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INCOME TAX OFFICER, COIMBATORE vs DAMAYANTI RAMACHANDRAN, GN MILLS POST, COIMBATORE | BharatTax

INCOME TAX OFFICER, COIMBATORE vs. DAMAYANTI RAMACHANDRAN, GN MILLS POST, COIMBATORE

ITA 103/CHNY/2025Status: DisposedITAT Chennai07 August 2025AY 2015-16Bench: SHRI MANU KUMAR GIRI (Judicial Member), SHRI S. R. RAGHUNATHA (Accountant Member)1 pages

AI SummaryDismissed

Facts

The appeals were filed against the order of the Commissioner of Income Tax (Appeals) for AY 2015-16 and 2016-17. The core issue revolves around the revaluation of business and its impact on partners' income, specifically concerning goodwill and profit-sharing ratios in M/s. Texmo Industries and M/s. Texmo Precision Castings.

Held

The Tribunal held that the Assessing Officer (AO) failed to follow the mandatory procedure for reassessment proceedings as laid down by the Supreme Court. Specifically, the AO did not provide proper reasons for reopening and did not dispose of the assessee's objections by way of a speaking order before proceeding with the assessment. Consequently, the reassessment orders were quashed.

Key Issues

Whether the reassessment proceedings initiated by the AO were valid, considering the alleged non-compliance with procedural requirements, including the non-provision of reasons and failure to dispose of objections by a speaking order.

Sections Cited

147, 148, 28(iv), 45(4), 143(2), 143(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI

Before: HON’BLE SHRI MANU KUMAR GIRI & HON’BLE SHRI S. R. RAGHUNATHA

Hearing: 25.06.2025Pronounced: 07.08.2025

आदेश / O R D E R

PER BENCH: These appeals are filed against the order of the learned Commissioner of Income Tax (Appeals), NFAC, Delhi [In short “the ld.CIT(A)”] for the A.Y. 2015-16 and 2016- 17 vide orders dated 29.11.2024 and 19.11.2024 respectively.

AY-2015-16 2. Grounds of appeal of the Revenue: i). The decision of Ld CIT(A) is based placing reliance on the provisions of sections 28(iv), 2(47) and 45(4) as "Prior to the amendment of section 45(4) of the Act vide Finance Act, 2021 w.e.f. 01.04.2021, section 45(4) of the Act says that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm association or body, of the previous year in which the said transfer took place". The CIT(A) NFAC has relied upon various decisions of the Apex court and High courts. Whether the Decision of the Ld.CIT(A) is acceptable for the reason that, the facts and circumstances of the case is distinguishable from those cited in the case laws relied upon by the assessee and the Ld CIT(A). ii). Whether the decision of the Ld CIT(A) is correct in the light of the judgment of the Hon'ble Apex court in the case of McDowell & Co. Ltd. v. CTO [1985]

22. Taxman

11. (SC) held that tax planning may be legitimate, provided it is within the frame work of law. Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay taxes honestly, without resorting to subterfuges. Here, the assessee being one of the partners of the erstwhile firm having derived a gain in the process of revaluation and reconstitution of the firm is liable to tax to the extent of compensation received on relinquishment of his rights in the share of profits of the firm, as a result of reconstitution.

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran iii). Whether the Ld CIT(A) was right in not considering the fact that, the assessee HUF is in receipt of compensation in lieu of relinquishment of its share of business profits in the Firm and continued to be a partner in the same, having share of 0.01%, even after re-constitution of the firm, as per amended deed. iv). Whether the Ld CIT(A) hasn't failed to appreciate that, the facts of current case are clearly distinct from the facts of the case laws cited by the assessee HUF, The entities which entered into Memorandum of Family Arrangement dated 05.05.2013 had clearly distinct and exclusive rights represented in the form of share holding/profit sharing ratios in Texmo Industries and Texmo Precision Castings. Hence, the transaction in instant case is not of members of a family taking a share of common property by virtue of independent title. It is rather relinquishment of exclusive assets/rights in favour of another for which clearly defined consideration is received. v). Whether the Ld CIT(A) was right in not appreciating the fact that, in this case, as evidenced, by the provisions of Memorandum of Family Arrangement and amended trust deeds of TI and TPC, the transfer of rights in profit sharing ratio was in lieu for substantial consideration, with clear business motive and hence, the same is taxable u/s 28(iv) of the Act. vi). Whether the Ld CIT(A) was right by not appreciating that, the decision rendered in the case of CIT Vs. Nijrang Specific family Trust (Guj) 287 ITR 148, wherein it is held that, assessee retiring from partnership Compensation received for goodwill treated as Income from Other Sources- is squarely applicable in the present case. As such, the AO has computed the income of the assessee HUF, who has received compensation akin to the case cited above, under income from business. vii). Whether the Ld CIT(A) was right in not considering the fact that, the AO, even though having placed a reference of section 2(47) in para 4.1 of the assessment order in one instance, did not discuss the scope of section 45(4) of the Act any where in the assessment order. The addition in the hands of the assessee has been made as income from business, being in the nature of a compensation received by the assessee HUF, as discussed elaborately in the assessment order. But, Ld CIT(A) has, made elaborate discussion on section 45(4), which is not relevant in the context of the assessee's case, there by diluting the efforts made by the AO to bring to books the unaccounted/undisclosed income earned by the assessee under the guise of family arrangement, which it is not. The AO has not taken recourse to sec 45(4) in the assessment order while bringing to tax the amount of Rs. 29,13,00,000/-. Here, the order of Ld CIT(A) is against facts and law. viii). The Ld CIT(A) failed to appreciate the fact that, in this case, the assessee HUF has been compensated with Rs. 29.13 crores for forgoing its share of (business) profits to the extent of 99.9% in the business of the firm, as per the re-constitution/ revaluation of the said firm, but still continuing as a partner with 0.01% share. The benefit/perquisite as envisaged in section 28 of the Act includes any money received CO No.19/Chny/2025 (AY-2015-16)

(i) The assessee HUF was a partner in the firms M/s.Texmo Industries and M/s.Texmo Precision castings, which implies that as per the accounting principles and in the eyes of law the Firm, the HUF and other partners are distinct identities forming integral parts of a business (ii) The revaluation of assets is made that of the firm in which the assessee HUF is a partner and hence, the introduction of goodwill thus enhancing the assets of the business entity firm is part of a business activity. (iii) The share percentage of assessee HUF in TCI as well as TPCL has been brought down to 0.01% from 50% and 30% respectively, as enjoyed by the HUF before the reconstitution. Here the assessee HUF has sacrificed by extinguishing its shares in the business profits of the firms. (iv) The above said reconstitution in profit sharing ratio of the partners of the firm implies that the same has been carried out in order to apportion the benefits derived out of business profit to each partner post reconstitution. (v) vide the reconstitution deed (named as family agreement) the assessee HUF in the capacity of a partner in the firm's business and its profits, even after extinguishing its shares continued to be partner with 0.01% share in the profits. (vi) The assessee HUF as well as other partners of the firm received credits in their books in the current accounts as compensation against relinquishment of share in the profits of the firm. (vii) since the revaluation has been carried out in the assets of the business firm and since no revaluation happened in the assets of HUF, the agreement entered into by the firms and its partners can only be termed as a business arrangement and not a family arrangement. No family property has been revalued nor assets distributed to its members. (viii) The compensation received by the assessee HUF is absorbed by the provisions of Section 28(iv) of the Act and not under any other provisions of the act. (ix) On careful examination of the course of incidents reveal that the assessee firm has resorted to a device wherein the taxability of income in the hands of the firm as well as its compensated partners could be avoided or rather evaded, in such a way that the revaluation of intangible assets in the form of goodwill of the firm is carried CO No.19/Chny/2025 (AY-2015-16)

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran profits to the extent of 99.9% in the business of the firm, as per the re-constitution / revaluation of the said firm, but still continuing as a partner with 0.01% share. The benefit / perquisite as envisaged in section 28 of the Act includes any money received under an agreement wherein the party performing the activity is compensated for not engaging in any activity related to their trade or profession. Additional In this case, 4 partners of a In case of Ramachandran It is submitted that, in Commissioner firm retired from the firm Family Group, the the cited case law, of Income Tax and received their share of revalued goodwill of firm partners have retired and vs. Mohanbhai capital including share of Texmo Industries was withdrew money from Pambhal, (SC) goodwill which was an asset credited into the current their capital account. The of the firm. accounts of partners and retirement of partners It was held in this case by not their capital and consequent hon'ble Court that: assignment of profit- Subsequently, money sharing rights to When a partner retires from was withdrawn from the continuing partners was a partnership and the current account by held to be not a transfer amount of his share in the partners in lieu of the for the purpose of net partnership assets...is reduction in profit section 45 of Income tax determined and given to sharing rights. Act. him, what he receives is his share in the partnership and The Memorandum of However, in case of not any consideration for Family Arrangement Ramachandran Family transfer of his interest in the impounded during the Group, the memorandum partnership to the Survey establishes that of Family Arrangement continuing partners. the withdrawals from clearly establishes that, firm is in lieu for the withdrawals from His share in the partnership reduction of profit- firm is in lieu for is worked out in the manner sharing rights. reduction of profit prescribed by the relevant sharing rights. provisions of the partnership law and it is this (his share Also, the funds in the partnership) which he withdrawn are from the receives in terms of money. current account of partners and not the There is in this transaction capital account. no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners 6.6 Therefore, the AO has contended that the assessee has withdrawn monies from the partnership firms. In such a case, without prejudice to the argument that no money has been withdrawn by the assessee, even if considered as withdrawn, the provisions of section 28(iv) would not come into play given that no non-monetary perquisites were received by the assessee.

