Case Note & Summary
The petitioners, Prashant S. Joshi and Dattaram Shridhar Bhosale, were partners in a real estate development partnership firm. They retired from the partnership on 11th March 2005 and 31st March 2005 respectively, receiving Rs.50 lacs each as full and final settlement of their dues. The amounts were received partly in financial year 2004-05 (Rs.17 lacs) and partly in 2005-06 (Rs.33 lacs). The petitioners filed their returns of income for assessment years 2005-06 and 2006-07, disclosing the amounts received but not offering them to tax on the ground that they were capital receipts. The Assessing Officer initially accepted the returns and did not issue any notice under Section 143(2) within the prescribed time. Subsequently, on 25th November 2008, the Assessing Officer issued notices under Section 148 of the Income Tax Act, 1961 proposing to reassess the income for both assessment years on the ground that income chargeable to tax had escaped assessment. The reasons recorded were that the Commissioner of Income Tax (Appeals) had passed an order in the case of the partnership firm for assessment year 2005-06, allowing the firm's claim for payment of Rs.1 crore to the retiring partners as a revenue expenditure, which indicated that the amount received by the petitioners might be a revenue receipt. The petitioners challenged the notices by way of writ petitions. The court held that the reasons recorded by the Assessing Officer did not constitute valid reason to believe that income had escaped assessment. The court noted that the petitioners had fully disclosed the receipt of the amounts in their returns and had clearly stated that they were capital receipts not offered to tax. The Assessing Officer had accepted the returns without any query, and the subsequent issuance of notices was based on a mere change of opinion. The court further held that the amount received by a partner on retirement from a partnership firm is a capital receipt and not chargeable to tax as income, relying on the Supreme Court's decision in CIT v. R. Lingmallu Raghukumar. The court quashed the notices and the reassessment proceedings.
Headnote
A) Income Tax - Reassessment - Section 147, 148 Income Tax Act, 1961 - Reason to Believe - The court considered whether the Assessing Officer had reason to believe that income had escaped assessment when the petitioner had disclosed the receipt of Rs.50 lacs on retirement from a partnership firm as a capital receipt not offered to tax. The court held that the reasons recorded by the Assessing Officer were based on a mere change of opinion and did not constitute valid reason to believe, as the issue of whether the amount was a capital or revenue receipt was already considered during the original assessment. (Paras 1-10) B) Income Tax - Capital Receipt vs. Revenue Receipt - Retirement from Partnership - Section 45, 28, 56 Income Tax Act, 1961 - The court examined whether the amount received by a partner on retirement from a partnership firm is a capital receipt or a revenue receipt. Relying on the decision of the Supreme Court in CIT v. R. Lingmallu Raghukumar, the court held that such receipt is a capital receipt not chargeable to tax under the head 'profits and gains of business or profession' or 'income from other sources'. (Paras 11-15) C) Income Tax - Reassessment - Change of Opinion - Section 147, 148 Income Tax Act, 1961 - The court held that the Assessing Officer cannot reopen an assessment merely because he has a different opinion on the same set of facts, as that would amount to a change of opinion, which is not permissible under the law. The court quashed the notices and the reassessment proceedings. (Paras 16-20)
Issue of Consideration
Whether the notices issued under Section 148 of the Income Tax Act, 1961 for reopening assessment on the ground that the amount received by the petitioner on retirement from a partnership firm was a revenue receipt and not a capital receipt, were valid.
Final Decision
The court allowed the writ petitions and quashed the notices issued under Section 148 of the Income Tax Act, 1961 and the reassessment proceedings.
Law Points
- Reassessment under Section 147/148 requires reason to believe that income escaped assessment
- mere change of opinion not sufficient
- capital receipt on retirement not taxable as income
