2014 (1) TMI 1739 - AT - Income Tax

Additional payments made to the retiring partners - addition on capital gain - existence of element of profit - Held that - The character of additional amounts paid to the retiring partners represent the share of the retiring partners in the Worth and Value of the business in which they were partners. The Worth and Value included the standing of the business, the goodwill and so many other intangible virtues. So, what is paid to the retiring partners is their rightful shares in that Worth and Value of the firms and plainly speaking, there is no such additional payments as alleged by the Revenue towards profits. What is paid to the retiring partners are those amounts due to them. The only thing is that their shares in Worth and Value of business have been separately computed. Therefore, we find that the additional payments made to the retiring partners were not in the nature of any profit or income within the meaning of Section 28(va). As nontaxable capital receipts and in that way, the Commissioner of Income Tax (Appeals) is right in holding that the amounts are not taxable - Decided against revenue

Summary

Issues:
Taxability of additional payments made to retiring partners as business income under Section 28(va) of Income-tax Act, 1961.

Analysis:
The case involved a group of seven appeals filed by the Revenue concerning the tax treatment of additional payments made to retiring partners of a business group mainly dealing in fireworks. The Revenue contended that the amounts received by the retiring partners were taxable as business income under Section 28(va) as they were over and above the value of the assets of the firms. The Commissioner of Income Tax (Appeals) had earlier held that the payments were in the nature of a family arrangement and not taxable based on a decision of the Hon'ble High Court of Madras.

Upon detailed consideration, the Tribunal found that the additional payments to the retiring partners were capital in nature and not revenue receipts. Citing various judicial pronouncements, including the Hon'ble Supreme Court and High Courts, it was established that such capital receipts on retirement from a partnership firm are not liable for capital gains taxation. The Tribunal emphasized that the amounts received were the retiring partners' share in the value of the business, including goodwill, making them capital receipts.

Regarding the invocation of Section 28(va) by the Assessing Officer, the Tribunal ruled that the clause did not apply as there was no agreement restricting the retiring partners from carrying on business activities. The retirement deeds were not akin to non-competition agreements, and the payments were made due to retirement from the business, not for refraining from business activities. The Tribunal also noted that even if there was an element of profit, it would not be taxable under Section 10(2A) of the Income-tax Act, 1961.

In conclusion, the Tribunal held that the additional payments to the retiring partners were non-taxable capital receipts representing their rightful shares in the worth and value of the business. Therefore, the Commissioner of Income Tax (Appeals) was justified in deleting the additions made by the assessing authority. Consequently, the appeals filed by the Revenue were dismissed, affirming the non-taxable nature of the payments to the retiring partners.