Bombay High Court
Romona Pinto vs Deputy Commissioner Of ... on 8 November, 2023
Bench: K.R. Shriram, Dr. Neela Gokhale
Digitally signed
2023:BHC-OS:13385-DB
GAURI by GAURI AMIT
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AMIT Date:
GAEKWAD 2023.11.09
11:06:48 +0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.2610 OF 2018
Ramona Pinto, an individual having her )
address at Flat No.52, Ivorick, St. Cyril Road, )
Bandra (West), Mumbai - 400 050 ) ....Appellant
V/s.
1. Deputy Commissioner of Income Tax - )
23(3), Mumbai having his office at Matru )
Mandir, 1st Floor, Tardeo Road, Mumbai - 400 )
007 )
2. Principal Commissioner of Income Tax - 23, )
Mumbai having his office at Matru Mandir, )
1st Floor, Tardeo Road, Mumbai - 400 007 ) ....Respondents
----
Mr. P.J. Pardiwalla, Senior Advocate a/w. Mr. Nitesh Joshi a/w. Mr. Atul
Jasani for appellant.
Mr. Siddharth Chandrashekhar for respondents - Revenue.
----
CORAM : K. R. SHRIRAM AND
DR. NEELA GOKHALE, JJ.
RESERVED ON : 27th OCTOBER 2023
PRONOUNCED ON : 8th NOVEMBER 2023
JUDGMENT : (PER K.R. SHRIRAM, J.) :
1 In this appeal filed under Section 260A of the Income Tax Act,
1961 (the Act) appellant is impugning an order dated 2 nd April 2018 passed
by the Income Tax Appellate Tribunal (the Tribunal). By the impugned
order, the Tribunal upheld the validity of the reassessment proceedings and
also upheld the assessment of a sum of Rs.28 Crores receivable by appellant
pursuant to an arbitration award as in the nature of income. The appeal
pertains to Assessment Year 2010-2011.
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2 In the previous year relevant to Assessment Year 2010-2011,
i.e., on 17th September 2009, consent terms were reached between
appellant, her brother and other 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 25 th 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?
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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 18 th 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 and Testament dated
16th September 1990. Appellant was bequeathed a further share of 5% in
the profits and losses of the said Firm. Accordingly, appellant became
entitled to a 25% share in the profits and losses of the said Firm. This fact
has been also mentioned in the application for probate filed by appellant's
brother.
5 It is appellant's case that somewhere circa 2005, appellant
realised that the said Firm was reconstituted vide a Deed of Partnership
dated 25th November 1997 entered into between appellant's brothers, viz.,
William D'Souza and Denzil D'Souza. According to the said Deed, appellant
was treated as having retired from the Firm as and from the close of
business on 24th November 1997. The said Firm had filed its return of
income for Assessment Year 1998-1999 enclosing reconstituted Deed of
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Partnership and financial showing appellant as an erstwhile partner.
Appellant's case was she continued to be a partner in the said Firm.
6 Since disputes arose, appellant and the continuing partners of
the said Firm decided to refer their matter to arbitration. Finally, by an
interim order dated 20th July 2007 the Apex Court directed the said Firm to
pay an amount of Rs.50,000/- per month to appellant. Subsequently, by a
final order dated 28th March 2008 the Apex Court was pleased to appoint
Mr. Justice S. P. Bharucha, Chief Justice of India (Retd.) as sole Arbitrator to
decide the disputes between appellant, 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 25 th 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 25 th December
of each subsequent year.
8 Appellant, pursuant to the interim order dated 20 th July 2007
of the Apex Court referred earlier, received an amount of Rs.5 lakhs in the
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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 26 th 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 16 th 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 also relied on
various decisions of the Apex Court and of this Court.
10 The return of income filed by appellant was processed by
respondent no.1, i.e., Deputy Commissioner of Income Tax - 23(3), on
20th March 2012 under Section 143(1) of the Act, whereby, the total income
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as offered by appellant in her return of income was accepted.
11 Almost two years later, appellant received a notice dated
19th March 2014 from respondent no.1 under Section 148 of the Act
alleging escapement of income for Assessment Year 2010-2011. Appellant
was directed to file return of income once again which was complied with.
