Arbitration award pursuant to family arrangement is not chargeable to tax

Bombay High Court held that amount received as per arbitration award by the appellant pursuant to a family arrangement is not chargeable to tax.

Facts- In the previous year, i.e., on 17^th September 2009, consent terms were reached between appellant, her brother and other members of the family, pursuant to which, the disputes between them have been settled. Consequent thereto, an arbitration award dated 25^th September 2009 came to be passed in terms of the consent terms. Pursuant thereto, appellant became entitled to receive an amount of Rs.28 Crores in full and final settlement of all disputes and claims raised by her against her brother and the other family members and/or P. N. Writer & Co. and/or any claims in respect of the bequest made under the Will dated 16^th September 1990 of her late father Mr. Charles D’souza. The said amount of Rs.28 Crores was assessed to tax in reassessment proceedings initiated by respondent no.1 u/s. 147 of the Act which assessment stands upheld in further appeal by both the CIT(A) and the Tribunal. The present appeal is against the impugned order dated 2^nd April 2018 passed by the Tribunal.

In this appeal filed u/s. 260A of the Income Tax Act, 1961, appellant is impugning an order dated 2^nd April 2018 passed by the Tribunal. By the impugned order, the Tribunal upheld the validity of the reassessment proceedings and also upheld the assessment of a sum of Rs.28 Crores receivable by appellant pursuant to an arbitration award as in the nature of income.

Conclusion- Held that as per Section 45(4) of the Act, assuming that there was a distribution of capital assets upon dissolution of the firm, it is the firm and not the partner who has to pay the tax.

Held that the receipt was relatable to a family arrangement, it will still not be chargeable to tax as such arrangement is an agreement between the members of the same family for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family peace, honour, security and property of the family by avoiding litigation and amounts so received or not exigible to tax.

The Tribunal ought to have held respondent no.1 had assumed jurisdiction under Section 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction. Further, on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount of Rs.28 Crores received by appellant as per the arbitration award was not chargeable to tax.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT