9911796707🚨 Important Update for Our Users
We are transitioning to our new and improved portal - www.taxtmi.com - for a better experience.
Follow us:
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2012 (1) TMI 433 - AT - Income TaxNature of receipt - reduction in the share of the partner - HELD THAT - In the various decisions the retirement does not involve any transfer qua the firm. The facts in the present case are different i.e. the assessee has transferred his share in favour of M/s. Ciba India Private Ltd. a third party who in consideration thereof has paid certain sum of money. Therefore the Ld. CIT (A) has rightly observed that the decisions of various courts of law relied upon by Ld. AR are not applicable in the present facts and circumstances of the case. In the judgment of Hon ble Supreme Court in the case of Chhotalal Mohenlal 1987 (4) TMI 73 - SUPREME COURT which is relevant in the present case where the Hon ble court has held that there was an assignment in favour of third party without consideration and the same has been held to be a transfer in favour of such party which amounted to gift. Therefore we concur with the findings of the Ld. CIT (A) which does not require any interference. Also we concur with the views of Ld. CIT (A) with regard to the valuation of goodwill. Non-compete fees the judgments of various courts of law relied upon by the Learned Counsel for the assessee cannot help the assessee. Since in the present facts and circumstances of the case the payment in the present case has been made only for compensating for the loss due to the reduction in the share of goodwill of the firm. We are convinced with the arguments made by Ld. CIT-DR that Section 16 of Partnership Act provides that the partner cannot indulge in the competition and therefore there is no question of compete fee in the present case and the amount received is a compensation received for reduction of share in the partnership firm which is shown as compete fee is required to be taxed in the same way as the amount of goodwill is taxed.Therefore we do not find any error in the order of Ld. CIT (A) in this respect who has rightly confirmed the action of Assessing Officer. Taxability of the capital gains - CIT(A) he has rightly treated the entire capital gains as Long Term Capital Gains. We find no infirmity in the order of Ld.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these cross-appeals were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Amount Received for Relinquishment of Share in Profit (Goodwill) Relevant Legal Framework and Precedents: The Tribunal considered section 45 of the Income-tax Act which taxes capital gains arising from transfer of a capital asset. The right to share profits in a partnership firm is recognized as a capital asset under section 2(14). Transfer is defined under section 2(47). The Supreme Court decisions cited by the assessee (CIT Gujarat v. Mohanbhai Pamabhai, Tribhovandas G Patel v. CIT, Sunil Siddarthbhai v. CIT) held that retirement from partnership and receipt of amount from continuing partners is not a transfer liable to capital gains tax. However, these decisions involved payments from continuing partners on retirement, not payments from a new incoming partner. Court's Interpretation and Reasoning: The Tribunal distinguished the present facts from the cited precedents. Here, the old partners did not retire but their share in profit was reduced by admission of a new partner who acquired 51% share. Payments were made directly by the new partner to the old partners for relinquishment of their profit share. This was held to be a transfer of capital asset to a third party, thus taxable under section 45. The Tribunal relied on the Supreme Court decision in CIT v. Chhotalal Mohanlal, which held that assignment of share to a third party is a transfer attracting capital gains tax. Key Evidence and Findings: The partnership deed, supplementary deed, and capital account adjustments showed that the old partners' share was reduced and payments were made directly by the new partner. The valuation of goodwill was furnished by the assessee based on accounting principles (capitalization and super profit methods), which was accepted as broadly correct. The ratio of payment corresponded to the ratio of relinquished shares, supporting the view that the payments represented consideration for goodwill. Application of Law to Facts: The Tribunal applied the legal definition of transfer and capital asset to the facts, concluding that the relinquishment of share in profit to a new partner constituted a transfer of capital asset, hence taxable as capital gains. Treatment of Competing Arguments: The assessee argued that the payments were capital receipts not liable to tax, relying on retirement cases. The Tribunal rejected this, noting that those decisions involved payments from continuing partners, not a new third party. The Revenue argued that section 14 of the Partnership Act includes goodwill and the payments were consideration for transfer of goodwill. The Tribunal agreed with the Revenue's position. Conclusion: The amount received by the old partners from the new partner for relinquishment of share in profit (goodwill) is taxable as capital gains under section 45. Issue 2: Taxability of Non-Competition Fees Relevant Legal Framework and Precedents: The assessee cited various decisions (CIT v. Kamal Behari Lal Singha, Gillandars Arbuthnot & Co. v. CIT, Best & Co. Pvt. Ltd., R.N. Agarwala v. CIT, Oberoi Hotels Pvt. Ltd. v. CIT) to