2012 (7) TMI 934 - AT - Income Tax

Whether Retirement from the partnership firm is liable to be taxed as long term capital gain arising on transfer of partnership rights - Held that - Amounts received by the partner on his retirement are exempt from capital gains tax.

Summary

Issues:
1. Taxability of amount received by the assessee on retirement from a partnership firm as long term capital gain.

Analysis:
The appeal before the Appellate Tribunal ITAT Pune involved the question of whether an amount received by the assessee on retirement from a partnership firm should be taxed as long term capital gain. The assessee, a partner in various firms, retired from a partnership firm and received a sum of Rs. 54,59,083 over and above the balance in his capital account. The Assessing Officer taxed this amount as long term capital gain, citing a decision of the Pune Bench of the Tribunal. However, the assessee claimed it as capital receipts not liable to tax. The Commissioner of Income-tax (Appeals) relied on a decision of a co-ordinate Bench in a similar case and deleted the addition made by the Assessing Officer.

The Revenue contended that the additional consideration received by the assessee was due to the relinquishment of his rights in the partnership firm and should be treated as capital gain. On the other hand, the respondent-assessee argued that the amount received on retirement should be exempt from capital gains tax, referring to the decision of a co-ordinate Bench in a similar case. The Tribunal examined the contentions and referred to various legal precedents, including judgments of the Supreme Court and High Courts, to support its decision.

The Tribunal observed that when a partner retires from a partnership firm and receives a share of the net partnership assets, including goodwill, there is no transfer of interest in the goodwill. It cited judgments that clarified that such amounts received by a retiring partner are not taxable as capital gains. The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) based on the legal position established by the precedents cited. Consequently, the appeal of the Revenue was dismissed, affirming the order of the Commissioner of Income-tax (Appeals).

In conclusion, the Appellate Tribunal ITAT Pune ruled in favor of the assessee, holding that the amount received on retirement from the partnership firm was not liable to be taxed as long term capital gain. The decision was based on legal precedents and established principles regarding the taxability of amounts received by a partner on retirement.