2010 (2) TMI 84 - HC - Income Tax

Sum received by assessee on retirement from firm of solicitors upon superannuation - held that income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite but it must be arising from business. Secondly section 28(iv) does not apply to benefits in cash or money - The contention of the petitioner was that (i) clause 35 of the deed of partnership had no application to a situation where a partner had retired mandatorily on attaining the age of seventy years. - Thus there was in our opinion no tangible material before the Assessing Officer to form a conclusion that income has escaped assessment. Hence though no assessment order was passed under section 143(3) we are of the view that the jurisdictional condition precedent prior to the exercise of the power to reopening the assessment under section 147 of the Act has not been fulfilled. The petition will therefore have to be allowed

Issues Involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Application of clause 35 of the partnership deed.
3. Application of section 28(va) and section 28(iv) of the Income-tax Act, 1961.
4. Jurisdictional condition precedent for reopening an assessment under section 147.

Issue-wise Detailed Analysis:

1. Validity of the notice issued under section 148 of the Income-tax Act, 1961:

The petitioner received a notice under section 148 on March 30, 2009, indicating that the income chargeable to tax for the assessment year 2004-05 had escaped assessment. The petitioner contended that the jurisdictional condition precedent for reopening an assessment under section 147 was not met, as there was no tangible material to form a belief that income had escaped assessment. The court emphasized that the existence of a "reason to believe" is a condition precedent for the exercise of power under section 147, and the reasons must be recorded in writing. The Supreme Court in Kelvinator of India Ltd. clarified that post-April 1, 1989, the power to reopen is wider but must be based on tangible material to avoid arbitrary exercise of power.

2. Application of clause 35 of the partnership deed:

The Assessing Officer relied on clause 35 of the partnership deed, which restricts retiring partners from soliciting the firm's clients for three years. However, this clause applies only to partners who retire voluntarily or are required to withdraw under clause 41, not to those who retire mandatorily upon attaining the age of seventy years, as in the petitioner's case. The court noted that the inference drawn by the Assessing Officer from clause 35 was without logical foundation and that clause 35 had no application to the petitioner's retirement upon superannuation.

3. Application of section 28(va) and section 28(iv) of the Income-tax Act, 1961:

The Assessing Officer initially referred to section 28(va) in the reasons recorded for reopening the assessment, suggesting that the amount received by the petitioner was for renouncing the right to carry on his profession. However, the petitioner argued that section 28(va) pertains to business, not profession, and thus was inapplicable. Furthermore, the Assessing Officer later relied on section 28(iv), which pertains to the value of any benefit or perquisite arising from business or profession. The court highlighted that section 28(iv) does not apply to benefits in cash or money, as established in Mahindra and Mahindra Ltd. v. CIT. Therefore, neither section 28(va) nor section 28(iv) was applicable to the petitioner's case.

4. Jurisdictional condition precedent for reopening an assessment under section 147:

The court reiterated that the jurisdictional condition for reopening an assessment under section 147 is the existence of tangible material to form a reason to believe that income has escaped assessment. In this case, the basis for the Assessing Officer's belief was clause 35 of the partnership deed, which was inapplicable to the petitioner's retirement. Consequently, there was no tangible material to justify the reopening of the assessment. The court concluded that the jurisdictional condition precedent for exercising the power to reopen the assessment under section 147 was not fulfilled.

Conclusion:

The court allowed the petition, quashing the notice dated March 30, 2009, and the order dated December 2, 2009. The basis for reopening the assessment was found to be without any logical foundation, and there was no tangible material to justify the belief that income had escaped assessment. The petitioner's arguments were upheld, and the jurisdictional condition precedent for reopening the assessment was deemed not to have been met.

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