DCIT CIR 16(20, MUMBAI V. LAKSHMI M. AIYAR, MUMBAI

ITA 2436/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48990 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 16-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN KUMAR
• Assessee Lawyers: A T JAIN
• Keywords: Capital asset; Capital receipt
• Section: 15

Judgement Text

1 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A, MUMBAI BEFORE SHRI R.S. SYAL, (AM) AND SHRI V. DURGA RAO, (JM) I.T.A. NO.2436/MUM/2009 (A.Y. ): 2005-06 DY. COMMISSIONER OF INCOME TAX CIRCLE-16(2), MATRU MANDIR TARDEO ROAD MUMBAI-400 007. VS. MRS. LAKSHMI M. AIYAR L-1, BREACH CANDY APTS. BHULABHAI DESAI ROAD MUMBAI-400 026. P.A. NO.AABPM 7143 B APPELLANT RESPONDENT APPELLANT BY SHRI SHRAVAN KUMAR RESPONDENT BY SHRI A.T. JAIN ORDER PER V. DURGA RAO, JM. THIS APPEAL RAISED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 5.12.2008 PASSED BY THE CIT(A) FOR THE ASSESSMENT YEAR 2005-06. 2. THE ONLY EFFECTIVE GROUND RAISED IN THIS APP EAL IS AS UNDER :- `WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) IS CORRECT IN TREATING THE AMOUNT RECEIVED B Y ASSESSEE AS CAPITAL RECEIPT INSTEAD OF REVENUE RECEIPT SINCE IT IS NOT DERIVED BY THE ASSESSEE FROM ANY PARTICIPATION IN BUSINESS ACTIVIT Y OF THE FIRM 3. FACTS OF THE CASE ARE THAT THE ASSESSEE RECEIVED A SUM OF RS.20,26,444/- FROM M/S. K.S. AIYAR & CO., WHICH WA S CLAIMED AS CAPITAL RECEIPT AND HENCE NOT OFFERED FOR TAXATION. THE FA CTS LEADING TO THE RECEIPT OF THIS SUM ARE THAT THE ASSESSEE IS WIDOW OF LATE SHRI MANI ARJUN AIYER, WHO BEFORE HIS DEATH WAS SENIOR PARTNER OF M/S. K.S . AIYER & CO. AS PER PARTNERSHIP DEED EXECUTED ON 9.9.1992, THE WIDOW OF THE DECEASED PARTNER WAS ENTITLED TO RECEIVE SPECIFIED AMOUNT ON RETIREM ENT OR DEATH OF PARTNER OF THE FIRM. AS PER THE TERMS AND CONDITIONS OF THE PARTNERSHIP DEED ON THE 2 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR DEATH OF SHRI MANI ARJUN AIYER, HIS WIDOW OR HIS ES TATE WAS TO BE PAID AT THE RATE OF 5% P.A. OF THE GROSS RECEIPTS OF THE F IRM FOR A PERIOD OF 10 YEARS OR TILL THE END OF THE ACCOUNTING YEAR NEXT FOLLOWI NG. ACCORDINGLY, AFTER THE DEATH OF SHRI MANI ARJUN AIYER, THE ASSESSEE RECEIV ED THE PAYMENT FROM THE FIRM AND CLAIMED IN THE RETURN OF INCOME AS CAPITAL RECEIPT. ON BEING SHOW CAUSED AS TO WHY THE SAID SUM BE NOT CHARGED TO TAX , THE ASSESSEE RELIED ON THE DECISION OF CIT VS. MRS. JAYA BHASKARAN 168 ITR 256 (PAT.) AND SUBMITTED THAT THE AFORESAID CASE SQUARELY APPLIES TO THE FACTS OF HER CASE. THE ASSESSING OFFICER AFTER CONSIDERING EXPLANATION TENDERED ON BEHALF OF THE ASSESSEE OBSERVED THAT THE FACTS OF MRS. JAYA B HASKARANS CASE (SUPRA) WERE ENTIRELY DIFFERENT FROM THE FACTS OF THE PRESE NT CASE. IT WAS NOTICED THAT IN THE CASE OF MRS. JAYA BHASKARAN (SUPRA), T HE PAYMENT WAS MADE IN LIEU OF EXERCISE OF RIGHT TO NOMINATE ON THE DEATH OF THE PARTNER, THE ELDEST SURVIVING CHILD, WHEREAS