Bombay HC Accepts the Assessee’s Alternate Claim Also & Lucidly Explains the Concept of Family Arrangement

CA S. Krishnan – [2023] 156 taxmann.com 661 (Article)

1. Introductory Remarks

A professional derives immense pleasure when he goes through certain judicial decisions wherein the facts of the case are analysed in detail and the judgment is rendered after detailed analysis of the facts of the case vis-à-vis applicable case laws. If one is permitted to say so, with respect, such pleasure was experienced by the author when he had an occasion to go through the decision of the Bombay High Court in the case of Ramona Pinto v. Dy. CIT [2023] 156 taxmann.com 282 wherein it was held that belief formed by revenue without any statement on whether and how receipt was of an income nature would render reasons as vague and incomplete thereby making reassessment proceedings initiated under section 148 of the Income-tax Act (the Act) bad in law and amount of settlement received by the assessee for relinquishing all her rights and claims as a partner in partnership firm was related to her retirement from firm and was not in nature of income chargeable to tax. The High Court also held that

“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 assessee as per the arbitration award was not chargeable to tax as a result of Family Arrangement.”

The full facts of the case have been digested in the next paragraph followed by the decision of the lower authorities, Tribunal and the Bombay High Court.

2. Facts of the case

A partnership firm by name PNW & Co. (the said Firm) was established in or about the year 1954 between the assessee’s late father CD and one PNW. The said Firm was reconstituted from time to time and the last partnership deed in this regard was executed on 18th January 1979. As per the partnership deed, the assessee along with her late father and brothers were the partners in the said Firm. The assessee was entitled to a share of 20% in the profits or losses made by the said Firm.

The assessee’s father CD who was the partner of the said firm expired on 24th November 1997 leaving behind his last Will and Testament dated 16th September 1990 wherein the assessee was bequeathed a further share of 5% in the profits and losses of the said Firm. Accordingly, the assessee became entitled to a 25% share in the profits and losses of the said Firm.

The assessee realised in or about the year 2005 that the said Firm was reconstituted vide a Deed of Partnership dated 25th November 1997 [the day following her father CD’s death] entered into between assessee’s brothers, viz., WD and DD. According to the said Deed, the assessee was treated as having retired from the Firm as and from the close of business on 24th November 1997[ date of CD’s death]. The said Firm had filed its return of income for the Assessment Year 1998-1999 enclosing reconstituted Deed of Partnership and financial statement showing the assessee as an erstwhile partner though the assessee raised the contention that she continued to be a partner in the said Firm.

As disputes arose between the assessee and the continuing partners the issue was referred to arbitration. Interim order in this matter was passed on 20th July, 2007 by the Supreme Court as a result of which an amount of Rs.50,000/- per month was paid to the assessee by the firm. By a final order dated 28th March 2008 the Supreme Court appointed a retired Chief Justice of India as the sole Arbitrator to decide the disputes between assessee, her siblings and the said Firm.

After considering claims and counter claims of the parties that were raised as also the consent terms arrived (at) between the parties before the Arbitral Tribunal, an award in terms of the consent terms was passed on 25th September 2009. As per the consent terms, the assessee relinquished all her rights, claims and demands of any nature whatsoever against the said Firm or its partners. In consideration thereof, the assessee was to receive an amount of Rs. 28 Crores and that she 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 instalments of Rs.3 Crores, on or before 25th December of each subsequent year

Pursuant to the interim order dated 20th July, 2007 passed by the Supreme Court which has been referred to earlier, the assessee received a sum of Rs. 5 lakhs during the assessment year 2008-09.

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