Appellant also received a copy of the reasons for reopening. The said
reasons referred to the information received in respect of an order dated
21st July 2007 passed by the Supreme Court as well as the arbitration award
dated 25th September 2009. The reasons also made reference to the fact
that the amount of Rs.7 Crores received by appellant during the Financial
Year 2009-2010, corresponding to Assessment Year 2010-2011, has not
been offered for tax in the return of income. Based on this, respondent no.1
has formed his belief that income of Rs.7 Crores chargeable to tax for
Assessment Year 2010-2011 has escaped assessment.
12 Appellant filed objections before respondent no.1 disputing
exercise of jurisdiction under Section 148 of the Act. Appellant urged that a
receipt is chargeable to tax only when it is of an income 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 Pamabhai1 and in Prashant S.
1 (1987) 165 ITR 166
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Joshi V/s. ITO2 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 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
2 (2010) 324 ITR 154 (Bom)
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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 reassessment
proceedings and issued notice dated 18 th March 2015 under Section 142(1)
of the Act. In the notice, appellant was asked to show cause as to why the
amount of arbitration award should not be assessed as business income
under Section 28(iv) of the Act. Alternatively, appellant was also asked to
show cause why the amount received as per the arbitration award should
not be regarded as for relinquishment of the partnership interest, and
hence, charged to capital gains. Appellant responded making detailed
submissions on non applicability of the provisions of Section 28(iv) and
provisions relating to capital gains. Appellant also filed copies of the
statement of claim made before the Arbitrator and also various documents
including request to the Registrar of Firms confirming that she has ceased
to be a partner of the said Firm.
16 Respondent no.1 passed the assessment order on 30 th March
2015 determining appellant's total income at Rs.28,18,91,590/-. Therein,
the amount of Rs.28 Crores was added as business income by invoking
Section 28(iv) of the Act. Alternatively, he held that the amount of
arbitration award was chargeable to tax as capital gains. It was further
alleged that appellant had not retired from the said Firm because the
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consent terms did not mention so and further held that the entire amount
was not towards her retirement from the said Firm.
17 Aggrieved by the assessment order, appellant filed 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 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
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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 to the inheritance right as per the father's Will, no part of such
amount would be chargeable to tax under the Act.
18 Aggrieved by the order dated 3rd February 2017 passed by the
CIT(A), appellant filed an appeal before the Tribunal. Appellant raised all
grounds before the Tribunal which dismissed the appeal by the impugned
order dated 2nd April 2018. The Tribunal upheld the reassessment
proceedings to be valid on the ground that prima facie there was material
on record which shows that income chargeable to tax had escaped
assessment. The Tribunal also concluded that there was a live nexus
between the material available with respondent no.1 and the belief formed
by him with respect to escapement of income. The Tribunal, however,
referred to the amount of arbitration award as special income which has to
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be considered in a wider sense. Miscellaneous application was filed before
the Tribunal which came to be dismissed.
19 Mr. Pardiwalla submitted as under :
(a) The reassessment proceedings have been initiated without
fulfilling the jurisdictional pre-conditions in Section 147 and Section 148 of
the Act as no income chargeable to tax had escaped assessment. This was
because on receipt of the amount of Rs.28 Crores all claims of appellant
against her brother and their family members and against the partnership
firm of P. N. Writer & Co. stand duly satisfied and appellant had no further
claims whatsoever 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
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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 20 th 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 to prove that it is within the taxing provision. (Parimisetti
Seetharamamma V/s. Commissioner of Income Tax3 and Mehboob
Productions Private Limited V/s. Commissioner of Income Tax4).
3 (1965) 57 ITR 532 (SC)
4 (1977) 106 ITR 758 (Bom.)
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The Revenue has not discharged the burden in the present
case. In the present case, the amount is received primarily for settlement of
relinquishment of the rights in the partnership firm as is apparent from a
perusal of clauses 1, 4 and 10 of the Consent Terms. The settlement of other
issues is only incidental and provided for only to preserve family peace and
amity.