IN THE CASE OF THE ASSESSE E, IT WAS AN ASSURANCE TO THE PARTNERS IN ORDER TO GET THEIR ATTENTION TO THE AFFAIRS OF THE FIRM BY ENSURING CONTINUOUS SUPPORT TO THEIR WIDOWS ON THEI R DEATH FOR A PERIOD OF 10 YEARS. THE ASSESSING OFFICER ALSO CONSIDERED CIRCULAR NO.573 DATED 29.8.1990 RELIED BY THE ASSESSEE IN SUPPORT OF HER CASE BUT OBSERVED THAT THE SAID CIRCULAR WAS NOT APPLICABLE TO THE ASSESSE ES CASE. RESULTANTLY THE AMOUNT RECEIVED BY THE ASSESSEE WAS HELD TO BE TAX ABLE AS REVENUE RECEIPT. 4. ON BEING AGGRIEVED THE ASSESSEE CARRIED THE MATT ER BEFORE THE LEARNED CIT(A). IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT THE AMOUNT RECEIVED BY THE ASSESSEE WAS NOT RELATED TO ANY BUSINESS DON E OR LOSS OF PROFITS AND IT WAS NOT RECOMPENSE FOR SERVICE, PAST OR FUTURE A ND THE PAYMENT DID NOT BEAR THE CHARACTER OF INCOME. IN SUPPORT OF THE CON TENTION THAT THE AMOUNT IN QUESTION WAS CAPITAL RECEIPT, THE ASSESSEE RELIE D ON THE DECISION OF P.H. DIVECHA VS. CIT (48 ITR 222)(SC). IT WAS ALSO SUB MITTED BEFORE THE LEARNED CIT(A) THAT THE DECISION IN THE CASE OF CIT VS. MR S. JAYA BHASKARAN SQUARELY APPLIED TO THE ASSESSEE'S CASE AS PAYMENT MADE THEREIN WAS BY THE SAME FIRM M/S. K.S. AIYER & CO. TO THE WIDOW O F ANOTHER PARTNER. THE LD. CIT(A), AFTER CONSIDERING THE OBJECT AND PURPOS E OF PAYMENT MADE IN THE CASE OF THE PRESENT ASSESSEE VIS--VIS THAT IN THE OTHER CASE NOTICED THAT IN 3 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR THE CASE OF THE ASSESSEE, THE FIRM HAD GIVEN ASSUR ANCE TO THE PARTNERS IN ORDER TO GET THEIR ATTENTION TO THE AFFAIRS OF THE FIRM BY ENSURING CONTINUED SUPPORT TO THEIR WIDOWS ON THEIR DEATH FOR A PERIOD OF 10 YEARS AND IN THE CASE OF MRS. JAYA BHASKARAN, IT WAS IN LIEU OF THE RIGHT BY THE ELDEST SURVIVING CHILD TO NOMINATE ANY QUALIFIED PERSON AS PARTNER. HE HELD THAT IN THE CASE OF THE ASSESSEE AS WELL AS MRS. JAYA BH ASKARAN, PAYMENTS WERE RECEIVED NOT RELATING TO ANY BUSINESS DONE OR TO LO SS OF PROFITS AND IT WAS NOT FOR ANY COMPENSATION FOR SERVICES RENDERED BY T HE ASSESSEE EITHER INDIVIDUALLY OR LIKELY TO BE RENDERED IN FUTURE. T HUS, THE PAYMENT IN THE HANDS OF THE RECIPIENT WAS HELD TO BE NOT BEARING A NY REVENUE CHARACTER. ACCORDINGLY HE HELD THAT THE PAYMENTS RECEIVED BY T HE ASSESSEE WAS IN THE NATURE OF CAPITAL AND NOT ASSESSABLE TO TAX AND ALL OWED THE APPEAL OF THE ASSESSEE AND DELETED THE ADDITION MADE BY THE ASSES SING OFFICER. 5. BEING AGGRIEVED THE REVENUE CARRIED THE MATTER I N APPEAL BEFORE THE TRIBUNAL. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDER PASSED BY THE ASSESSING OFFICER AND SUBMITTED THAT THE CASE RELIED UPON BY THE ASSESSEE IN CIT VS. MRS. JAYA BHASKARAN (SUPRA) WAS NOT APPLICABLE TO FACTS OF THE PRESENT CASE. HE ARGUED THAT THE ASSESSING OFFICER HAD RIGHTLY DISTINGUISHED THE FACTS OF THE PRESENT CASE WITH THOSE OF MRS. JAYA BHASKARAN (SUPRA) AND RIGHTLY HELD THAT THE PA YMENTS RECEIVED BY THE ASSESSEE WAS NOT CAPITAL RECEIPT. 6. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE AS SESSEE STRONGLY SUPPORTED THE DECISION IN THE CASE OF MRS. JAYA BHA SKARAN SUPRA. HE SUBMITTED THAT THE SAID DECISION CLEARLY APPLIED TO THE ASSESSEE'S CASE. HE FURTHER SUBMITTED THAT THE OBJECT OF THE PAYMENT MA DE TO THE ASSESSEE WAS AN ASSURANCE GIVEN TO THE ASSESSEE WHICH IS SAME AS IN THE CASE OF MRS. JAYA BHASKARAN WHERE THE ELDEST SURVIVING CHILD WAS TO BE NOMINATED AS PARTNER I.E. IT WAS AN THE ASSURANCE GIVEN TO THE P ARTNERS TO SUPPORT THEIR LEGAL HEIRS IN FUTURE. HE FURTHER SUBMITTED THAT I N THE CASE OF P.H. DIVECHA VS. CIT 48 ITR 222 (SC) ALSO THE PAYMENT MADE TO TH AT ASSESSEE ALSO DID NOT RELATE TO ANY BUSINESS OR TO LOSS OF PROFITS, WHICH HAS BEEN HELD TO BE NOT TAXABLE. 4 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR 7. WE HAVE HEARD BOTH THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ONLY ISSUE INVOLVED IN TH IS APPEAL IS WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE, AFTER THE DEATH OF HER HUSBAND FROM THE FIRM M/S. K.S. AIYER & CO., IN WHICH HE WAS A PARTN ER, IS A CAPITAL OR REVENUE RECEIPT. ACCORDING TO THE ASSESSEE THE AMO UNT RECEIVED IS IN THE NATURE OF CAPITAL RECEIPT BECAUSE SHE HAS RECEIVED THESE PAYMENTS UN- RELATING TO ANY BUSINESS OR LOSS OF PROFITS AND FUR THER IT WAS NOT A RECOMPENSE FOR SERVICE, PAST OR FUTURE. FURTHER, TH E ASSESSEE HAS RELIED ON THE DECISION OF MRS. JAYA BHASKARAN (SUPRA). ACCOR DING TO THE ASSESSING OFFICER THE PAYMENT RECEIVED BY THE ASSESSEE IS REV ENUE IN NATURE BECAUSE ACCORDING TO THE PARTNERSHIP DEED CLAUSE 9(1)(B), PAYMENT UNDER THIS CLAUSE SHALL BE FOR FULL AND FINAL SETTLEMENT OF S HRI MANI ARJUN AIYER INCLUDING THE USER OF HIS SHARE OF GOODWILL, TENANC Y RIGHTS, CAPITAL ASSETS AND ALL HIS OTHER CLAIMS IN THE FIRM IN RESPECT OF HIS PAST CONNECTION WITH THE FIRM. THE LEARNED CIT(A) CONSIDERED THE ENTIRE FACTUAL MATRIX OF THE CASE OF MRS. JAYA BHASKARAN (SUPRA) AND P.H. DIVECHA SUP RA AND HELD THAT THE DECISION IN THE CASE OF MRS. JAYA BHASKARAN SQUAREL Y APPLIES TO ASSESSEE'S CASE AND AS SUCH THE PAYMENT RECEIVED BY THE ASSESS EE COULD NOT BE CHARGED TO TAX. UNDER SIMILAR CIRCUMSTANCES WHEN S OME OTHER PARTNER OF THE FIRM DIED AND THE COMPENSATION WAS PAID BY THE FIRM, THE REVENUE SOUGHT TO TAX THE SAME. THE HONBLE PATNA HIGH COUR T IN THAT CASE OF CIT VS. MRS. JAYA BHASKARAN (SUPRA) UPHELD THE TRIBUNAL ORDER BY HOLDING THAT THE RECEIPT WAS NOT TAXABLE IN THE HANDS OF THE WID OW OF THE DECEASED. IN HOLDING SO, RELIANCE WAS ALSO PLACED ON THE DECISIO N IN THE CASE OF P.H. DIVECHA VS. CIT (SUPRA) WHEREIN THE HONBLE SUPREME COURT. IN THE SAID CASE OF MRS. JAYA BHASKARAN, THE TRIBUNAL WHILE DEC IDING THE ISSUE FOLLOWING THE CASE OF P.H. DIVECHA (SUPRA) HAS NOTED THAT THE HONBLE SUPREME COURT OBSERVED THAT IN DETERMINING WHETHER THIS PAYMENT AMOUNTS TO A RE TURN FOR LOSS OF A