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2012 (7) TMI 652 - AT - Income TaxCapital Gains - amount received from partnership firm on retirement - payment of consideration in cash - share of goodwill - capital asset u/s 2(14) - transfer u/s 2(47) - held that - 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. - 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. - the assessee satisfies the parameters and, therefore, there was a transfer of interest of the retiring partner over the assets of the partnership firm on her retirement and, therefore, there was a liability to tax on account of capital gain.
Issues Involved:
1. Whether the amount received by the assessee on retirement from the partnership firm constitutes a transfer of capital asset liable to capital gains tax. 2. Whether the assessee is entitled to set off short term capital loss against the capital gains. Detailed Analysis: Issue 1: Transfer of Capital Asset and Capital Gains Tax - Facts: The assessee retired from the partnership firm and received Rs. 8,22,17,952, which included her share of goodwill and capital account balance. The Assessing Officer treated this amount as long-term capital gains, arguing that the retirement involved the transfer of a capital asset. - Assessing Officer's View: The AO opined that the receipt of Rs. 7,95,88,639 as goodwill was a transfer of a capital asset under sections 2(14) and 2(47) of the IT Act, leading to capital gains tax. He relied on the decision of CIT vs. A.N. Naik Associates (265 ITR 346) and other cases to support this view. - Assessee's Argument: The assessee argued that the goodwill belongs to the partnership firm, not the partners individually, and receiving her share on retirement does not constitute a transfer. She cited cases like CIT vs. R. Lingmallu Raghukumar (247 ITR 801) and others to support her claim that the amount received on retirement is not taxable as capital gains. - Tribunal's Analysis: The Tribunal examined the nature of partnership and the provisions of the IT Act. It noted that post-1988 amendments, relinquishment of capital assets on retirement amounts to a transfer. It referred to various judgments, including those of the Bombay High Court and the Supreme Court, to conclude that the mode of retirement and the nature of the transaction determine if it constitutes a transfer. - Conclusion: The Tribunal held that the assessee's retirement involved the relinquishment of her share in the partnership assets, constituting a transfer under section 2(47). Therefore, the amount received was liable to capital gains tax. Issue 2: Set Off of Short Term Capital Loss - Facts: The assessee incurred a short term capital loss of Rs. 97,07,329 from investments in SBI Mutual Funds. The AO disallowed the set off, citing the Supreme Court decision in Goetze (India) Ltd. (284 ITR 323), as the loss was not claimed in the original return. - Assessee's Argument: The assessee contended that the set off should be allowed as the AO had proposed to tax the amount as capital gains, and the claim was made during assessment proceedings. She cited the decision of the Ahmedabad ITAT in Kisan Discretionary Family Trust (2 DTR 363) and argued that the CIT(A) has the power to entertain such claims. - Tribunal's Analysis: The Tribunal noted that if the transaction relating to the acquisition of the capital asset was disclosed in the original return, the loss should be considered in accordance with the law. - Conclusion: The Tribunal directed the AO to consider the assessee's claim for set off of the short term capital loss if the transaction was disclosed in the original return. Final Order: The appeal of the assessee was partly allowed, directing the AO to consider the set off of short term capital loss, while confirming the capital gains tax on the amount received on retirement. The stay application filed by the assessee was dismissed as infructuous.
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