(d) An amount received by a partner upon retirement from the
said Firm is not chargeable to tax. Upto 31st March 1988, i.e., before
insertion of Section 45(4) by the Finance Act 1987 with effect from 1 st 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. ( Tribhuvandas G. Patel
V/s. CIT 5 and CIT V/s. Lingmallu Raghukumar6).
That the amount was received for retirement from the said
Firm as is clear from the statement of claim before the Arbitrator, the
consent terms, the correspondence between the Attorneys and information
relating to reconstitution of the said Firm being filed with the Registrar of
Firms. 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
5 (1999) 236 ITR 515 (SC)
6 (2001) 247 ITR 801 (SC)
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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 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
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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.
Ramanathan7, CIT V/s. Sachin P. Ambulkar8 and CIT V/s. R. Nagaraja Rao9).
20 Mr. Chandrashekhar submitted as under :
(a) the amount received/receivable by appellant as a part of
the arbitration award would be chargeable to tax under Section 28(iv) of
the Act which reads as under :
28. The following income shall be chargeable to income-tax
under the head "Profits and gains of business or profession",--
xxxxxxxxxxx
(iv) the value of any benefit or perquisite, whether convertible
into money or not, arising from business or the exercise of a
profession.
xxxxxxxxxxx
This submission can be rejected straight away because the
CIT(A) has, in paragraph 7.8 of his order, accepted appellant's contentions
relying on Mahindra and Mahindra Ltd. V/s. CIT 10 as approved by the Apex
Court that Section 28(iv) does not apply to benefits in cash or money and
that the benefit or perquisite which can be brought to tax under the said
Section is a benefit in kind. A monetary amount, as in the present case,
cannot be assessed under the said Section. CIT V/s. Mafatlal Gangabhai &
Co. (P.) Ltd.11 also supports this view where the Apex Court was considering
a similar provision which used the words "whether convertible into money
7 (2000) 245 ITR 494 (Mad)
8 (2014) 42 taxman.com 22 (Bom)
9 (2013) 352 ITR 565 (Karn)
10 (2003) 261 ITR 501/(2018) 404 ITR 1 (SC)
11 (1996) 219 ITR 644 (SC)
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or not" following the words "any benefit or amenity or perquisite". Their
submission was that what is within the mischief of the sub clause is an
expenditure incurred for providing a benefit, amenity or perquisite to an
employee and that 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 Tax12. 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.
12 (1963) 48 ITR 222 (SC)
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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 Tax13.
(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 14 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". 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. The Tribunal has
correctly held that the receipt was a special income and hence, the receipt
was taxable in nature.
(e) Reliance was placed on orders of the Tribunal in
Shevantibhai C. Mehta V/s. ITO15 and Savitri Kadur V/s. DCIT16. These
13 (1956) 30 ITR 286 (AP)
14 1970 (2) SCC 724
15 (2004) 4 SOT 94 (Pune)
16 (2019) 106 taxman.com 314 (Bang)
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orders, in our view, are contrary to the judgments of the Apex Court in
Mohanbhai Pamabhai (Supra), Tribhuvandas G. Patel (Supra), Lingmallu
Raghukumar (Supra) and of this Court in the case of Prashant S. Joshi
(Supra) and hence, do not lay down the correct position.
\
FINDINGS :
21 The law as regards jurisdiction under Section 148 of the Act is
very clear. The following jurisdictional pre-conditions are required to be
fulfilled :
(i) the assessee's income chargeable to tax has escaped
assessment;
(ii) the Assessing Officer must have formed a belief that the
assessee's income chargeable to tax has escaped assessment;
(iii) the belief as formed by the Assessing Officer that the
assessee's income chargeable to tax has escaped assessment
must not be based on a change of opinion;
(iv) his belief must not be based on same material 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.
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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.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 vague and incomplete thereby making the
reassessment proceedings initiated under Section 148 of the Act bad in law.
