TaxTMI 
TaxTMI 
2023 (11) TMI 545
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....members of the family, pursuant to which, the disputes between them have been settled. Consequent thereto, an arbitration award dated 25th September 2009 came to be passed in terms of the consent terms. Pursuant thereto, appellant became entitled to receive an amount of Rs. 28 Crores in full and final settlement of all disputes and claims raised by her against her brother and the other family members and/or P. N. Writer & Co. and/or any claims in respect of the bequest made under the Will dated 16th September 1990 of her late father Mr. Charles D'souza. The said amount of Rs. 28 Crores was assessed to tax in reassessment proceedings initiated by respondent no. 1 under Section 147 of the Act which assessment stands upheld in further appeal by both the CIT(A) and the Tribunal. The present appeal is against the impugned order dated 2nd April 2018 passed by the Tribunal. This Court was pleased to admit the appeal by its order 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, th....
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....lant, her siblings and the said Firm. 7. Claims and counter-claims were filed before the Arbitrator. During the course of arbitration proceedings, the parties arrived at consent terms, which was taken on record by the Arbitrator and an award in terms of the consent terms was passed on 25th September 2009. As per the consent terms, appellant relinquished all her rights, claims and demands of any nature whatsoever against the said Firm or its partners. In consideration thereof, appellant was to receive an amount of Rs. 28 Crores. Appellant was to be paid an amount of Rs. 7 Crores on or before 25th December 2009 and the balance amount of Rs. 21 Crores was to be paid, in seven equal installments of Rs. 3 Crores, on or before 25th December of each subsequent year. 8. Appellant, pursuant to the interim order dated 20th July 2007 of the Apex Court referred earlier, received an amount of Rs. 5 lakhs in the previous year relevant to Assessment 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,....
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....me character and there was nothing in the reasons to show as to how the amount of Rs. 7 Crores received by appellant was in the nature of income. It was also urged that the amount related to her retirement from the said Firm, i.e., in lieu of relinquishment of her claim as a partner of the said Firm and, accordingly, as held in CIT V/s. Mohanbhai Pamabhai (1987) 165 ITR 166 and in Prashant S. Joshi V/s. ITO (2010) 324 ITR 154 (Bom) the amount was not chargeable to tax. 13. The objections were disposed by respondent no. 1 by an order dated 21st August 2014. In the order disposing objections, a reference has been made to the information received by respondent no. 1 from the Assessing Officer of P. N. Writer & Co., i.e., the said Firm, stating that appellant had separated from the said Firm in 2009 and an amount of Rs. 28 Crores was agreed to be paid to appellant as a settlement. Therefore, as per the information with respondent no. 1 the amount of 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....
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....ed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. During the course of hearing before the CIT(A), appellant filed valuation reports in respect of various properties owned by the said Firm to justify the amount of Rs. 28 Crores that was received as her share from the said Firm. It was explained to the CIT(A) that the reserves of the company P. N. Writer & Co. Pvt. Ltd., which had taken over the business of the said Firm for the year ending 31st March 2006, was over Rs. 100 Crores. The CIT(A) dismissed the appeal by an order dated 3rd February 2017. While dismissing the appeal, the CIT(A), however, accepted appellant's contention that the provisions of Section 28(iv) had no application to the present case and that the amount of Rs. 28 Crores could not be assessed as capital gains in the hands of appellant. The CIT(A), however, held the amount of arbitration award as income from other sources under Section 56(1) of the Act because the 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 appel....
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....ver against them and/or against the said Firm. Appellant also could not claim any rights in respect of the bequests made to her by her father in his Will, i.e., his share of 5% in the said Firm. Hence, the amount received in terms of the arbitration award was received for retirement from the said Firm or relinquishment of her rights under the Will. As such the receipt can never represent income chargeable to tax and hence, reassessment proceedings could not be initiated in the absence of any income chargeable to tax having escaped assessment. (b) Mere reference in the reasons recorded to the consent terms and the arbitration award would never form the basis of a belief that income chargeable to tax had escaped assessment, unless, respondent no. 1 made out a prima facie case in the reasons that the amount received/receivable by appellant under the arbitration award was of an income nature which burden has not been discharged. The information based on which the 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....
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....ms. The valuation of the properties of the said Firm also supported this position. CIT V/s. Mohanbhai Pamabhai [91 ITR 393 (Guj)] was approved by the Apex Court in Mohanbhai Pamabhai (Supra). 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)]. (e) Assuming without admitting that any portion of the arbitration award relates to the inheritance by appellant under the Will of her late father or otherwise, in the absence of 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 ....
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....a cash payment to the employee is not an "expenditure" contemplated by the sub clause and the use of the qualifying words "whether convertible into money or not" puts the matter beyond doubt. The Apex Court held that the language employed in the sub clause is not capable of taking within its ambit cash payments made to the employees by the assessee because they cannot be brought within the purview of the words "any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite" more so because of the following words "whether convertible into money or not". Infact the Tribunal also accepted this position in the impugned order. Therefore, as this aspect of the matter has been decided in favour of appellant by both the Appellate Authorities and the Revenue was not in appeal before the High Court, it was also not open to the Revenue to raise the issue at this stage. (b) Under what category of income the receipt has to be fitted, one has to look at the motive behind 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 rig....
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....rial as was available with him in the original proceedings i.e., some fresh tangible material should come to his notice subsequent to the framing of the intimation/assessment; (v) the Assessing Officer cannot initiate reassessment proceedings with a view to make further enquiries or investigation into the facts of the case without forming the belief that the assessee's income chargeable to tax has escaped assessment. In our view, the said jurisdictional pre-conditions have not been fulfilled. Therefore, it can be stated that the assumption of jurisdiction by respondent no. 1 under Section 148 of the Act to reassess appellant's income is without jurisdiction. 22. The reasons recorded by respondent no. 1 for reopening the assessment reads as under : Reason for reopening of assessment in the case of Mrs. Ramona Pinto for the Assessment Year 2010-11 The assessee has filed return of income for the assessment year 2010-11 on 16.07.2010 declaring total return of income of Rs. 18,91,589/-. The return was processed u/s. 143(1) 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....
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....he 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 under Section 148 of the Act, in our view, will be bad in law. 24. 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. ....
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....pening the assessment. Moreover, this also indicates that even at the stage of disposing the objections the Assessing Officer was not clear on the basis why appellant's income chargeable to tax has escaped assessment. 27. 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 of P. N. Writer & Co. as well as the partners. Appellant had initiated arbitration proceedings as she was wrongfully shown as retired from the said Firm. This is brought out by the statement of claim made by appellant before the Arbitrator. Even the claim based on the father's Will was mainly related to the additional 5% share of the said Firm. Therefore, the 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....
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....ved any share from the said Firm after the settlement. Further, the said Firm - P. N. Writer & Co. had also filed the relevant information with respect to change of constitution of the firm with the Registrar of Firms which showed that appellant had retired from the said Firm with effect from 24th November 1997. The arbitration award was also given for withdrawal of all claims and rights in respect of the suits filed by appellant against the said Firm and its partners. This fact also supports appellant's claim to show that the rights settled were in respect of her partnership interest in the said Firm. As regards the observation on no positive balance in appellant's capital account with the said Firm, the same is an irrelevant factor because for working out of rights upon retirement one is not required to look at the balance in the capital account. Further, appellant had produced a valuation report valuing the immovable assets of the partnership firm which discloses that the value of the immovable properties of the said Firm was more than Rs. 100 Crores. The fact that the partners agreed to a payment of Rs. 28 Crores fits in with this value. Further, the said Firm had also tr....
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....income nature chargeable to tax as income from other sources. The Tribunal has failed to consider this issue in a proper perspective. 31. 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. 273 ITR 1. 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. 32. Upto 31st March 1988, i.e., before insertion of Section 45(4) by the Finance Act 1987 with effect from 1st April 1988, the amount received by a partner upon retirement from the firm was in the nature of working out of his rights as a partner and not for transfer of his partnership interest to the continuing partners. That the amount was received for retirement from the said Firm is clear from the statement of claim filed befo....
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....d refer to letter dated 26th March 2015 filed by appellant before respondent no. 1 in the course of reassessment proceedings, wherein, it was alternatively urged that the said payment would not be chargeable to tax as it is received pursuant to a family arrangement. Hence, it is not an after thought and the relevant facts formed part of the record. 35. Alternatively, even if the amount received/receivable under the arbitration award is regarded as damages, the nature of the dispute which was settled was with respect to disputes pertaining to the partnership firm or inheritance and, hence, the receipt should be capital in nature (CIT V/s. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)). Further, it has been held by this Court in CIT V/s. Abbasbhoy A. Dehgamwalla (1992) 195 ITR 28 that the amount received as damages also cannot be brought to tax as capital gains. 36. Burden to show that a particular receipt is of an income nature is on the Revenue which has not been discharged in the facts of the present case. The mere rejection of an assessee's explanation without any positive finding as to the true character of the receipt cannot justify a conclusion being reached by an Assessing....
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.... to pay the tax. Therefore, reliance placed by Mr. Chandrashekhar on the judgment of the Apex Court in Erach F. D. Mehta (Supra) would also be of no relevance as the case at hand is not a case where one out of two partners has retired resulting into a dissolution of the firm. 39. One of the further submissions as made by Mr. Chandrashekhar was that the amount received/receivable by appellant would be chargeable to tax as "Income from other sources". In this regard, Section 56(1) of the Act provides income of every kind which is not to be excluded from the total income under the Act is to be charged to tax under the head income from other sources if it is not chargeable under any other heads. Hence, the receipt has to be first of an income nature for it to be assessed as under the residual head. As stated ealier, whether the receipt is for retirement from the partnership firm or in lieu of inheritance or pursuant to the family arrangement or as damages, it shall not be chargeable to tax under the Act. Mere referring to the receipt, as a special income as done by the Tribunal would also not by itself make the receipt as taxable in nature. There is no such concept of special income. ....
