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TMI Blog2010 (2) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner to the first writ petition (W. P. No. 2287 of 2009) agreed to receive a sum of Rs. 50 lakhs, in addition to the balance lying to his credit on the capital and/or current account as reflected in the books of account as on March 8, 2005 in full and final settlement of his dues on account of retirement. Out of the amount of Rs. 50 lakhs, the petitioner received an amount of Rs. 17 lakhs in the financial year 2004-05, relevant to the assessment year 2005-06, and Rs. 33 lakhs in the financial year 2005-06 relevant to the assessment year 2006-07. The petitioner filed his return of income for the assessment year 2005-06 on August 31, 2005 and for the assessment year 2006-07 on July 21, 2006. Both the returns disclosed the amounts received on account of the retirement of the petitioner from the partnership firm and that the amounts, being capital receipts, were not offered to tax. 3. In the companion writ petition (W. P. No. 59 of 2010) as well the petitioner received an amount of Rs. 50 lakhs in the financial years 2004-05 and 2005-06. The petitioner filed his return of income disclosing the amount. The amount was not offered for taxation on the ground that it was a capital rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces issued by the first respondent under section 148, learned counsel appearing on behalf of the petitioner urged the following submissions: (i) The validity of reassessment has to be determined on the basis of reasons recorded. The reasons, as 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; (ii)Assuming that 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 to the effect that an amount paid to a retiring partner in a partnership firm does not amount to a trans-fer within the meaning of section 2(47). Therefore, the belief that was formed by the first respondent could not be of a reasonable person properly instructed in law ; (iii) Even assuming that the stand of the Department is that the amount is chargeable as business income, the reliance placed on clauses (iv) and (v) of section 28 to sustain the belief is completely misplaced ; and (iv) The basis of the belief, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer. The reasons which are recorded cannot be supplemented by affidavits. The imposition of that requirement ensures against an arbitrary exercise of powers under section 148. 10. A Division Bench of this court, speaking through Mrs. Justice Sujata Manohar (as the learned judge then was), held thus in N. D. Bhatt, IAC of I.T. v. I. B. M. World Trade Corporation [1995] 216 ITR 811, 823 (Bom). "It is also well-settled that the reasons for reopening are required to be recorded by the assessing authority before issuing any notice under section 148 by virtue of the provisions of section 148(2) at the relevant time. Only the reasons so recorded can be looked at for sustaining or setting asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two retiring partners as revenue expenditure. Since the assessee claimed the payment to be exempt by treating it as a capital receipt, it is stated that there was reason to believe that the receipts under the deed of retirement had escaped assessment within the meaning of section 147. 13. During the subsistence of a partnership, a partner does not possess an interest in specie in any particular asset of the partnership. During the subsistence of a partnership, a partner has a right to obtain a share in profits. On the dissolution of a partnership or upon retirement, a partner is entitled to a valuation of his share in the net assets of the partnership which remain after meeting the debts and liabilities. 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). Chief Justice P. N. Bhagwati (as the learned judge then was) speaking for a Division Bench of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 dealt with the issue in the following observations (page 402) : "When, therefore, a partner retires from a partnership and the amount of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o predicate that a particular amount is received by the retiring partner in respect of his share in a particular partnership asset or that a particular amount represents consideration received by the retiring partner for extinguishment of his interest in a particular asset." 15. The appeal against the judgment of the Gujarat High Court was dismissed by a Bench of three learned judges of the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166. The Supreme Court relied upon its judgment in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The Supreme Court reiterated the same principle by relying upon the judgment in Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. The Supreme Court held that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the same Finance Act. Sub-section (4) of section 45 provides that profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place. The fair market value of the assets on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer for the purpose of section 48. Ex facie sub-section (4) of section 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the admitted position before the court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be noted is that even in a situation where sub-section (4) of section 45 applies, profits or gains arising from the transfer are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the formation of belief by the Assessing Officer is within the realm of subjective satisfaction." 18. The Supreme Court held that so long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceedings under section 147 and failure to take steps under section 143(3) will not render him powerless to initiate reassessment proceedings even when an intimation under section 143(1) had been issued. In other words, when an intimation has been issued under section 143(1), the Assessing Officer is competent to initiate reassessment proceedings provided that the requirements of section 147 are fulfilled. In such a case as well, the touchstone to be applied is as to whether there was reason to believe that income had escaped assessment. 19. Learned counsel appearing on behalf of the Revenue has sought to urge that the amount received by the assessee is chargeable to tax under clauses (iv) and (v) of section 28. As already noted earlier, reliance on the provisions of section 28(iv) and (v) has been placed in the order passed by the Assessing Officer on November 16, 2009 in the companion petition, while disposing of the objections of the assessee. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147. In these circum-stances, the petition shall have to be allowed by setting aside the notice under section 148. 21. Writ Petition No. 2287 of 2009 is allowed by quashing and setting aside the notice dated January 19, 2009. Writ Petition No. 59 of 2010 is allowed by quashing and setting aside the notices dated January 23, 2009 and February 9, 2009. 22. Rule is made absolute accordingly. There shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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