CAPITAL ASSET OR IS INCOME, PROFITS OR GA INS LIABLE TO INCOME-TAX, ONE MUST HAVE REGARD TO THE NATURE AND QUALITY OF THE P AYMENT. IF THE PAYMENT WAS NOT RECEIVED TO COMPENSATE FOR A LOSS OF PROFIT S OF BUSINESS, THE RECEIPT IN 5 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR THE HANDS OF THE APPELLANT CANNOT PROPERLY BE DESCR IBED AS INCOME, PROFITS OR GAINS AS COMMONLY UNDERSTOOD. TO CONSTITUTE INCOME , PROFITS OR GAINS, THERE MUST BE A SOURCE FROM WHICH THE PARTICULAR RECEIPT HAS ARISEN, AND A CONNECTION MUST EXIST BETWEEN THE QUALITY OF THE RE CEIPT AND THE SOURCE. IF THE PAYMENT IS BY ANOTHER PERSON, IT MUST BE FOUND OUT WHY THAT PAYMENT HAS BEEN MADE. IT IS NOT THE MOTIVE OF THE PERSON WHO PAYS THAT IS RELEVANT. MORE RELEVANCE ATTACHES TO THE NATURE OF THE RECEIP T IN THE HANDS OF THE PERSON WHO RECEIVES IT THOUGH IN TRYING TO FIND OUT THE QUALITY OF THE RECEIPT ONE MAY HAVE TO EXAMINE THE MOTIVE OUT OF WHICH THE PAYMENT WAS MADE.THE PERIODICITY OF THE PAYMENT DOES NOT MAK E THE PAYMENT A RECURRING INCOME BECAUSE PERIODICITY MAY BE THE RES ULT OF CONVENIENCE AND NOT NECESSARILY THE RESULT OF THE ESTABLISHMENT OF A SOURCE EXPECTED TO BE PRODUCTIVE OVER A CERTAIN PERIOD. 8. IN THE INSTANT CASE IT IS QUITE MANIFES T FROM THE FACTS OF THE CASE THAT THE PAYMENT MADE TO THE ASSESSEE DID NOT RELAT E TO ANY BUSINESS DONE BY HER FOR THE FIRM. IN THE LIKE MANNER IT WAS NOT TO COMPENSATE THE ASSESSEE FOR ANY LOSS OF PROFITS SUFFERED BY HER BE CAUSE OF THE FIRM. IT WAS ALSO NOT A COMPENSATION FOR ANY SERVICES RENDERED BY HER EITHER IN PRESENT OR IN FUTURE. THE ASSESSEE WAS NEITHER THE PRINCIP AL HOLDER OF THE PARTNERSHIP FIRM NOR HAD INVESTED ANY CAPITAL NOR H AD RENDERED ANY SERVICE TO THE FIRM. AT THE SAME TIME, IT IS PALPABLE THAT IT WAS HER DECEASED HUSBAND, WHO WAS PARTNER IN THE FIRM, ON WHOSE DEAT H, THE FIRM PAID THE SAID AMOUNT TO THE ASSESSEE. IT IS FURTHER IMPORTAN T TO BEAR IN MIND THAT IT WAS NOT A ONE-TIME PAYMENT. RATHER IT CONTINUED TO BE PAID BY THE FIRM TO THE ASSESSEE OVER THE PERIOD AS PER THE TERMS OF TH E PARTNERSHIP DEED. AS THE PAYMENT WAS TOWARDS THE RECOGNITION OF THE VALU ED SERVICES RENDERED BY THE PARTNER DURING HIS LIFE TIME AND IT WAS A SORT OF RELIEF TO THE DISTRESSED FAMILY, AND THAT TOO AS PER THE TERMS OF THE PARTNE RSHIP DEED, IT COULD NOT BE SAID TO HAVE A REVENUE CHARACTER IN HER HANDS. THEREFORE, IN OUR CONSIDERED OPINION THE PAYMENT RECEIVED BY THE ASSE SSEE DID NOT BEAR THE RECEIPT IN THE NATURE OF REVENUE INCOME. IT CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE. THE PRINCIPLE LAID DOWN BY THE DECIS ION IN CIT VS. MRS. JAYA 6 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR BHASKARAN(SUPRA) FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF P.H. DIVECHA (SUPRA), SQUARELY APPLIES TO T HE ASSESSEE'S CASE. THE ANALOGY CAN BE DRAWN FROM THE CIRCULAR NO.573,F.NO. 200/115/90-IT(A-I) DATED 21.8.1990, AS PER