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2019 (7) TMI 593 - AT - Income TaxComputation of Capital gains - sum above credit standing in partner account was received on his retirement from a partnership firm - certain amount credited on revaluation of assets - whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge u/s 45 ? - HELD THAT:- The decision in the case of Tribhuvandas G.Patel [1996 (2) TMI 16 - SUPREME COURT] is a case where the deed of reconstitution specifically referred to release of rights of the outgoing partners in the assets of the partnership and further the fact that a specified sum over and above the sum standing to the credit of the partner’s capital account was paid to the retiring partner, which excess sum was attributed to the retiring partner giving up his rights over the properties of the firm. It is only because of the provisions of Sec.47(ii) of the Act that the Hon’ble Court held that there was no incidence of tax on capital gain on the transaction. The decision will therefore have to be viewed as not applicable to cases after the amendment to the law w.e.f. 1-4-1989 whereby Sec.47(ii) of the Act was deleted and simultaneously Sec.45(3) & 45(4) were introduced. Therefore the question whether there will be incidence of tax on capital gain on retirement of a partner from the partnership firm would depend on the upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel [1977 (9) TMI 13 - BOMBAY HIGH COURT] and N.A. Modi's case [1985 (10) TMI 52 - BOMBAY HIGH COURT] . Therefore the decision of the ITAT Mumbai in the case of Sudhakar M.Shetty Vs. ACIT [2010 (9) TMI 746 - ITAT, MUMBAI] following the decision of the Pune Bench of the ITAT in the case of Shevantibhai C. Mehta v. ITO [2003 (8) TMI 208 - ITAT PUNE] holding that question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected, holds good. Therefore taxability in such situation would depend on several factors like the intention as is evidenced by the various clauses of the instrument evincing retirement or dissolution, the manner in which the accounts have been settled and whether the same includes any amount in excess of the share of the partner on the revaluation of assets and other relevant factors which will throw light on the entire scheme of retirement/reconstitution. After reducing the Partner’s drawing and other payments made the balance to the credit of Assessee’s capital account as on 31.3.2007 was ₹ 2,77,88,200/-. On 9.6.2007 the Assessee’s was paid ₹ 38,38,200 towards Goodwill and another sum of ₹ 2,39,00,000/- being part of the consideration of ₹ 339.50 lacs payable on retirement. The difference between the sum of ₹ 3,39,50,000 and the sum of ₹ 2,77,88,200 viz., a sum of ₹ 61,61,800 was taxed as capital gain by the AO. Out of the above, ₹ 38,38,200 was Goodwill. Therefore to the extent of ₹ 2,77,88,200 being closing balance as on 31.3.2007 in the capital account and ₹ 38,38,200/- being Goodwill, was the sum payable as per the capital account of the Assessee. The claim of the Assessee that the entire sum of ₹ 61,61,800 is Goodwill is not substantitated by entries in the books of accounts of the Assessee and the book entries are only for ₹ 38,38,200/- recorded in the Assessee’s capital account as well as Goodwill Account. The capital gain therefore would be ₹ 339.50 lacs minus ₹ 2,77,88,200 + 38,38,200 = ₹ 23,23,600/-. The Assessee had invested a sum of ₹ 50 lacs in specified bonds and therefore the AO allowed deduction upto ₹ 50 lacs. Therefore there would no capital gain which is chargeable to tax. We uphold the action of the revenue authorities in taxing the excess paid over and above the sum standing to the credit of the capital account of the Assessee as capital gain. The computation of the capital gain has been modified by us by treating value of goodwill also as part of the credit in the partners capital account. Consequently, the capital gain in question was less than ₹ 50 lacs and since the Assessee has been allowed exemption u/s.54EC to the extent of ₹ 50 lacs, no capital gain is exigible to tax in the present case - Appeal of the assessee is allowed
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