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran 5. 13.05.2021 The case was transferred to faceless Faceless assessment unit assessment unit 6. 16.07.2021 Notice u/s. 142(1) was issued 7. 26.07.2021 Assessee responded to the 142(1) notice 8. 10.09.2021 Show cause notice was issued to the The objection for re- assessee. opening was disposed of with a speaking order. 9. 13.09.2021 Draft assessment order was issued to the assessee. 10. 13.09.2021 Assessee filed their response 11. 16.09.2021 Hearing was fixed 12. 17.09.2021 Assessee’s response was recorded and considred VC link was shared and the assessee has not joined. 13. 19.09.2021 VC link was shared and the assessee has not joined. 14. 18.09.2021 Order u/s 147 was passed. Final assessment order was passed. 11.1 The ld.DR further submitted that after the assessee has requested for reasons, the AO has provided the reasons on 29.09.2020. Thereafter the assessee has raised objections against the reopening of the case. The AO has disposed of the reasons with a speaking Order on 10.09.2021. The final Order was completed on 18.09.2021. It is submitted that in the whole assessment proceedings, adequate opportunities were provided to the Assessee and after considering all the replies and submissions only the AO has passed the Assessment Order. (i) The assessment proceedings in this case have been initiated duly serving notice U/s.148 for each AY's separately by recording reasons therein and after obtaining approvals from the specified authorities as mandated by law. (ii) On being requested by the assessee, the reasons recorded for each year have been communicated to the assessee, in the due course of the assessment proceedings. (iii) The objections raised by the assessee on the reasons for re-opening of the case have been disposed of by the AO by justifying the reasons to the satisfaction of the assessee, as mandated by the Hon'ble Apex Court verdict and thus, in obedience to law the AO has discharged his duty well before finalization of the assessment proceedings. The assessee HUF has themselves CO No.19/Chny/2025 (AY-2015-16)

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran submitted before the ld.CIT(A) that, the AO has disposed of the objections raised. (iv) It is pertinent to mention here that the Hon'ble Jurisdictional Madras High Court has dealt with this specific issue, while dealing with the case of M/s.Home Finders Housing Ltd. in Writ Petition No.1019 of 2017 and W.M.P.Nos.1001 and 6076 of 2017, while examining into the adherence of the AO to legal obligations and the Court directions while disposing of such objections raised by the assessee during the course of assessment proceedings. For clarity and better perception, the abstract of the relevant para of the Hon'ble High Court order is appended here as under: "It is not in dispute that there is no statutory requirement to pass an order taking into account the statement of objections filed by the assessee after receiving the reasons for invoking section 147. The Supreme Court in GKN Drive shafts (India) Ltd. (supra) has given a procedural safeguard to the assessee to avoid unnecessary harassment by directing the Assessing Officer to pass a speaking order taking into account the objections for reopening the assessment under section 147. The forming of opinion to proceed further by disposal of the objections need not be a detailed consideration of all the facts and law applicable. It must show application of mind to the objections raised by the notice. In case the objections are such that it would require a detailed examination of facts and application of legal provisions, taking into account the assessment order sought to be reopened, the string of violations, suppression of material particulars and transactions which would require considerable time and would be in the nature of a detailed adjudicatory process, the Assessing Officer can dispose of the objections, by giving his tentative reasons for overruling the objections. The disposal of objections is in the value of a procedural requirement to appraise the assessee of the actual grounds which made the Assessing Officer to arrive at a prima facie satisfaction that there was escape of assessment warranting reopening the assessment proceedings. The disposal of such objection must be before the date of hearing and passing a fresh order of assessment. In case, on a consideration of the objections submitted by the assessee, the Assessing Officer is of the view that there is no ground made out to proceed, he can pass an order to wind up the proceedings. It is only when a decision was taken to overrule the objections, and to proceed further with the reassessment process, the Assessing Officer is obliged to give disposal to the statement of objections submitted by the assessee." (v) This particular decision of Hon'ble High Court of Madras has been upheld by the Hon'ble Supreme Court, vide order in Special Leave Petition (C) No.12721 of 2018 dated 18.05.2018 dismissing the SLP filed by the assessee challenging the said Hon'ble High Court order.