WHICH A LUMP SUM EX-GRATIA PAYMENT MADE TO THE WIDOW OR OTHER LEGAL HEIRS OF AN EMPLOYEE, WHO DIES WHILE STILL IN ACTIVE SERVICE, IS NOT TAXABLE AS INCOME UNDER THE INCOME TAX ACT, 1961. THE VERY SPIRIT OF THE CIRCULAR, THAT WHEN ANY PAYMENT IS M ADE TO THE LEGAL HEIR TO SUPPORT THEM IN HARDSHIP AND ENSURE LIVELIHOOD, IT CANNOT BE TAXED, COINCIDES WITH THE RATIO OF THE AFORENOTED JUDGMENT IN THE CASE OF P.H. DIVECHA (SUPRA). IN THE CASE OF PADMARAJE RS. KADAM BANDE VS. CIT, [1992] 195 ITR 877, THE HONBLE SUPREME COURT HELD AS UNDE R:- IN SUCH OF THOSE CASES FALLING UNDER CL. (D) OF TH E PROVISO TO S. 15(1) OF THE 1955 ACT, NO STATUTORY RIGHT IS CREATED. THIS I S UNLIKE THOSE CASES FALLING UNDER CLS. (I), (II) AND (III) OF SUB-S. (1 ) OF S. 15. THE FACT THAT THE ASSESSEE HAS APPLIED FOR A GRANT FOR MAINTENANCE NO R AGAIN, THE PERIODICITY OF PAYMENT, WOULD BE CONCLUSIVE. NEITHE R THE NOMENCLATURE NOR THE PERIODICITY OF THE PAYMENT WOULD BE DETERMI NATIVE FACTORS. REGARD MUST BE HAD ONLY TO THE NATURE AND QUALITY O F THE PAYMENT. THE MARGINAL HEADING OF S. 15 IS 'COMPENSATION'. THE FA CT THAT, UNDER CLS. (I), (II) AND (III) OF S. 15(1), THE COMPENSATION I S PAID AS OF RIGHT AND IN CASES FALLING UNDER CL. (D) OF THE PROVISO, IT IS A DISCRETIONARY PAYMENT, WOULD NOT STAMP THE PAYMENT WITH THE CHARACTER OF R EVENUE. THE PAYMENT MADE BY THE GOVERNMENT IS UNDOUBTEDLY VOLUN TARY. HOWEVER, IT HAS NO ORIGIN IN WHAT MIGHT BE CALLED A REAL SOU RCE OF INCOME. NO DOUBT S. 15(1), PROVISO, CL. (D) ENABLES THE APPLIC ANT TO SEEK PAYMENT BUT THAT IS FAR FROM SAYING THAT IT IS A SOURCE. TH EREFORE, IT CANNOT AFFORD ANY FOUNDATION FOR SUCH A SOURCE. FURTHER, I T IS A COMPASSIONATE PAYMENT FOR SUCH LENGTH OF PERIOD AS THE GOVERNMENT MAY, IN ITS DISCRETION, ORDER. HENCE, THE AMOUNTS RECEIVED BY T HE ASSESSEE DURING THE FINANCIAL YEARS IN QUESTION HAVE TO BE REGARDED AS CAPITAL RECEIPTS AND, THEREFORE, ARE NOT INCOME WITHIN THE MEANING O F S. 2(24). 10. IN VIEW OF THE ABOVE JUDGMENTS OF THE H ONBLE SUPREME COURT AND ALSO THE JUDGMENT OF THE HONBLE PATNA HIGH COURT I N THE CASE OF JAYA BHASKARAN (SUPRA), TAKING INTO CONSIDERATION OF THE FACTS OF THE PRESENT CASE, WE UPHOLD THE ORDER OF CIT(A) IN HOLDING THAT THE AMOUNT IN QUESTION RECEIVED BY ASSESSEE CANNOT BE CHARGED TO TAX AS TH E SAME ARE IN CAPITAL RECEIPT. 7 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED ON THIS 27 TH DAY OF MAY, 2011 SD/- SD/- ( R. S. SYAL) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 27 TH MAY, 2011. COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A)-CONCERNED. 4 CIT, CONCERNED. 5.DR,A BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. DETAILS DATE INITIAL S DESIGNATION 1. DRAFT DICTATED ON 3.5.2011 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 3.5.2011 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 8 ITA NO.2436/M/2009 MRS. LAKSHMI M. AIYAR 10. DATE OF DISPATCH OF ORDER