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Shri Manish R. Shah Versus Income Tax Officer Ward-27 (5)

2015 (8) TMI 853 - BOMBAY HIGH COURT

Retirement benefit on settlement of account with the partnership firm - whether was taxable under Section 10(3) in the hands of Partner? - ITAT held that the amount received by the Appellant is not on account of goodwill and set aside the order of the CIT(A) who held the amount not taxable under Section 10(3) - Held that:- The impugned order upsetting the finding of the CIT(A) is on a factually erroneous basis as pointed out herein above and cannot be sustained. The fact that the amount of ͅ .....

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₹ 1,75,000/- was received by the Appellant in consideration of the goodwill left behind in the firm, then without anything more, the receipt of the above amount cannot be said to be casual for the purposes of Section 10(3) of the Act. In fact, the CIT(A) in his order holds that the amount received by the Appellant being a portion of the goodwill, cannot be said to be casual. The goodwill the firm possesses is inherent in it. It is at the time when the Appellant retired that the same was q .....

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by Section 10(3) of the Act - Decided in favour of assessee. - Income Tax Appeal No. 40 of 2001 - Dated:- 6-8-2015 - M. S. Sanklecha And N. M. Jamdar, JJ. For the Appellant : Mr V B Joshi For the Respondent : Mr Suresh Kumar ORDER P.C. This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act), impeaches the order dated 31st July, 2000 passed by the Income Tax Appellate Tribunal (the Tribunal). The Assessment Year involved is 1992-93. 2. This Appeal was admitted on 1st April, 2004 on .....

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allied product since 1969. The Appellant did not bring in any capital into the firm and was inducted as a working partner, entitled to a share of 35% in the profit of the business. 4. In the year 1991, due to personal reasons, the Appellant had to shift base from Mumbai to Baroda, requiring him to retire from the said firm w.e.f. 1st April, 1991. At the time of retirement, it was mutually decided between the partners that besides the credit standing to the capital account a further amount of  .....

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, payable out of ₹ 5 lakhs being distributed amongst the retiring partners in the profit sharing ratio. In its return of income for the relevant Assessment Year 199293, the Appellant had appended a note that a sum of ₹ 1,75,000/- received from the said firm on full and final settlement of his account and the same has been deposited in IDBI Capital Bonds. 5. The Assessing Officer by his order dated 27th December, 1994 did not accept the Appellant's contention that the above amount .....

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ved by an order dated 1st September, 1995, the Appeal of the Appellant was allowed, inter alia holding that the amount of ₹ 1,75,000/- received by the Appellant cannot be subjected to tax under Section 10(3) of the Act. This inter alia, on the ground that the amount received by the Appellant as retiring partner, was goodwill attributable to Appellant i.e. the income earning capacity of the firm. Consequently, holding that Section 10(3) of the Act would not no application as it is not casua .....

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, 2000, the Appeal was allowed by holding that the Appellant had been partner of the firm only for a period of one year and goodwill is built generally over a period of time. Thus, the amount received of ₹ 1,75,000/- was on capital account. Further, reliance was placed upon clauses of the agreement dated 3rd April, 1991 titled as Deed of PartnershipcumRetirement which does not provide for payment of goodwill. Consequently, the impugned order held that the amount received to be casual and n .....

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to the extent such receipts do not exceed five thousand rupees in the aggregate: Provided that where such receipts relate to winnings from races, the provisions of this clause shall have effect as if for the words "five thousand rupees" the words "two thousand five hundred rupees" had been substituted: Provided further that this clause shall not apply to (i) capital gains chargeable under the provisions of section 45; or (ii) receipts arising from business or the exercise of .....

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ns; (b) Section 10(3) of the Act would have no application when the amount received are chargeable to tax under the head 'Capital gains' as provided under Section 45of the Act; and (c) The amount received by a partner on his retirement are in the nature of capital receipt and the tax on the same is to be discharged by the Appellant under Section 45(4) of the Act is a settled position in view of the decision of Apex Court in Mohanbhai Pamabhai (supra) and also of this Court in Prashant V. .....

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nly for one year; and (c) The decision of the Apex Court in Mohanbhai Pamabhai (supra) would have no application as the present case dealt with a retirement of a partner and not dissolution of the firm consequently Section 45(4) of the Act being relied upon by the Appellant, is without basis. 11. The Assessing Officer has taxed an amount of ₹ 1,70,000/- out of ₹ 1,75,000/- received by the Appellant on his retirement from the firm w.e.f. 1st April, 1991. This on the ground that it is .....

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is clause would have no application in case they arise out of capital gains chargeable to tax under Section 45 of the Act or arise from exercise of business or profession. 13. In the present case, the CIT(A) held that the amount of ₹ 1,75,000/- paid by the firm to the Appellant was the amount of goodwill in the firm attributable to the Appellant. This payment of goodwill is as held by the CIT(A) not a casual receipt. Thus, not taxable under Section 10(3)of the Act. Alternatively, it held t .....

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tributed any capital when he came into the firm. Further, reliance is placed upon certain clauses of a Deed of PartnershipcumRetirement dated 3rd April, 1991 to conclude that the amount of ₹ 1,75,000/- is not an amount received as goodwill. 14. We find substance in the submission of Mr. Joshi, the learned Counsel appearing for the Appellant that the impugned order has proceeded on mere assumptions and presumptions to conclude that no goodwill could have been generated by the Appellant. The .....

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ch he would have contributed to goodwill of firm. Third presumption that retiring partners would have no right to a goodwill of a business as that is available only when the business is sold as whole and continuing entity. We are at a loss from where does the Tribunal gets this position in law. Lastly, the impugned order relies upon the Deed of PartnershipcumRetirement dated 3rd April, 1991 and in particular clause 15 thereof which states that no goodwill will accrue to or belong to a retiring p .....

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t of their capital account as on 31st March, 1991. It is further agreed that the said sum of ₹ 5,00,000/- shall be distributed amongst the Retiring Partners and Continuing Partner in their respective Profit sharing ratio of the old firm. The Retiring Partners shall not have any right whatsoever in the assets of the said Partnership." The aforesaid clause was completely ignored by the impugned order of the Tribunal. 15. In the circumstances, the impugned order upsetting the finding of .....

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rdingly, we hold that the amount of ₹ 1,75,000/- paid to Appellant is goodwill. Once we reach a conclusion that the amount of ₹ 1,75,000/- was received by the Appellant in consideration of the goodwill left behind in the firm, then without anything more, the receipt of the above amount cannot be said to be casual for the purposes of Section 10(3) of the Act. In fact, the CIT(A) in his order holds that the amount received by the Appellant being a portion of the goodwill, cannot be sai .....

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