TMI Blog2018 (2) TMI 1368X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer to the total income of the assessee on account of goodwill, which is enhanced by the ld. CIT(Appeals) to ₹ 44,25,000/-. 2. The assessee in the present case is an individual, who was a partner in the partnership firm of M/s. Process Chemicals Co. with other partner being Shri Ranjit Mukherjee having profit share of 50% each. The said partnership firm was reconstituted on 01.12.2008 by inducting two new partners Shri Piyush Chakraborty and Shri Chandralekha Chakraborty. After the reconstitution, the profit sharing ratio of the erstwhile two partners including the assessee was reduced to 5% from 50% with the profit sharing ratio of new partners being 60% and 30% in case of Shri Piyush Chakraborty and Shri Chandralekha Chakraborty. Thereafter the assessee retired from the partnership firm of M/s. Process Chemicals Co. from 01.04.2009. Before his retirement, he received a sum of ₹ 81,81,158/- during the period 01.12.2008 to 30.03.2009 from the partnership firm as against the capital balance amount of ₹ 40,02,377/- as on March 31, 2008. The assessee thus had received a sum of ₹ 41,78,781/- in excess of his capital account balance and since the same was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould not be enhanced to ₹ 45,25,000/- being the credit in his capital account on account of creation of goodwill. In reply, it was submitted by the assessee that the creation of goodwill in the books of account of the partnership firm could not be added as capital gin as there was no transfer so as to bring the amount in question to tax under section 45 of the Act. It was submitted that the amendment made in section 55(2)(a) and relied upon by the Assessing Officer was to bring to tax the capital gain on transfer of goodwill only and there being no transfer of goodwill on the retirement of the assessee from the partnership firm of M/s. Process Chemicals Co., no capital gain tax could be charged on notional basis since there was only a creation of goodwill in the books with no transfer taking place. Reliance in support of this contention was placed on behalf of the assessee on the decision of the Hon ble Karnataka High Court in the case of CIT vs.- Karnataka Agro (ITA No. 594 of 2013 dated 29.06.2014), wherein the partnership firm had credited self-generated assets in the form of goodwill of business to the extent of ₹ 7,69,28,000/- and had transferred the same to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diting the partners' capital account @ ₹ 44,25,000/- each on 27/10/2008/-. On 1st December 2008 Partnership reconstituted with new partners and appellant along with Mr. Puranjit Mukherjee relinquished their shares to the extent of 45% each in favour of new partners. Immediately from 1st December 2008 the appellant started withdrawing the amounts from his capital account and by 30/03/2009 the appellant has withdrawn ₹ 81.81 lacs including the goodwill and got retired from the firm with effect from 01/04/2009. These entire transactions clearly show that the partners intended to retire and for that purpose, the goodwill was valued and credited to the Partners' Capital account and accordingly amounts were withdrawn from the capital accounts. Therefore, the excess payments made to the partners can be regarded as the payments for relinquishing or assigning their rights in the partnership firm. And now the issue is whether the payment on account of goodwill is taxable in the hands of the Retiring Partner or not? Section 55 of the Income Tax has been amended with effect from 01/04/1988 with an intention to bring the transfer of goodwill and the cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was examined by the Hon'ble Income Tax Appellate Tribunal Hyderabad Bench in the case of Smt. Girija Reddy, P. Vs. Income Tax Officer, Ward-6(2) and delivered the decision in ITA No.297/Hyd/2012 Assessment Year 2008-09 after considering the Hon'ble Supreme Court judgement in the case of CIT vs. Mohanbhai Pamabhai, Hobble Supreme Court judgement in the case of CIT vs. R. Lingmallu Raghukumar (2001), and various other judgements and held as under: Held: Thus, in our opinion, it was a case of lump sum payment in consideration of the retiring partner assigning or relinquishing her share or right in the partnership and its assets in favour of the continuing partners. We are of the view that the manner of the retirement in case of the assessee is such that it can be regarded as assigning or relinquishing by the retiring partner of her share or right in the partnership firm and its assets in favour of the continuing partners. Therefore, we are of the view that the assessee satisfies the parameters laid down by the Bombay High Court in the cases referred to above and, therefore, there was a transfer of interest of the retiring partner over the assets of the partnership fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 55 by the Finance Act, 1987. The ld. CIT(Appeals), however, distinguished the decision of the Hon ble Karnataka High Court in the case of Karnataka Agro (supra) on the basis that the said decision was rendered in the case of partnership firm and not in the case of the partner. As submitted by the ld. counsel for the assessee, even though the said decision was rendered by the Hon ble Karnataka High Court in the case of partnership firm, the provisions of section 45(4) were held to be not attracted on the ground that there was no transfer of any right in the capital asset much less the goodwill by the partnership firm in favour of the retiring partners. A perusal of the impugned order of the ld. CIT(Appeals) shows that he has mainly relied on the decision of the Hyderabad Bench of this Tribunal in the case of Smt. Girija Reddy vs.- ITO [52 SOT 113], wherein it was held that where a lumpsum payment was made to a retiring partner for consideration of assigning or relinquishing her share over assets of partnership firm in favour of continuing partners, it was a case of transfer and the assessee thus was liable to pay tax on account of capital gain. At the time of hearing before the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the case and rival contentions. The revenue s case is primarily based on the provision contained in section 55(2) under which the cost of goodwill has to be taken as nil if it has not been purchased from a previous owner. Such is the case here nonetheless, this cost is for the purpose of sections 48 and 49, which deal with the mode of computation of the income chargeable under the head capital gains. Before coming to the mode of computation, it has to be seen whether any amount is chargeable to capital gains tax u/s 45, which is the charging section. The ld. DR was not able to explain how provisions of section 45 were applicable in the instant case. Sub-section 4 of this section deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital asset on dissolution or otherwise of a firm, and brings to tax the capital gains in the hands of the firm. However, we are dealing with a case of the partner here. The firm acquired goodwill over a period of time, which was brought into the books and distributed amongst existing partners before the new partners were taken in and some existing partners retired. The asset of the firm already existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been no transfer of such goodwill by the said firms. The firms still own and hold such goodwill and the assessee who has retired has no interest of any nature whatsoever therein. The revenue's case is primarily based on view that money received. in lieu of goodwill from the firm by the partner is casual receipt in the nature of income which is not taxable in the hands of the firm. What the partners got at the time of the retirement including the amount credited for the goodwill of the firms is a capital receipt in their hands. The partners did not own the goodwill nor did they transfer the same. The goodwill all along remained with the firm as its asset even after the retirement of the partners. What the partners got on retirement was for the value of their interest in the firm. This view is duly supported by various decision cited by the Ld. Authorised Representative including the decision .of Apex Court in the case of Sunil Siddharthhbhai vs. CIT (supra). 9.1. In the instant case, the firms have not realized any amount on account of goodwill hence the question of any assessment being made in their hands does not arise. The notional valuation of the goodwill in its ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
