2015 (8) TMI 853 - HC - Income Tax

Retirement benefit on settlement of account with the partnership firm - whether was taxable under Section 10(3) in the hands of Partner? - ITAT held that the amount received by the Appellant is not on account of goodwill and set aside the order of the CIT(A) who held the amount not taxable under Section 10(3) - Held that - The impugned order upsetting the finding of the CIT(A) is on a factually erroneous basis as pointed out herein above and cannot be sustained. The fact that the amount of ₹ 1,75,000/- paid to the Appellant by the firm was in the nature of payment of goodwill is also supported by the fact that the firm considered only the amount of ₹ 1,75,000/- being a part of ₹ 5 lakhs as attributable to Appellant goodwill. This amount was on account of having paid the retiring partners their contribution to the goodwill of the firm. Accordingly, we hold that the amount of ₹ 1,75,000/- paid to Appellant is goodwill. Once we reach a conclusion that the amount of ₹ 1,75,000/- was received by the Appellant in consideration of the goodwill left behind in the firm, then without anything more, the receipt of the above amount cannot be said to be casual for the purposes of Section 10(3) of the Act. In fact, the CIT(A) in his order holds that the amount received by the Appellant being a portion of the goodwill, cannot be said to be casual. The goodwill the firm possesses is inherent in it. It is at the time when the Appellant retired that the same was quantified to enable the firm to exploit the goodwill left behind by the retiring partner. For the purposes of Section 10(3) of the Act applying not only should the receipt qualify as income but it has also to be casual and non-recurring. Therefore, the amount of ₹ 1,75,000/- received by the Appellant not being casual as it was always foreseen and anticipated prior to retirement. It has only been quantified at the time of retirement of the Appellant. Thus, the receipt is not hit by Section 10(3) of the Act - Decided in favour of assessee.

Summary

Issues:
1. Taxability of amount received on retirement under Section 10(3) of the Income Tax Act, 1961.

Analysis:
The appellant, a partner in a firm, received an amount of Rs. 1,75,000 on retirement, claimed as non-taxable capital receipt. The Assessing Officer taxed a portion of it under Section 10(3) as casual and nonrecurring income. The Commissioner of Income Tax (Appeal) allowed the appellant's claim, stating the amount was goodwill attributable to the appellant and not taxable. The Tribunal, however, reversed this decision, considering the amount as a casual receipt under Section 10(3) due to lack of evidence of goodwill generation within a year and absence of capital contribution by the appellant.

The crux of the dispute lies in the interpretation of Section 10(3) of the Act. The appellant argued that the amount was a capital receipt and should be taxed under Section 45, citing relevant case law. The Revenue contended that the amount constituted income under goodwill and was not on capital account, opposing the appellant's reliance on case law. The Tribunal upheld the taxability of the amount as casual and nonrecurring under Section 10(3), emphasizing the absence of goodwill generation within a year and clauses in the partnership-cum-retirement deed.

The High Court analyzed the facts and legal provisions in detail. It noted that the Tribunal's decision was based on assumptions and ignored crucial clauses in the deed. The Court emphasized that the amount was payment for goodwill and not casual income, as quantified at retirement. Referring to case law and the definition of 'casual,' the Court concluded that the amount was not hit by Section 10(3) as it was anticipated and quantified before retirement. Therefore, the Court ruled in favor of the appellant, holding the amount non-taxable under Section 10(3) and disposing of the appeal accordingly.