TMI Blog2023 (11) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by appellant and bifurcated the amount of arbitration award between each of such rights and claims.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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal. 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, 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 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred 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, 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 upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant. 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 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 compri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived/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 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer 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. 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 proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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. 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 aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfied 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip 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 and/or interest of any nature whatsoever with respect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 : xxxxxxxxxxxxxxxxxxx Whether, on the facts and in the circumstances of the case, the Tribunal 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 acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which are the essentials of a family arrangement that : (1) The family settlement must be a bona fide one so as 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 Divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and Saraswathi Bai That each of the parties were holding apart from personal properties, the family properties and shares in different business concerns 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 settlemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Act. It is well settled that a partition is not a transfer, What is recorded in a family settlement is nothing but a partition Every member has an anterior title to the property which is the subject-matter of a transaction, that is, partition or a family arrangement. So there is a adjustment of shares, crystallization of the respective rights in the family properties and therefore it cannot be construed as a transfer in the eye of law. When there is no transfer there is no capital gain and consequently no tax on capital gain is liability to be paid. The tribunal on proper consideration of the entire material on record has categorically held that the transaction question is a family arrangement. There is no transfer, there is no capital gain and therefore there is no liability to pay capital gain tax. The order is in accordance with law. The substantial questions of law are answered in favour of the assessee and against the revenue, No merits in this appeal. Accordingly, this appeal is dismissed. 43. In the circumstances, we answer the substantial questions of law as framed in favour of appellant. The Tribunal ought to have held respondent no. 1 had assumed jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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