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran Where the AO without disposing of the objections raised by the assessee, had intriguingly dealt with the objections against the reopening of assessment in the body of re-assessment order, which action of the AO was in gross defiance to the binding direction of the Hon’ble Supreme Court (supra) and was an attempt to over-reach the Apex Court by noncompliance to the procedure stipulated therein. Therefore, the impugned action of the AO is an attempt to defeat the purpose of such an exercise to be carried out by the AO and against the binding decision of the Hon’ble Supreme Court. It is noted that the AO has disposed off the objections in the body of the reassessment order which action of the AO is gross-defiance to the order of the Hon’ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd. and against the Hon’ble Bombay High Court in the case of Asian Paints Ltd. Bharat Jayanthi Lal Patel (supra), wherein their Lordships have given clear directions that the AO must dispose off the objections raised by the assessee against re-opening and facilitate at least four (4) weeks time before re-assessment order is framed, so that assessee may prefer filing of Writ Petition before the Hon’ble jurisdictional High Court against the re-opening of assessment. In the light of the above discussion, we are of the view that the assessee succeeds on the legal issue that the AO failed to comply with the binding directions of the Hon’ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd., before framing the reassessment order. The AO rejecting objections of the assessee against re-opening by merely doing so while passing the re-assessment order, wouldn’t come to the rescue of the Revenue because such an action of AO is noted to be in gross defiance to the binding order of the Hon’ble Supreme Court; and the AO couldn’t have over reached the order of the Hon’ble Supreme Court by disposing off the objections while framing the re-assessment order, which defeats the purpose of such an exercise as discussed supra. Therefore, we hold that the omission on the part of the AO to comply with the directions of the Hon’ble Supreme Court in the case of M/s.GKN Driveshafts (India) Ltd., strikes at the root of the jurisdiction of the AO to re-open the assessment and consequent passing of reassessment order dated 31.03.2022 is held to be non-est in the in the eyes of law and all other grounds are academic and not adjudicated. Therefore, on the legal issue as discussed, we quash the re-assessment order dated 31.03.2022 passed u/s.147/143(3) of the Act for AY 2016-17.”

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran furnished to the assessee till the completion of the assessment, the reassessment order cannot be upheld. 12.9 Further, in the case of Home Finders Housing Ltd. v. ITO (2018) 404 ITR 611 (Mad-HC), as relied by the Revenue is addressed in the aforesaid decision of IDFC Bank Ltd. V. PCIT/ACIT (supra) wherein it was distinguished as under: “the Hon’ble Madras High Court was of the view that non-compliance of the procedure indicated in the case of M/s. GKN Driveshafts (India) Ltd., was only an irregularity which could be cured by remitting the matter to the authority. The Ld. Sr. Counsel further pointed out that the Hon’ble Madras High Court in Home Finders Housing Ltd. (supra), noted that the assessee in that case at no point of time requested the AO to pass a speaking order disposing off the objections (refer Para No.12). However, in the present case, the Ld. Sr. Counsel pointed out that the assessee had specifically requested the AO to pass a speaking order disposing off the objections as laid down by the Hon’ble Supreme Court in the case of M/s. GKN Driveshafts (India) Ltd. (supra) and in addition to such a request, also prayed before the AO to dispose off the objections at least four (4) weeks before framing of re-assessment order as held by the Hon’ble Bombay High Court in the case of Asian Paints Limited v. DCIT & anr. (2008) 296 ITR 90 (Bom) and also in the case of Bharat Jayantilal Patel v. UOI reported in [2015] 378 ITR 596 (Bom.), which fact we find from perusal of Page No.86 of the Paper Book. Thus, according to the Ld. Sr. Counsel, it can be noted that the decision of the Hon’ble Madras High Court in the case of Home Finders Housing Ltd. (order dated 25.04.2018), is distinguishable on the facts and not applicable to the present case.” Further, it was held that, “the order in the case of Home Finders Housing Ltd., (supra) was a decision rendered earlier to the decision held by the Hon’ble Division Bench in CIT v. Janak Shanthilal Mehta (supra) and in such an event i.e. when there are two conflicting views between the order of Hon’ble High Court of co-equal strength (of the same Court) then, later pronouncement of the Hon’ble Court is binding on us.” 12.10 On perusal of the records, we note that the AO has miserably failed to supply reasons recorded for the reopening of the assessment where from one can see whether the legislative scheme is fulfilled. The Income-tax Officer can clothe himself with the jurisdiction to assess or reassess u/s.147(a) of the Act only if he records the reasons which can stand the test of relevance in accordance with the judicial pronouncements and after obtaining necessary sanction. This has been further fortified in the case of Kavee Enterprises (P.) Ltd. v. Commissioner of Income-tax CO No.19/Chny/2025 (AY-2015-16)

The question referred in this case is no longer res integra. In the case of GKN Driveshafts (India) Ltd. (supra), the assessee challenged the validity of notice issued under sections 148 and 143 of the Act. While disposing of the application Their Lordships of the Supreme Court observed: “We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the otice is to file return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the otice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the above said five assessment years.” (p. 20) 9. In the case of Agarwalla Bros. (supra) the Division Bench of the Patna High Court was considering a similar question. In that case, in the original assessment the Income-tax Officer accepted the cost of construction of the various properties as return. Subsequently on the basis of enquiry, the Income-tax Officer was of the opinion that the cost of construction was understated and assessment was re-opened under section 147(a) of the Act. The Division Bench answering the question held that for determining the validity of assumption of jurisdiction by the Income-tax Officer under section 147(a) of the Act, the Tribunal has to confine itself only to the recorded reasons and in case the recorded reasons failed to stand the test of "reasons to believe" within the meaning of section 147(a), the very initiation of the proceedings can be said to be ab initio void rendering all consequential actions including the order of assessment as being ineffective and non est. The Division Bench, considering the decisions of various High Courts, observed :— "Therefore, the legislative scheme is that the Income-tax Officer can clothe himself with the jurisdiction to assess or reassess under section 147(a) of the Act only if he records the reasons which can stand the test of relevance in accordance with the judicial pronouncements and after obtaining necessary CO No.19/Chny/2025 (AY-2015-16)

& CO No.20/Chny/2025 (AY-2016-17) Damayanti Ramachandran sanction as stated above notices are issued by him but if, in any case, it is found that the reasons recorded by him are not germane to the exercise of jurisdiction under section 147(a) of the Act, then the very assumption of jurisdiction will be ab initio void rendering the entire process of assessment as a nullity. There can be hardly any doubt in holding that the recording of the reasons is a pre- requisite to the assumption of jurisdiction by the Income-tax Officer for initiating the proceedings under section 147(a). The reasons so recorded acquire much significance when the action is taken under clause (a) of section 147 because it is only the recorded reasons which can indicate as to why the Income-tax Officer was made to believe that income has escaped assessment for the relevant assessment year. Further, the language employed in section 151 clearly leads to the conclusion that the Board or the Commissioner of Income-tax, while according, sanction for issuance of notice under section 148 and for coming to an objective conclusion authorizing the Income-tax Officer to take action under section 147(a), are required to confine themselves only to the reasons recorded by the Income-tax Officer. Therefore, looking at the entire scheme and purpose of the Act, I am of the considered view that the validity of the assumption of jurisdiction under section 147(a) can be tested only by reference to the reasons recorded under section 148(2) of the Act and the Income-tax Officer is not authorized to refer to any other reason even if it can be otherwise inferred and/or gathered from the records. If the reasons so recorded are such that, on their basis, it can possibly be said that income chargeable to tax has escaped assessment for a certain assessment year because of the omission of failure on the part of the assessee to make a return for that year or to disclose fully and truly all material facts necessary for such assessment, there can be a valid case for invoking the jurisdiction conferred by clause (a) of section 147. If, on the contrary, the reasons recorded by the Income-tax Officer cannot lead to such a conclusion, the proceedings initiated by the Income-tax Officer under that clause must be declared as ab initio void." (p. 792) 10. In the instant case, admittedly the assessee filed his original return on 12-4-1989 showing loss of Rs.