2016 (10) TMI 554 - AT - Income Tax

Capital gain - amount received by retiring partner - transfer of goodwill - Held that - In the instant case, as noted above, the assessee as a retiring partner has received certain amount over and above the capital balance towards his share in the partnership firm. The partnership firm has continued to exist after the retirement of the assessee partner. The Revenue has treated the additional amount so received from the partnership firm as long term capital gain and sought to tax the same. However, we find that in the case of Mr. Riyaz A. Shaikh (2013 (12) TMI 248 - BOMBAY HIGH COURT ) has held amount received by a partner on retirement cannot be taxed as long term capital gain on transfer of goodwill. When a partner retires from the firm and receives share of amount calculated on the value of partnership asset including goodwill of the firm, there is no transfer of interest of the partner in the goodwill and no part of the amount received is exigible as capital gain under section 45 of the Act. - Decided in favour of assessee

Summary

Issues:
Taxability of amount received upon retirement from partnership firm as Long Term Capital Gain, denial of indexation benefit, distinction of facts, applicability of section 45(4) of the Income-tax Act, 1961.

Taxability of Amount Received Upon Retirement:
The appeal was filed against the order of CIT(A)-I, Pune regarding the taxability of the amount received by the assessee upon retirement from a partnership firm as Long Term Capital Gain. The Assessing Officer found that the additional sum received over and above the capital balance by the assessee was taxable under section 45 of the Act without indexation. The Assessing Officer concluded that since the cost of acquisition of rights in the partnership firm was Nil, the entire surplus amount was chargeable as income under the head 'capital gains.' The CIT(A) also upheld this view, leading to the appeal before the Tribunal.

Denial of Indexation Benefit:
The Assessing Officer denied the benefit of indexation claimed by the assessee on the ground that the capital introduced in the firm was not considered as the cost of acquisition for rights in the firm's property. The dispute arose from the interpretation of whether the amount received upon retirement should be subject to indexation benefit. The assessee contended that the surplus amount received should not be taxable at all, while the Revenue argued for taxability under section 45 of the Act. The issue of denial of indexation benefit was crucial in determining the tax liability on the amount received.

Distinction of Facts and Applicability of Section 45(4):
The CIT(A) made a distinction in the facts of the case and confirmed the taxability of the surplus receipts from the partnership firm. The assessee argued that the capital gain tax liability rests on the partnership and not on the partners individually. Additionally, the assessee contended that the cost of acquisition of rights in the firm was not ascertainable and hence should not be considered as Nil. The applicability of section 45(4) of the Act was debated, with the Revenue asserting that the amount received represented an additional revenue over and above the capital balance, thus necessitating taxation. The CIT(A) did not find merit in the assessee's claim that the surplus receipts were exempt from tax.

Judgment:
The Tribunal, after considering the submissions and previous legal precedents, held in favor of the assessee. Referring to a Co-ordinate Bench decision, the Tribunal noted that the amount received by a partner on retirement cannot be taxed as long term capital gain on the transfer of goodwill. Citing the decision of the Hon'ble Bombay High Court, the Tribunal concluded that the Revenue's action was contrary to legal precedent. Consequently, the appeal of the assessee was allowed, and the taxability of the amount received upon retirement was overturned. The Tribunal emphasized the direct decision of the Hon'ble Jurisdictional High Court on the issue, supporting the assessee's plea and granting the relief sought.

This comprehensive analysis of the judgment highlights the key issues involved, the arguments presented by the parties, and the Tribunal's decision based on legal interpretations and precedents.