Ita/30/2004 Of Smt.visalakshy Kumaran v. The Commissioner Of Income Tax, Ekm

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE HARUN-UL-RASHID MONDAY, THE 1ST DECEMBER 2008 / 10TH AGRAHAYANA 1930 ITA.No. 30 of 2004() -------------------- APPELLANT: -------------------- SMT.VISALAKSHY KUMARAN, XL/4690, PULLEPADY, CHITTOOR ROAD, COCHIN 682 035. BY ADV. SRI.T.M.SREEDHARAN RESPONDENT(S): --------------- THE COMMISSIONER OF INCOME TAX, ERNAKULAM. ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01/12/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &HARUN-UL-RASHID, JJ. .................................................................... I.T. Appeal No.30 of 2004 ....................................................................Dated this the 1st day of December, 2008. JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by the assessee is whetherthe amount of Rs.50 lakhs received by her under Annexure-Bagreement was assessable to income under the head "income from othersources" under Section 56 of the Income Tax Act. The facts leading tothe case are the following. The assessee along with two others werecarrying on business in bakery items under the name Cochin Bakeryfrom 1971 onwards. On the death of one of the partners, the firm wasreconstituted. The firm was reconstituted on 25.12.1975 and in thereconstituted deed also appellant was a partner. However, later thepartners fell out from each other which led to litigation before civilcourt. Besides partners filing suits for settlement of account and fordissolution of the firm, employees also filed suit claiming certainamounts. In fact, the civil court passed a preliminary decree in July1991 declaring the firm as dissolved with effect from 9.8.1989. However, final decree was not passed and several suits including onefiled by the appellant was pending. While so, a purchaser cameoffering good price for the land in which the building was locatedwherein business was being carried on by the firm. It is the admittedposition that the firm had only tenancy right in the building located onthe 25 cents of land owned by two partners other than the appellant.After the two partners namely, the owners agreed to sell the property,they came to a settlement whereunder appellant relinquished her claimsas partner of the firm and signed compromise application for settlingsuits on receipt of consideration of Rs.50 lakhs under Annexure-Bagreement dated 26.7.1995. 2. Under Annexure-B agreement, appellant was to get Rs.50lakhs reduced by Rs.1 lakh for brokerage for sale of the land owned bythe other two partners. The payments were to be received in twofinancial years 1995-96 and 1996-97. Around Rs.12 lakhs wasreceived in the financial year 1995-96 and the balance Rs.37 lakhs was received in the next financial year i.e. 1996-97. However, thedepartment considered the entire payments as received in the year in which the property was sold and full consideration was received i.e.1997-98 and brought to tax the amount received by the appellant. Inthe appeal filed by the assessee, the C.I.T.(Appeals) held that the firmwhich was defunct for several years had assets worth no value andtherefore, he allotted Rs.1 lakh towards receipt of appellant's respectiveshare from the firm on dissolution and the balance was taken asgratuitous payment from the other partners and approved assessment ofthe said amount as income from other sources. In second appeal, theTribunal confirmed the findings of the Commissioner against whichthis appeal is filed. We have heard counsel appearing for the appellantand Senior counsel appearing for the respondents. which the property was sold and full consideration was received i.e.1997-98 and brought to tax the amount received by the appellant. Inthe appeal filed by the assessee, the C.I.T.(Appeals) held that the firmwhich was defunct for several years had assets worth no value andtherefore, he allotted Rs.1 lakh towards receipt of appellant's respectiveshare from the firm on dissolution and the balance was taken asgratuitous payment from the other partners and approved assessment ofthe said amount as income from other sources. In second appeal, theTribunal confirmed the findings of the Commissioner against whichthis appeal is filed. We have heard counsel appearing for the appellantand Senior counsel appearing for the respondents. 3. On going through Annexure-B, we find that the appellant orthe firm in which the appellant was a partner had no right in theownership of the land. On the other hand, the firm in which theappellant was a partner had only a leasehold right in the building whichwas located on the land involved. For around six years prior to thefinal settlement, business was closed and the firm had hardly any assetwith any value. However, the protracted litigation pending before civil courts prevented the owners from selling the property free of anyencumbrance because technically lease was still in force in favour ofthe defunct firm. Therefore, settlement was reached among thepartners whereunder landed property was agreed to be sold for the pricestated in Annexure-B and which was shared among the partners,appellant getting only a meagre share of around 10% of the saleproceeds. Even though we find force in the contention of counsel forthe appellant that the finding of the C.I.T.(Appeals) and the Tribunalthat the payment received is gratuitous in nature and withoutconsideration is not tenable because but for consideration paid forgiving up her claims as partner of the firm, property could not havebeen sold, we are still not inclined to interfere with the orders of theTribunal because admittedly appellant had no right in land and theleasehold right itself was in favour of the firm. In fact, the amountpaid to the appellant is only to purchase peace and for early disposal ofthe land or otherwise, litigation would have continued and sale wouldhave been delayed. There is no scope for interference with theapportionment of the receipt by allocating Rs.1 lakh towards consideration of share on dissolution of the firm and balance aspayment without consideration because on facts, the firm had hardlyany asset with value and the appellant had no right in the land whichwas sold by the other partners. 4. The next question to be considered is the propriety ofassessment of the amount under income from other sources underSection 56 of the Act. Here again, appellant did not canvass theposition that the amount received is either gift or sale consideration onsale of a capital asset in the form of relinquishment of rights in thefirm. As already found by us above, if at all there is consideration forthe receipt of money, it is only for early settlement of litigation pendingbefore civil courts and the land owners by making payment, purchasedpeace for early disposal of the land. Standing Counsel relied ondecision of the Supreme Court in COMMISSIONER OF INCOMETAX V. G.R.KARTHIKEYAN (1993) 201 ITR 866 and contended thatdefinition of "income" under Section 2(24) is not exhaustive andincome not falling under any specific head should be assessed underSection 56 of the Act. In view of the findings above, we do not find any justification to deviate from the view taken by the Tribunal. Eventhough I.A. No.2968/2004 is filed to raise the contention that thegratuitous payment becomes income through amendments to Sections 2(24)(xiii) and Section 56 only with effect from 1.9.2004 and we allowthe petition, we do not think there is any scope for considering thisbecause we have found that the income received is not in the nature ofgratuitous payment, but for appellant's agreement for settlement ofdisputes among the parties and for releasing whatever be her rights inthe firm. Consequently, we dismiss the appeal. C.N.RAMACHANDRAN NAIRJudge pms HARUN-UL-RASHIDJudge