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 whether the amount of Rs.50 lakhs received by her under Annexure-B agreement was assessable to income under the head "income from other sources" under Section 56 of the Income Tax Act. The facts leading to the case are the following. The assessee along with two others were carrying on business in bakery items under the name Cochin Bakery from 1971 onwards. On the death of one of the partners, the firm was reconstituted. The firm was reconstituted on 25.12.1975 and in the reconstituted deed also appellant was a partner. However, later the partners fell out from each other which led to litigation before civil court. Besides partners filing suits for settlement of account and for dissolution of the firm, employees also filed suit claiming certain amounts. In fact, the civil court passed a preliminary decree in July 1991 declaring the firm as dissolved with effect from 9.8.1989. 2 However, final decree was not passed and several suits including one filed by the appellant was pending. While so, a purchaser came offering good price for the land in which the building was located wherein business was being carried on by the firm. It is the admitted position that the firm had only tenancy right in the building located on the 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 claims as partner of the firm and signed compromise application for settling suits on receipt of consideration of Rs.50 lakhs under Annexure-B agreement dated 26.7.1995. 2. Under Annexure-B agreement, appellant was to get Rs.50 lakhs reduced by Rs.1 lakh for brokerage for sale of the land owned by the other two partners. The payments were to be received in two financial years 1995-96 and 1996-97. Around Rs.12 lakhs was received in the financial year 1995-96 and the balance Rs.37 lakhs was received in the next financial year i.e. 1996-97. However, the department considered the entire payments as received in the year in 3 which the property was sold and full consideration was received i.e. 1997-98 and brought to tax the amount received by the appellant. In the appeal filed by the assessee, the C.I.T.(Appeals) held that the firm which was defunct for several years had assets worth no value and therefore, he allotted Rs.1 lakh towards receipt of appellant's respective share from the firm on dissolution and the balance was taken as gratuitous payment from the other partners and approved assessment of the said amount as income from other sources. In second appeal, the Tribunal confirmed the findings of the Commissioner against which this appeal is filed. We have heard counsel appearing for the appellant and Senior counsel appearing for the respondents. 3. On going through Annexure-B, we find that the appellant or the firm in which the appellant was a partner had no right in the ownership of the land. On the other hand, the firm in which the appellant was a partner had only a leasehold right in the building which was located on the land involved. For around six years prior to the final settlement, business was closed and the firm had hardly any asset with any value. However, the protracted litigation pending before civil 4 courts prevented the owners from selling the property free of any encumbrance because technically lease was still in force in favour of the defunct firm. Therefore, settlement was reached among the partners whereunder landed property was agreed to be sold for the price stated in Annexure-B and which was shared among the partners, appellant getting only a meagre share of around 10% of the sale proceeds. Even though we find force in the contention of counsel for the appellant that the finding of the C.I.T.(Appeals) and the Tribunal that the payment received is gratuitous in nature and without consideration is not tenable because but for consideration paid for giving up her claims as partner of the firm, property could not have been sold, we are still not inclined to interfere with the orders of the Tribunal because admittedly appellant had no right in land and the leasehold right itself was in favour of the firm. In fact, the amount paid to the appellant is only to purchase peace and for early disposal of the land or otherwise, litigation would have continued and sale would have been delayed. There is no scope for interference with the apportionment of the receipt by allocating Rs.1 lakh towards 5 consideration of share on dissolution of the firm and balance as payment without consideration because on facts, the firm had hardly any asset with value and the appellant had no right in the land which was sold by the other partners. 4. The next question to be considered is the propriety of assessment of the amount under income from other sources under Section 56 of the Act. Here again, appellant did not canvass the position that the amount received is either gift or sale consideration on sale of a capital asset in the form of relinquishment of rights in the firm. As already found by us above, if at all there is consideration for the receipt of money, it is only for early settlement of litigation pending before civil courts and the land owners by making payment, purchased peace for early disposal of the land. Standing Counsel relied on decision of the Supreme Court in COMMISSIONER OF INCOME TAX V. G.R.KARTHIKEYAN (1993) 201 ITR 866 and contended that definition of "income" under Section 2(24) is not exhaustive and income not falling under any specific head should be assessed under Section 56 of the Act. In view of the findings above, we do not find 6 any justification to deviate from the view taken by the Tribunal. Even though I.A. No.2968/2004 is filed to raise the contention that the gratuitous payment becomes income through amendments to Sections 2 (24)(xiii) and Section 56 only with effect from 1.9.2004 and we allow the petition, we do not think there is any scope for considering this because we have found that the income received is not in the nature of gratuitous payment, but for appellant's agreement for settlement of disputes among the parties and for releasing whatever be her rights in the firm. Consequently, we dismiss the appeal. C.N.RAMACHANDRAN NAIR Judge HARUN-UL-RASHID Judge pms