In the order dated 21st August 2014, respondent no.1, while disposing the
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objections raised by appellant to his assumption of jurisdiction under
Section 148 of the Act has stated that the receipt of Rs.7 Crores was not in
respect of appellant's retirement from the said Firm. The order, however,
states that the information/material available with respondent no.1 at the
time of formation of his belief comprised of information received by him
from the Assessing Officer of P. N. Writer & Co. as well as the note placed by
appellant in her return of income filed for Assessment Year 2010-2011. The
information reveals that the said receipt was towards appellant's retirement
from the said Firm. Therefore, justification given by respondent no.1 in the
order dated 21st August 2014 for taxability of the said receipt as not relating
to appellant's retirement from the said Firm was contrary to the
information/material available with him.
The law is very settled in as much as the belief formed by the
Assessing Officer has to be based on the information/material available
with him at the time of formation of the belief. There was no material
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 under Section 148 of the Act,
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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.
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
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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 proceedings without forming the requisite belief and
only with a view to enquire/investigate into the facts, his assumption of
jurisdiction under Section 148 of the Act, in our view, would be bad in law.
26 We should also note that with a view to justify the taxability of
Rs.7 Crores in the hands of appellant, respondent no.1, in the order dated
21st August 2014 disposing the objections, has referred to the following
aspects :
(i) the amount is received by the Appellant in lieu of arbitration
Award which is taxable in the year of decision when amount is
payable;
(ii) the amount has been received by the Appellant on account of
her expulsion from the firm of P.N. Writer & Co. and the decision
of the Hon'ble Supreme Court in the case of Mohanbhai
Pamabhai (supra) which was concerned with amount received by
a partner upon her retirement from the firm would not apply to
amount received on expulsion;
(iii) the Appellant has received the said amount as she has given
up her rights and interests in the firm. According to Respondent
No.1, this would tantamount to a transfer and the difference
between the market value of the assets of the firm and the cost
would be chargeable to capital gains under section 45 of the Act.
None of these circumstances find any mention in the reasons
recorded by respondent no.1 for reopening 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.
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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 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
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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 rights against the firm
and its partners;
(v) As per the consent terms the Appellant and her husband was
also required to transfer certain assets being shares of
companies to the counter parties in the arbitration which were
completely unconnected with the firm;
(vi) There was no positive balance in the capital account of the
Appellant in the books of the said firm. Therefore, the amount
received was not relatable to the firm; and
(vii) The Appellant had also not been able to establish the basis
on which the amount of Rs.28 Crores had been arrived at.
28 The Tribunal has failed to appreciate that there was a dispute
between appellant and her brothers with respect to her wrongful retirement
from the said Firm. For invocation of arbitration proceedings the matter was
carried right upto the Hon'ble Supreme Court. The settlement amount was
receivable by appellant for relinquishment of her rights and claims as a
partner of the said Firm. In these circumstances, though there may be no
mention of her retirement from the said Firm in the consent terms or the
arbitration award, the only inference possible would be that she no longer
continued as a partner of the said Firm after such settlement. It is also not
anybody's case that appellant has not played any role in the said Firm or
received any share from the said Firm after the settlement.
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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 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
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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 that
appellant and her husband had transferred equity shares of two companies
to the counter parties in the arbitration proceedings and, therefore, amount
received by appellant under the arbitration award also related to such
transfer, the Tribunal should have appreciated that when the rights between
the parties inter se were settled, it was also agreed that appellant would
transfer the said shares to her brother's group. It is quite obvious that it is
an overall family settlement which has been arrived at.
30 Even if we go alongwith the Tribunal that appellant had
received the amount of Rs.28 Crores under the arbitration award for
transfer of a composite bundle of rights, it was not open to assess the entire
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amount of the award as income from other sources. 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.
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.17. 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 1 st April 1988, the amount received
by a partner upon retirement from the firm was in the nature of working
17 273 ITR 1
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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 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 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
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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.
33 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. Even
if 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 eligible to tax. We find support for this view in
AL. Ramanathan (Supra), Sachin P. Ambulkar (Supra) and R. Nagaraja Rao
(Supra).
34 In the course of hearing, Mr. Chandrashekhar has urged that
the said submission should be rejected as an afterthought as done by the
Tribunal. In this regard, we would refer to letter dated 26 th 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.
