EASTERN ASBESTOS PRODUCTS V. THE COMMISSIONER OF INCOME TAX

CWJC/7515/1997

AI Insights

The case involves Hind Mosaic and Cement Works, a partnership firm, challenging the taxation of income received from relinquishing tenancy rights under the Income Tax Act, 1961. The firm, along with other partners, had entered an agreement with Wazir Sahkari Grih Nirman Samiti to relinquish their tenancy rights for a sum of Rs. 7 lacs each. Initially, the income was not taxed, but subsequent reassessments led to disputes. The court examined whether the income from relinquishment of tenancy rights is taxable and whether the reassessment was valid under sections 147 and 148 of the Act. The court found that the income was a capital receipt, referencing previous judgments that supported this view.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 760407 (HC-PATNA)
• Appeal Type: Others
• Pronouncement Date: 28-04-2011
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax versus Neba Ram Hansraj (Patna) 223 ITR 854, Commissioner of Income Tax versus D P Sandu Bros. Chembur P. Ltd. 273 ITR 257, Eastern Asbestos Products v. The Commissioner of Income Tax, Patna & Ors.
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: HARSHWARDHAN PRASAD; ARCHANA SINHA
• Assessee Lawyers: D V PATHY; M S ABHI SARKAR AND S N SINHA ADVOCATES
• Keywords: Capital receipt; Income Tax; Jurisdiction; Re-assessment; Relinquishment of tenancy rights
• Section: 147; 148; 226; 55(2)

