Whether when assessee fails to receive alimony and then settles her past and future claims for lumpsum amount, such receipt is capital in nature - YES: ITAT

THE issues before the Bench are - Whether when the assessee fails to receive her alimony and then she settles her past and future claims for certain lumpsum amount, such receipt is to be treated as capital receipt and Whether accumulated monthly installments of alimony can be taxed u/s 56(2)(vi). And the verdict goes against Revenue.

Facts of the case

The AO observed from the bank statement of the assessee that there was a credit of Rs.39,98,408.60. The assessee's explanation in respect of credit entry was that, she received the amount as alimony due from her husband over a period of time. The AO held that the assessee was not covered under the definition of relative as provided in exceptions to section 56(2) (vi) and, therefore, held the amount received as income taxable under the provisions of section 56(2) (vi). The CIT (A) deleted the addition.

On Appeal before the Tribunal the DR submitted that payments in lieu of divorce were to be made in installments and there was no mention of lump-sum payment in the divorce agreement. He further argued that the divorce was executed in 1990 hence the amount received did not fit into the definition of relative as in explanation to section 56(2)(vi). The AR submitted that when the wife threatened for execution of divorce agreement and her husband, therefore, parted with the amount as full and final settlement. It was further argued that the amount received was not without consideration and rather it contained consideration for extinguishing her right of living with her husband. The amount was a capital receipt.

Having heard the parties, the Tribunal held that,

++ we have heard the rival parties and have gone through the material placed on record. We find that the divorce agreement was though entered in 1989-90 and monthly payments were promised to be paid to the assessee by her husband, who did not pay the same and, therefore, the assessee threatened to take legal action against the husband who therefore, paid a lump-sum amount for settlement of all her claims against the husband;

++ the CIT (A) has held that the amount was paid by way of alimony only because they were husband and wife and appellant was spouse of the person who has paid the amount and, therefore, payment received from spouse did fall within the definition of relative. The CIT (A) has also held that the amount was received against consideration of relinquishing her personal right of claiming monthly payments as provided under the divorce agreement. In the case law of Princes Maheshwari Devi relied by both the Departmental Representative and the AR, the Bombay High Court had held monthly payments of alimony as taxable and lump-sum amount of alimony as tax free being capital receipt;

++ in the present case, though the assessee was to receive monthly alimony which was to be taxable in the each year from conclusion of divorce agreement but in this case monthly payments were not received and, therefore, were not offered to tax. The receipt by the assessee represents accumulated monthly installments of alimony which has been received by the assessee as a consideration for relinquishing all her past and future claims. Therefore, we held that there was sufficient consideration in getting this amount and, therefore, section 56(2)(vi) is not applicable;

++ moreover, if the Revenue’s arguments are to be accepted of it being monthly payments liable for tax as per Bombay High Court order, then also the amounts represented by past monthly payments cannot be taxed in this year. Therefore, we held that amount was a capital receipt not liable to tax;

++ we do not find any infirmity in the orders of CIT (A).