2014 (1) TMI 1681 - AT - Income Tax

Capital gain - whether there is no transfer within the meaning of sec. 2(47) when a partner received his share in the partnership business? - retirement of partners - CIT (A) deleted the addition by holding that there is no transfer - Held that - A reading of clause 4 of the deed of retirement makes it clear that the amount of ₹ 1.25 cores was paid to the assessee towards his share capital and not for relinquishing or extinguishing his rights over any assets of the firm. The term goodwill, in our view has been loosely used in the aforesaid clause. Furthermore, a plain reading of the clause 4 will not in any manner indicate that payment of ₹ 25 lakhs was towards transfer of goodwill as suggested by the Assessing Officer. Therefore, considering totality of facts and the circumstances of the case and applying the ratio laid down by the Hon ble jurisdictional High Court in the case of Chalasani Venkatesara Rao (2012 (9) TMI 12 - Andhra Pradesh High Court), which is binding on us, we are of the view that the order passed by the CIT (A) needs to be upheld - Decided in favour of assessee.

Issues Involved:
1. Whether the CIT (A) was correct in deleting the addition of Rs. 25 lakhs by holding that there is no transfer within the meaning of sec. 2(47) of the Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 25 Lakhs by CIT (A):
The primary issue in this appeal is whether the CIT (A) was justified in deleting the addition of Rs. 25 lakhs by holding that there is no transfer within the meaning of section 2(47) of the Income Tax Act. The facts reveal that the assessee, an individual, retired from the partnership firm M/s Square Projects Associates and received Rs. 25 lakhs surplus apart from his share capital of Rs. 1 crore. The Assessing Officer (AO) treated this surplus as taxable under capital gains, considering it as goodwill paid to the assessee for leaving the firm. However, the CIT (A) deleted this addition, relying on the Supreme Court's decision in CIT vs. R. Lingamallu Raghu Kumar, which held that such retirement does not amount to a transfer under section 2(47) of the Act.

2. Arguments by the Department:
The department argued that the excess consideration of Rs. 25 lakhs received by the assessee was towards the transfer of goodwill, making it taxable as short-term capital gain. The department contended that goodwill is a capital asset, and any consideration received for its transfer should be chargeable to capital gains tax. They also argued that the CIT (A) relied on a decision that was factually distinguishable.

3. Arguments by the Assessee:
The assessee, supported by various judgments, argued that goodwill is an asset of the firm and cannot be transferred by an individual partner. The assessee cited decisions from different High Courts and Tribunal benches, which held that excess amounts received by partners on retirement or dissolution are not liable for capital gains tax. The assessee also referred to a larger bench decision of the Karnataka High Court in CIT vs. Dynamic Enterprises, which held that there is no transfer of capital assets upon the retirement of a partner.

4. Tribunal's Analysis and Conclusion:
The Tribunal considered the submissions and examined the legal issue of whether there was a transfer within the meaning of section 2(47) of the Act. It referred to the Supreme Court's decision in CIT vs. R. Lingamallu Raghu Kumar, which upheld that no transfer occurs when a partner retires and receives an excess amount. The Tribunal also cited the Kerala High Court's decision in CIT vs. Kunnankulam Mill Board and the Karnataka High Court's decision in CIT vs. Dynamic Enterprises, which supported the view that no transfer of capital assets occurs upon the retirement of a partner.

The Tribunal noted that the assessee received a lump sum amount of Rs. 1.25 crore from the partnership firm towards his share, and no capital asset was transferred by the firm to the assessee. The Tribunal held that the term 'goodwill' was loosely used in the retirement deed and that the payment of Rs. 25 lakhs was not towards the transfer of goodwill. It relied on the jurisdictional High Court's decision in Chalasani Venkateswara Rao, which held that no transfer occurs when a partner retires and receives his share in the partnership assets.

Conclusion:
The Tribunal concluded that the CIT (A) was correct in deleting the addition of Rs. 25 lakhs, as there was no transfer within the meaning of section 2(47) of the Act. The appeal filed by the department was dismissed.

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