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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.18). Further, it has been held by this Court in CIT
V/s. Abbasbhoy A. Dehgamwalla19 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
18 (2010) 325 ITR 422 (SC)
19 (1992) 195 ITR 28
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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
partners in the said Firm, viz., appellant and her brother Mr. Denzil D'souza,
and 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. After the
demise of appellant's father, the said Firm was reconstituted by Mr. William
D'souza and Mr. Denzil D'souza as continuing partners and appellant being
shown as retired from the said Firm. Hence, the said Firm was not dissolved
but continued to exist. In fact, clause (9) of the partnership deed, copy
whereof forms part of the Memo of Appeal also clarifies that death of a
partner shall not dissolve the firm. Further, after the death of William
D'Souza, his children were inducted as partners, and were partners at the
time that the consent terms were arrived at. At no point of time was only a
single person left as partner. In any event, the principle as applicable to non
taxability of the amount received by a retiring partner would equally apply
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to the amount received upon dissolution. Further, as per Section 45(4) of
the Act, assuming that there was a distribution of capital assets upon
dissolution of the firm, it is the firm and not the partner who has 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. 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
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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 thereon, if any, the
Claimant relinquishes all rights, claims and demands of any
nature whatsoever against the Respondent abovenamed, the
partnership firm of P .N. Writer & Co. and all other entities
owned and/or controlled by the Respondents.
3. The payment of the aforesaid amount of Rs.28,00,00,000/-
(Rupees Twenty Eight Crores Only) and interest thereon, if any,
shall stand secured by a charge on the following properties :
(a) Warehouse at Plot No.D-178/3, Shirwani, T.T.C. Ind.
Area, Thane-Belapur Road, Thane - 400 613- estimated
value of Rs.6.60 crores;
(b) Warehouse at Plt No - 272/1, hope Farm Circle,
Whitefield, Bangalore - 560 066 - estimated value of Rs.12
crores;
(c) Warehouse & office at No.3, 2nd Street. Third Main
Road, CIT Nagar, (extn), Nandanam, Chennai - 600 035 -
estimated value of Rs.4.20 crores;
(d) Office at 41, Dickenson Road, Bangalore - 560 042 -
estimated value of Rs.1.20 crores;
(e) Flat at Orion Building, 174 St. Cyril Road, Bandra(w),
Mumbai - 400 050 - estimated value of Rs.1.95 crores;
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(f) Office at Roy Apartments, Sahar Road, Andheri(E),
Mumbai-400 099 - estimated value of Rs.90 lacs;
(g) Office at Jayant Villa Worli, Mumbai - 400 025 -
estimated value of Rs.60 lacs;
(h) Office 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 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
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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 is
however made clear that any stamp duty, registration charges or
tax that may become payable to facilitate such transfer, either by
the Claimant and/or by her husband, will be borne or paid by
the Respondents :-
(a) 55 equity shares of Rs.1000 each fully paid up in
Oceanair Transport and Investment Company Pvt. Ltd.;
(b) 2001 equity shares of Rs.1000 each fully paid up in
JOSCO International Shipping Agency Pvt. Ltd;
(c) 1/5 share of 2 Bighas 8 Biswas Part of Khasra
No.875/2/1 situate at Burari, Delhi registered originally in
the names of all the partners and family members;
(d) Agricultural lands admeasuring 52 acres 132 Guntas
under GUT Nos.533, 534, 904, 913, 914, 885 & 886 in
Shillim Village, Maharashtra;
(e) Plot of land situated at 159/1A, GST Road, Vandalur,
Chennai - 600 048 registered originally in the name of all
the partners and family members;
(f) Any other properties/shares/interest if found to be
held by the Claimant and/or her husband for and on
behalf of the Respondents/Firm and/or sister concerns.
10. The Respondents agree to indemnify and keep the Claimant
indemnified in respect of all and/or any demands and/or claims
made by any 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.