argue that non-competition fees are capital receipts not liable to tax. The Financial Bill 2002 was also cited, which proposed taxing non-competition fees only from assessment year 2003-04 onwards. Court's Interpretation and Reasoning: The Tribunal examined the partnership deed and section 16 of the Partnership Act, which prohibits partners from competing with the firm while they remain partners. The non-competition agreement was held to be a colourable device since the partners were already legally bound not to compete. The payments labelled as non-competition fees were in the same ratio as the loss of share in goodwill, indicating they were essentially additional consideration for goodwill. The Tribunal referenced Supreme Court decisions (McDowell & Co. Ltd., B.M. Kharve) emphasizing substance over form in tax matters, rejecting the non-competition agreement as a genuine contract for separate payment. Key Evidence and Findings: The wording of the non-competition agreement was inconsistent (mentioning "whole time director" which did not apply to partners). The ratio of non-competition fees paid to the partners mirrored their loss of profit share. The partnership deed already contained restrictive covenants against competition. Application of Law to Facts: The Tribunal applied the principle that legal form cannot override the true nature of a transaction. Since the partners were already restricted from competition, the separate payment was not for a genuine non-competition covenant but for loss of goodwill share. Treatment of Competing Arguments: The assessee maintained the payment was genuine non-competition fees and not taxable before AY 2003-04. The Revenue contended there was no real non-competition as partners were bound by law and partnership deed, so the payment was for goodwill and taxable as capital gains. The Tribunal agreed with the Revenue. Conclusion: The non-competition fees received are not exempt capital receipts but are part of the consideration for loss of share in goodwill and taxable as capital gains under section 45. Issue 3: Classification of Capital Gains as Long-Term or Short-Term Relevant Legal Framework: The period of holding for capital assets determines whether gains are long-term or short-term. For shares in a partnership firm, the period of holding is relevant. Court's Interpretation and Reasoning: The Tribunal found that the assessee had increased his share from 40% to 55% on 5.11.1996 and relinquished 28% on 1.7.1998. The 15% share acquired on 5.11.1996 was held for less than 36 months, hence gains on that portion were short-term. The remaining 13% share was held for longer and gains on that portion were long-term. Conclusion: The capital gains were to be bifurcated into short-term and long-term capital gains accordingly. Issue 4: Applicability of Retirement Precedents to Present Case Court's Interpretation and Reasoning: The Tribunal distinguished the cited precedents where partners retired and received payments from continuing partners. Here, the partners did not retire but partially relinquished share to a new partner who made payments directly. Hence, the precedents were not applicable. Conclusion: The legal principles governing retirement cases do not apply to admission of a new partner with direct payments from the new partner to old partners. Issue 5: Validity of Non-Competition Agreement Court's Interpretation and Reasoning: The Tribunal held the non-competition agreement was a colourable device to avoid tax. The partnership deed and section 16 of the Partnership Act already imposed non-competition obligation on partners. The separate payment for non-competition was therefore a disguised payment for goodwill. Conclusion: Non-competition agreement was not genuine and payments under it are taxable as capital gains. 3. SIGNIFICANT HOLDINGS "The amount paid separately by the new incoming partner to the old partners without involving the firm is nothing, but consideration for intangible asset i.e. the loss of share of partner in the goodwill of the firm. Accordingly, this amount is to be charged to tax under the head capital gains." "In view of section 16 of the Partnership Act and clause 8.1 and 8.11 of the partnership deed, the assessee was legally bound not to compete with the business of the firm, till he is a partner in the firm. Therefore, this condition itself has enhanced the value of goodwill of the firm and the payments separately made in the name of noncompetition agreement is nothing, but the payment made for the loss of partner's share in the goodwill." "All these facts suggest that non-competition agreement is merely a devise to avoid the tax. In fact it is the consideration received for loss of share in the goodwill. One has to look into the substance of the transaction and not into the mere legal form of a document presented by the assessee." "The decisions of various courts of law relied upon by the Learned Counsel for the assessee are not applicable in the present facts and circumstances of the case where the assessee has transferred his share in favour of M/s. Ciba India Private Ltd., a third party who in consideration thereof has paid certain sum of money." "The entire amount received by the assessee of Rs. 6,43,60,000/- is nothing, but consideration received for goodwill and the same has to be taxed under section 45 of the Income-tax Act." "The ld. CIT (A) has rightly treated the entire capital gains as Long Term Capital Gains. We find no infirmity in the order of Ld. CIT (A)." Final determinations:
|