Judgement Text

"CIVIL WRIT JURISDICTION CASE No.12950 of 2001 In the matter of an application under Article 226 of the Constitution of India. HIND MOSAIC AND CEMENT WORKS, a partnership firm having its office at Exhibition Road, Patna through its partner L N Poddar, son of Late Dawarika Prasad Poddar, resident of Khojpura, Bailey Road, Patna .......... Petitioner Versus 1. THE COMMISSIONER OF INCOME TAX, Patna 2. The Dy. Commissioner of Income Tax (Investigation) Circle -2 (1), Patna ......... Respondents with CWJC No.3003 of 1999 HIND MOSAIC & CEMENT WORKS, PATNA... Petitioner Versus THE COMMISSIONER OF INCOME TAX.....Respondent with CWJC No.7515 of 1997 EASTERN ASBESTOS PRODUCTS...... .....Petitioner Versus THE COMMISSIONER OF INCOME TAX ......Respondent ******* For the Petitioners : Mr. D V Pathy, Advocate with M/s Abhi Sarkar and S N Sinha Advocates For the Respondents : Mr. Harshwardhan Prasad Standing Counsel Ms. Archana Sinha, Advocate ******** P R E S E N T HON’BLE MR. JUSTICE SUDHIR KUMAR KATRIAR HON’BLE MR. JUSTICE SAMARENDRA PRATAP SINGH S K KATRIAR, J. CWJC No. 12950 of 2001 is directed against the order dated 25.1.2001 (Annexure-7), passed by the learned Deputy Commissioner of Income Tax, whereby the income for relinquishment of tenancy rights has been taxed under the provisions of the Income Tax Act 1961 (hereinafter referred to as `the Act’). It relates to the assessment year 1989-1990. 2. A brief statement of facts essential for the disposal of the writ petition may be indicated. The petitioner is a partnership firm and was at the relevant point of time engaged, inter alia, in the business of manufacture of tiles, other cement products, pipes, etc. It had taken a portion of a premises on rent situate on Exhibition 2 Road in the township of Patna, from one Smt. Jayanti Roy, widow of Col. Niranjan Roy, and other ex-owners. In fact, it was a sprawling premises and was taken on rent by the present petitioner and three other partnership firms, namely, Eastern Asbestos Products (Petitioner of the analogous CWJC No.7515 of 1997), M/s Ashirvad Enterprises, and M/s Poddar Industrial Corporation. The latter two are not before us. The ex-owners executed a registered deed of absolute sale, transferring right, title and interest with respect to the premises in question with all rights and liabilities in favour of Wazir Sahkari Grih Nirman Samiti (hereinafter referred to as `Samiti’). The petitioner and three other partnership firms entered into an agreement dated 15.10.88 (Annexure -10), with the Samiti, whereby the four partnership firms including the two petitioners before us agreed to relinquish their tenancy rights in the premises in question in favour of the Samiti, and hand over vacant possession of the same on receipt of a sum of Rs.7 lacs each partnership firm. 2.1) The petitioner submitted its returns for the period in question, and had stated as follows in the annexure to the return entitled `Computation of Total Income’: “Note Amount received on account of relinquishment of tenancy rights being in the nature of capital receipts has been credited to the Partners Capital amount in their respective profit sharing ratio.” The learned assessing officer passed order of assessment on 30.3.92 (Annexure -3), whereby he accepted the declaration with respect to the amount received on account of relinquishment of tenancy rights. Aggrieved by the adverse portions of the assessment order, the petitioner had preferred appeal which was allowed in part by the learned Commissioner of Income Tax by his order dated 7.12.92 (Annexure-4). Aggrieved by this order, the petitioner preferred appeal before the learned Tribunal which was allowed by order dated 9.8.94 3 (Annexure-5). In other words, the aforesaid declaration made by the petitioner with respect to the income received on account of relinquishment of tenancy rights was accepted by all the three authorities. 2.2) The petitioner received notice under the provisions of section 148 of the Act, calling upon the petitioner to show cause as to why the assessment proceedings be not re-opened, particularly with respect to the income received from relinquishment of tenancy rights. The petitioner challenged the same by preferring the aforesaid CWJC No.3003 of 1999. The same was admitted by a Division Bench of this Court by order dated 15.3.2000. In view of the position that the Division Bench did not pass any interim order of stay of further proceeding before the learned assessing officer, she proceeded with re-assessment, and passed the aforesaid order of assessment on 25.1.2001, and impugned in CWJC No.12950 of 2001. 3. While assailing the validity of the impugned order of assessment, learned counsel for the petitioner submits that the question whether or not such an income is liable to payment of income tax is covered by the following reported judgments:- (i) A Division Bench judgment of this Court in Commissioner of Income Tax versus Neba Ram Hansraj (Patna) 223 ITR 854 (ii) Judgment of the Supreme Court in Commissioner of Income Tax versus D P Sandu Bros. Chembur P. Ltd. 273 ITR 257 He submits in the same vein that, in view of the two authoritative pronouncements, there is no scope for issuance of notice under section 148 of the Act which renders the notice bad in law and, consequently, the impugned order as well. He next submits that M/s Ashirvad Enterprises and M/s Poddar Industrial Corporation, the two other similarly circumstanced partners occupying portions of the 4 same premises, and party to the same agreement dated 15.10.88, have already been granted relief by the learned authorities under the Act. In his submission, therefore, the petitioner cannot be dissimilarly treated. Learned counsel lastly submits that the position has with the insertion of section 55(2) in the Act, with effect from 1.4.1995, the legal position has perhaps changed as a result of which the income in question may not be taxed with effect from the date of insertion. 4. Learned Senior Standing Counsel for the Department submits that the Supreme Court has by its order dated 26.10.98, passed in Civil Appeal no.524 of 1999 (Eastern Asbestos Products v. The Commissioner of Income Tax, Patna & Ors.), already framed the following issues for the determination of this Court:- “(i) Whether the impugned notice satisfies the condition precedent or not. (ii) If the condition precedent is satisfied, what appropriate order to be passed; and (iii) If the condition precedent is not satisfied, what appropriate order to be passed regarding notice under section 146 of the Income –tax Act 1961.” In his submission, the writ petitioner is inviting the Court to decide issues beyond those framed by the Supreme Court. He next submits that the petitioner had made a vague declaration in its income tax return reproduced hereinabove whereby not even the amount was mentioned as a result of which the same escaped attention of the learned authorities under the Act. He further submits that the order dt. 29.1.99, of the Settlement Commission, passed in terms of section 245 BA of the Act, will bind only the parties before the Commission, and not others. He lastly submits that the decisions relied upon by learned counsel for the petitioner are with respect to tax cases after the entire course of proceedings under the Act had been undergone and, therefore, inapplicable to the writ proceeding which has been preferred without exhausting alternative remedies. 5 5. The following substantial questions of law have been framed for our consideration which includes issues formulated by the Supreme Court: “(i) Whether the impugned notice satisfies the condition precedent or not? (ii) If the condition precedent is satisfied, what appropriate order to be passed? (iii) If the condition precedent is not satisfied, what appropriate order to be passed regarding notice under section 146 of the Income –tax Act 1961? (iv) Whether the order of the re-assessment under the provisions of section 147 of the Act is prima-facie illegal and without jurisdiction inasmuch as the particulars of receipt on account of relinquishment of tenancy rights were duly disclosed in the original return of income? (v) Whether the order of re-assessment is prima-facie illegal and without jurisdiction inasmush as there is no omission or failure on the part of the assessee to disclose material facts relevant to an assessment? (vi) Whether the re-assessment under the provisions of section 148 of the Act is illegal and without jurisdiction inasmuch as the findings therein are perverse and contrary to the materials on record? (vii) Whether the order of re-assessment is illegal and without jurisdiction as the same is nothing but a mere change of opinion in respect of the facts duly adjudicated and considered by the preceding assessing officer in the original assessment? (viii) Whether the order of re-assessment is illegal and without jurisdiction as the claims in relation to tenancy rights were duly accepted by the preceding assessing officer in the original assessment and also in the assessment of the sister concerns of the petitioner and also by the Settlement Commission, Additional Bench, Calcutta in the case of the sister concerns of the petitioner in respect of the same set of transactions and the same set of facts? (ix) Whether the order of re-assessment is wholly illegal and without jurisdiction as the original order of assessment stood merged in the order of the Tribunal? (x) Whether the re-assessment is illegal and without jurisdiction as the credit entries in the partners capital account shown to be out of compensation received on account of relinquishment of tenancy rights derived its source from Shri L N Poddar who had received the money on account of surrender of tenancy rights and therefore, the credit entries deriving source out of such an exempt source or income would in any case be exempt? (xi) Whether the order of re-assessment is illegal and without jurisdiction as there is no rationale and intelligible nexus between the reasons and the belief? (xii) Whether an order of re-assessment is illegal and without jurisdiction as the condition precedent to the issue of notice under the provisions of section 147 read with section 148 of the Act are not satisfied?” 6 6. We have perused the materials on record and considered the submissions of the learned counsel for the parties. It appears from a perusal of the agreement dt. 15.10.88 that the petitioner, M/s Eastern Asbestos Products (the petitioner in the analogous CWJC No.7515 of 1997), M/s Ashirvad Enterprises, and M/s Poddar Industrial Corporation, were four partnership firms engaged in same or similar business, and were occupying different portions of the same premises taken on rent from Smt. Jayanti Roy and other co-owners. The ex-owners alienated right, title and interest of the premises in question in favour of the Samiti by registered deed of absolute sale with all rights and liabilities. The four partnership firms on the one hand, and the Samiti, on the other, had entered into the agreement dated 15.10.88, whereby the four partnership firms agreed to hand over vacant possession of the property in question to the Samiti in lieu of having received 28 lacs rupees in total. In other words, each partnership firm received a sum of Rs.7 lacs. The question whether or not the money or the income received for the relinquishment of tenancy rights was the subject matter of a Division Bench of this Court in C I T vs. Neba Ram Hansraj (supra). This Court held that such an income is capital receipt and, therefore, cannot be subjected to payment of income tax. It appears that the judgment of the Division Bench was handed down on 1.8.96, and was, therefore, available to the learned assessing officer when she passed the impugned order on 25.1.2001. The petitioner’s case is entirely covered by the judgment of this Court in C I T vs. Neba Ram Hansraj (supra). 7. The same issue was considered by the Supreme Court in C I T vs. D B Sandu Bros. Chembur P. Ltd. (supra), wherein the law to the same effect has been laid down. In view of the authoritative pronouncements of the Supreme Court and this Court, we reach the conclusion that the money or income derived from relinquishment of 7 tenancy right is capital receipt and cannot, therefore, be subjected to payment of income tax. 8. Consequently, CWJC No.12950 of 2001 succeeds. The impugned order dated 25.1.2001, passed by the learned Deputy Commissioner of Income Tax, is hereby set aside. 9. CWJC No.3003 of 1999, as stated hereinabove, challenges issuance of notice under section 148 of the Act, calling upon the petitioner to show-cause as to why the assessment proceedings be not re-opened, and the income received by it for relinquishment of tenancy rights be not taxed. In view of the foregoing discussion, quashing the order of assessment, the impugned notice has become infructuous and has to be quashed. CWJC No.3003 of 1999 also succeeds. 10. We now take up CWJC No.7515 of 1997. This writ petition is at par with CWJC No.3003 of 1999, and challenges the validity of issuance of notice under section 148 of the Act. As stated hereinabove, the petitioner of CWJC No.7515 of 1997 was also a partnership firm at the relevant point of time, is also a party to the aforesaid agreement of 25.10.88, for relinquishment of tenancy rights. In view of the foregoing discussion, the impugned notice is hereby set aside. CWJC No.75715 of 1997 is accordingly allowed. 11. In the result, CWJC No. 12950 of 2001, CWJC No.3003 of 1999, and CWJC No. 7515 of 1997, are hereby allowed. The substantial questions of law are answered in favour of the petitioners (the assessees), and against the Revenue. In the facts and circumstances of the case, there shall be no order as to costs. ( S K Katriar, J.) S P Singh, J. I agree. ( S P Singh, J.) Patna High Court, Patna The 28th of April 2011 AFR/mrl 8 "