to the said P. N. Writer Co. Pvt. Ltd., and thereafter direct the Respondents to compensate the Claimant on account of the aforesaid loss; (f) that this Hon'ble Tribunal direct that the said partnership firm of P.N. Writer Co. constituted under the partnership deed dated 18th January 1979 stand dissolved; (g) that this Hon ble Tribunal direct Respondent No. 1 to disclose on oath the assets and accounts of the said partnership firm; (h) that this Hon'ble Tribunal direct that the accounts of the said pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was right in law in holding that the transactions of the assessee amount to a family arrangement and cannot be termed as a transfer and there was no chargeable capital gains arising from that transaction? 2. A perusal of the records goes to establish that the dispute arose in that family and the family arrangement was arrived at in consultation with the panchayatdars and accordingly realignment of interest in several properties had resulted. The family arrangement was arrived at in order to avoid continuous friction and to maintain peace among the family members. The family arrangement is an agreement between the members of the same family intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour. So, family arrangements are governed by principles which are not applicable to dealings between strangers and the family arrangement among them is for the interest of the family, for the harmonious way of living. So, such re-alignment of interest by way of effecting a family arrangement among the family m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between the various members of the family; (2) The said settlement must be voluntary and should not be induced by fraud, coercion or undue influence ; xxxxxxxxxxxxxxxxxxx In Sachin P. Ambulkar (Supra) the Division Bench of Bombay High Court framed the following questions of law and concluded as under : 1. The questions of law raised by the Revenue in this appeal reads thus : (A) Whether the consideration received under the family settlement on transfer of right, title and interest in the family property is a transfer under Section 2(47) of the I.T. Act and liable to be taxed as Capital Gain under Section 45 of I.T. Act? (B) Whether on the facts and circumstances of the case and on true and proper interpretation of the family settlement dated 15th October, 2003 the consideration of Rs. 2,25,00,000/- received by the assessee on transfer of his right, title and interest in the family property to the party of the second part under family settlement is a Capital Gain liable to be taxed u/s. 45 of I.T. Act? 2. The ITAT in para 19 of its order has recorded thus : 19. We find that in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rns and each of the family business has been independently managed by one of the parties. Disputes arose between the parties. The dispute was referred to an arbitrator. The arbitrator suggested a settlement which the parties agreed In terms of the settlement the assessee had to resign from Kaveri Breweries, a partnership firm and transfer has interest to Sri Neelakanta Rao for a consideration of Rs. 35,000/- being the capital balance of the firm, Accordingly, the assessee transferred the shares, Sri Neelakanta Rao transferred the shares held by in favour of the assessee. The assessee claimed there was no transfer which give rise to any capital gains However the assessing authority held that there was a transfer, there was a capital gain and therefore the assessee is liable to pay the tax Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (appeals). The appellate Commissioner confirmed the order of the assessing authority, Aggrieved by these two orders the assessee preferred an appeal to the Tribunal, The Tribunal after considering the judgment of the Apex Court in the case of Ram Charan Das v. Girja Nandini Devi AIR 1966 SC 323 and also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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