2014 (2) TMI 679 - AT - Income Tax

Chargeability of amounts Amount received from other continuing partners Share in partnership Held that - Assessee contended that there are separate rights and the right to share in partnership (goodwill) is separate for which no cost was paid and provisions of section 55(2)(b) are not applicable as it is a professional firm - The decision in A.R. Krishnamurthy vs. CIT 1989 (2) TMI 2 - SUPREME Court followed - The determination of the cost of the right to excavate clay in the land in terms of money may be difficult but was nonetheless of a money value and the best valuation possible must be made - Once the cost of the leasehold rights was determined then there was no difficulty in making apportionment - The value of leasehold rights in the cost of acquisition of land being determinable, the computation provisions under the Act were applicable and section 45 would be attracted - The computation made by AO is approved for taxing the amounts received from the other three continuing partners by the retired partner (assessee ) thus, there is no need to consider the alternate contentions that provision of section 55(2b) are not applicable - the facts indicate that the share in assets and goodwill are non-separable rights acquired at the time of admission by paying cost, the same is liable to tax under the provision of capital gain Decided against Assessee. Error in computation of Capital gain Held that - On examination of computation of income, assessee s contention is found to be correct - Assessee offered short term capital gain on transfer of receipts in share of assets of partnership - Assessing Officer included the consideration received again in his working while determining the capital gains on both rights of share in asset/goodwill - Thereafter, the capital gain offered was again brought to tax (as per statement) - Thus, the amount was brought to tax twice thus, the AO is directed to exclude the amount at the time of passing order Decided in favour of Assessee.

Summary

Issues Involved:
1. Chargeability of amounts received from continuing partners by the retired partner (assessee) from the firm, particularly in the nature of right to share in partnership (Goodwill).
2. Whether the amounts received by the appellant should be taxed as short-term capital gains.
3. Applicability of Section 55(2)(a) regarding the cost of acquisition of goodwill.
4. Whether the amount offered by the assessee was brought to tax twice.

Detailed Analysis:

1. Chargeability of Amounts Received:
The core issue in the appeal is the chargeability of amounts received by the retired partner (assessee) from continuing partners, specifically concerning the right to share in partnership (Goodwill). The assessee contended that these receipts are capital receipts and should not be taxed. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the amounts as short-term capital gains.

2. Taxation as Short-Term Capital Gains:
The AO observed that the amounts received by the assessee on retirement from the firms were not offered for taxation. The assessee relied on the Supreme Court decision in Malabar Fisheries Co. v. CIT, but the AO noted that the case law cited was not applicable since the payments were made by the continuing partners, not the firm. The AO computed the short-term capital gains as follows:
- For Dalal & Shah, Mumbai: Sale proceeds of Rs. 50,24,000/- less cost of acquisition Rs. 5,16,150/-, resulting in a short-term capital gain of Rs. 45,07,850/-.
- For Dalal & Shah, Ahmedabad: Sale proceeds of Rs. 6,12,000/- less cost of acquisition Rs. 13,153/-, resulting in a short-term capital gain of Rs. 5,98,847/-.

3. Applicability of Section 55(2)(a):
The AO alternatively considered that the amounts received for goodwill should be taxed by taking the cost of acquisition as NIL, invoking Section 55(2)(a). The CIT(A) upheld this view, stating that the capital gains on transfer of goodwill should be Rs. 45,00,000/-, along with the capital gain of Rs. 6,06,697/- declared by the assessee on account of transfer of his share in partnership assets, totaling Rs. 51,06,697/-.

The assessee contended that Section 55(2)(a) should not apply as the firm is a professional firm and the term "goodwill" should be interpreted in the context of business. The CIT(A) dismissed this argument, noting that the amounts received were for the transfer of rights in the partnership, including goodwill, and were taxable as capital gains.

4. Double Taxation Claim:
The assessee raised an additional ground, claiming that the amount of Rs. 6,06,697/- was taxed twice. The Tribunal found merit in this claim, directing the AO to exclude the amount of Rs. 6,06,697/- from the taxable income while passing the consequential order.

Conclusion:
The Tribunal upheld the AO's computation of short-term capital gains on amounts received by the retired partner from continuing partners. It confirmed that the amounts received for the transfer of rights, including goodwill, were taxable. The Tribunal also directed the AO to rectify the double taxation of Rs. 6,06,697/-. The appeal was partly allowed, providing relief only on the additional ground of double taxation.