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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 18 th 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 25 th 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
partnership firm be taken from such date as this Hon'ble
Tribunal deems fit;
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(i) that this Hon'ble Tribunal appoint some fit and proper person
as Receiver of the assets of the firm, for the purpose of
distribution thereof;
(j) that in the alternative to prayers (e) and (h) above,
Respondent No.1 by himself and/or through his servants and/or
agents be restrained by an order and permanent injunction of
this Hon'ble Tribunal from in any manner whatsoever
preventing the Claimant from participating in the business of
the said partnership firm, and for this purpose having full and
free access to all its offices, properties, records and accounts;
(k) that Respondent Nos.3 to 5 be restrained by an order and
permanent injunction of this Hon'ble Tribunal from holding
themselves out or in any manner purporting to act as partners of
the partnership firm of P. N. Writer and Co.;
(l) for costs, both of the present arbitration as well as with
respect to Arbitration Petition No.428 of 2005 and all related
and connected matters arising therefrom;
(m) for such further and other relief's as the nature and
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
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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 accordingly re-
alignment 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 members would not amount to transfer.
3. This court has held in CIT v. R. Ponnammal [1987] 164 ITR
706 that :
". . . the family arrangement had been brought about by
the intervention of the panchayatdars and this clearly
showed that the sons and daughters of the assessee were
laying claims to the property which the assessee got under
the will of her father and it was not relevant at the time
when the family arrangement was entered into to find out
as to whether such claims if made in a court of law would
be sustained or not. If the assessee found it worthwhile to
settle the dispute between herself, her sons and daughters
by making the family arrangement, the said arrangement
could not be ignored by a tax authority. In view of the
finding of the Tribunal, the family arrangement dated
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December 17th, 1971, had to be held to be a valid piece of
document and, hence, the Tribunal was right in its view
that no transfer of property was involved within the
meaning of Section 2(xxiv) of the Gift-tax Act and, hence,
there was no liability to gift-tax either under Section 4(1)
(a) or under Section 4(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 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 ;"
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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 :
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(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 the instant case there has been a
genuine dispute among the family members and
several suits were filed and judgments were
pronounced. Finally the parties to the suits decided
to come to a settlement and the family arrangement
was reached and a Consent Decree was passed by the
Bombay High Court in Suit No.4616 of 1998 on
16th October, 2003. The Royalty paid by the Court
Receiver was only an interim relief of their share of
income from the properties of G.D. Ambulkar, which right
arose on account of their preexisting right in the
properties as per Will of G.D. Ambulkar. Family
arrangement is a device by which dispute between
family members as to their respective property rights
were settled. Such settlement may involve division of the
property as between them and consequently a release
of rights by one or the other in favour of the allottees.
Conflicting legal claims get so settled. Since the
settlement only defines a pre-existing joint interest as
separate interests, there is no conveyance, if the
arrangement is bonafied. Since there is no conveyance,
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.
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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 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 of the Gauhati High Court in the
case of Ziauddin Ahmed v. CGT [1976] 102 ITR 252 held that
admittedly there are lot of disputes between the family members
of the asssessee who are none other than the relatives of one
other and in that event, the family arrangement and settlement
entered into between the parties on the suggestion made by the
arbitrator cannot be termed as a transfer either in respect of
movable or immovable properties or in respect of commercial
properties. Therefore, the Tribunal held that there is no transfer
and it was only a family arrangement. Therefore he was not
liable to pay tax on capital gains Accordingly he set aside the
order passed by the lower authorities. Aggrieved by the said
order the Revenue has preferred this appeal .
2. The substantial question of law which is framed in this appeal
on 12-8-2006 reads as under :
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2. Whether, the Tribunal was correct in holding that the
transfer of shares took place by virtue of family
arrangement and there was no transfer as there was family
disputes and such arrangement took place at the instance
the arbitrator.
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This Court had an occasion to Consider the aforesaid questions
in the case of KN, Madhudhan Gift Tax Appeal Nos.1 & 2 of
2008 disposed off on 6th September, 2010, in the aforesaid
Judgment it was held that the word transfer does not include
partition or family settlement as defined under 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 jurisdiction under Section 147 of the Act
without fulfilling the jurisdictional pre-conditions and hence, the
reassessment proceedings were without jurisdiction. Further, 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 appellant as per the
arbitration award was not chargeable to tax.
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44 Appeal disposed accordingly. No order as to costs.
(DR. NEELA GOKHALE, J.) (K. R. SHRIRAM, J.)
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