Bombay H.C : Notice u/s 148 bad if issued for assessment of payment to the retired partner is made for relinquishing/discharge

High Court Of Bombay

Smt. Jyoti Rajnikant Vs. ACIT

J.P. Devadhar And Mrs. Mridula Bhatkar, JJ.

W.P. No. 29 Of 2011

January  24, 2011


1. Heard.

2. Rule. Returnable forthwith. By consent of the parties the petition is taken up for final hearing.

3. The petitioners have challenged the notice dated 25-3-2010 issued under section 148 of the Income-tax Act, 1961. By the said notice the assessment for the assessment year 2004-05 is sought to be reopened by recording the following reasons :

“On a perusal of the records, it is seen that the assessee was a partner in M/s. Little and Co. a solicitor firm, and retired on 23-3-2004. During the year relevant to the assessment year 2004-05 the assessee was paid Rs. 21,65,625 on his retirement by the firm. The said amount has been reflected in the assessee’s capital account as receipt from M/s. Little and Co. and also confirmed by the assessee’s representative’s letter dated 11-12-2006.
On a perusal of the memo of income it is seen that the assessee has listed the exempted income but the said sum of Rs. 21,65,625 has not been shown as exempted income by the assessee. The assessee has not shown the same amount as taxable income.

On going through the partnership deed dated 1-1-2003 of M/s. Little and Co. the clause Nos. 35, 36, 37, 38 read with 8 and 9 clearly states that the retiring partner discharge the following rights:

(i) asset

(ii) goodwill

(iii) profit of the partnership business

(iv) compensation for loss of right to participate in the profits of the current year in which the partner retires.

(v) restricting retiring partner soliciting the clients of the firms for 3 years from the date of retirement attracting the provisions of section 28(va).

From the above clauses of the partnership it is clear that the payment to the retired partner is made for relinquishing/discharge of all the above rights and interest which includes non-competing with the firms professional activities for three years. Therefore, the receipt of Rs. 21,65,625 received from the firm on retirement is to be assessed as income under the Income-tax Act.

As the assessee has not declared the said sum as taxable income, I am of the opinion and reasons to believe that income chargeable to tax has escaped assessment to the extent of amount received at Rs. 21,65,625 from the firm on the assessee’s reason, coming within the meaning of section 147 of the Income-tax Act, by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for this assessment year. The time limit for issuing notice under section 148 of the Income-tax Act is on March 31, 2011. In view of the above, your honour is requested to grant sanction under section 151 for the issue of notice under section 148 of the Income-tax Act 1961.”

4. Counsel for the revenue states that in the case Balkrishna Hiralal Wani v. ITO [2010] 321 ITR 519 (Bom.), assessment sought to be reopened on similar grounds is held to be bad in law.

5. In these circumstances for the reasons recorded in the aforesaid case, the impugned notice dated 25-3-2010 issued under section 148 of the Income-tax Act, 1961 is quashed and set aside.

6. Rule is made absolute.

7. No order as to costs.

[Citation : 332 ITR 229]

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