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.... at Central Plaza, 2/6, Sarat Bose Road, Kolkata - 700 020 - estimated at Rs. 100 lacs. The Respondents represent and confirm that the above properties are owned and possessed by the Respondents and/or the firm P. N. Writer & Co. and are presently unencumbered. xxxxxxxxxxxxxxxxxxx 4. On receipt of the aforesaid sum of Rs. 28,00,00,000/- (Rupees Twenty Eight Crores Only) and interest thereon, if any, all claims of the Claimant against the Respondents abovenamed and against the partnership firm of P. N. Writer & Co. will stand duly satisfied and the Claimant will have no further claims whatsoever either against the Respondents abovenamed and/or against the partnership firm of P. N. Writer & Co. The Claimant will also not claim any rights in respect of the bequests made to her under the Will dated 16th September, 1990 of her late father Mr. Charles D'souza. 5. The Claimant do withdraw all suits/legal proceedings filed by her against the Respondents abovenamed, and/or against firms and entities owned and/or controlled by them including those listed hereinafter : (i) Suit No. 2002 of 2008 filed in the Hon'ble Bombay High Court; (ii) Suit No. 238 of 2009 filed i....
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....party that may presently be pending and/or filed in future, against the Claimant in her capacity as a partner of P. N. Writer & Co. xxxxxxxxxxxxxxxxxxx These consent terms also indicate that these are for retirement from the partnership firm and in any case could be only considered as a family settlement. 41. The reliefs sought in the statement of claim filed before the Arbitral Tribunal also read as under : (a) that this Hon'ble Tribunal order and declare that the partnership deed dated 18th January 1979 continues to remain valid, subsisting and binding on the parties thereto and that as per the terms of the said partnership deed dated 18th January 1979, the Claimant and Respondent No. 1 are the only surviving partners of the said partnership firm of P.N. Writer & Co.; (b) that this Hon'ble Tribunal order and declare that the purported Supplementary Deed of Partnership dated 1st April 1992 is void ab-initio and in any event not binding on the Claimant; (c) that this Hon'ble Tribunal order and declare that the purported partnership deeds dated 25th November 1997 and 12th April 2003 having been fraudulently executed are void ab-initio and create no rights a....
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....d circumstances of the case may require. Therefore, the amount of Rs. 28 Crores can be considered as amount received by a partner upon retirement from the said Firm and is not chargeable to tax. 42. Suit No. 2002 of 2008 referred to in the consent terms is a suit where appellant was challenging the decision of the brothers to transfer the business of the said Firm to P. N. Writer & Co. Pvt. Ltd. Suit No. 238 of 2009 filed in the Bombay High Court referred to in the consent terms is a suit by appellant against Denzil D'Souza for rights in a flat that belonged to the father and which was not included to in the Will. These indicate in the alternative an overall family settlement and even in that case if we hold that the receipt was 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 by preserving the family peace, honour, security and property of the family by avoiding litigation and amounts so received or not exigible to tax. The relevant portion in AL. Ramanathan (Supra) read as under : xxxxxxxxxxx....
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....2) and consequently no question of inclusion of the income of the minor in the hands of the assessee would also arise." It is the settled law that when parties enter into a family arrangement, the validity of the family arrangement is not to be judged with reference to whether the parties who raised disputes or rights or claimed rights in certain properties had in law any such right or not. In Maturi Pullaiah v. Maturi Narasrmham, AIR 1966 SC 1836, the Supreme Court has observed that : "17. Briefly stated, though conflict of legal claims in praesenti or in future is generally a condition for the validity of a family arrangement, it is not necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims will suffice. Members of a joint Hindu family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an arrangement is entered into bona fide and the terms thereof are fair in the circumstances of a particular case, courts will more readily give assent to such an arrangement than to avoid it." In Kale v. Deputy Director of Consolidation, the Supreme Court has laid down the propositions whi....
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....e, there is no need for registration of such arrangements, when orally made, even if later reduced to writing." 3. The ITAT following the decision of the Apex Court in the case of Maturi Pullaiah and Anr. v. Maturi Narasinhamand ors. AIR 1966 (SC) 1836, held that there is no transfer of assets in the family arrangement and the amount received by the assessee is part of the family arrangement and not towards the transfer of any capital assets and hence no Capital Gains Tax liability arises. In our opinion, the decision of the ITAT is based on finding of facts, hence no question of law arises. Accordingly, the appeal is dismissed. Also in R. Nagaraja Rao (Supra) the Karnataka High Court held as under : The Revenue has preferred this appeal against the order passed by the Tribunal which held that the tansactions and the family arrangement made between the assessee and the other family members cannot be treated otherwise than a family arrangement. Hence there is no transfer either of the movable or immovable as such. The assessee is not liable to pay any capital gains. There was a family arrangement by a deed dated 21-12- 1992 between the children of late J.N. Radhakrishna an....