2017 (1) TMI 327 - AT - Income Tax

Revision u/s 263 - transfer within the meaning of sec. 2(47) when a partner received his share in the partnership business - CIT observed that when a partner retires from a partnership firm, the amount received over and above the capital account of the partner is taxable in total without allowing any deductions towards cost of acquisition of the asset also A.O. without application of mind allowed the cost of acquisition claimed by the assessee, which is otherwise not allowable, therefore, the assessment order passed by the A.O. is prejudicial to the interest of the revenue - Held that - We find force in the arguments of the assessee, for the reason that the coordinate bench in the case of ACIT Vs. N. Prasad 2014 (1) TMI 1681 - ITAT HYDERABAD held that when a partner retires from the partnership firm, taking his share of interest in the firm, no element of transfer is involved thereby not liable for capital gain tax. A similar view was expressed by the Hon ble Supreme Court, in the case of CIT Vs. R. Lingamallu Raghu Kumar (1997 (1) TMI 74 - SUPREME Court) wherein held that on retirement of assessee partner from the firm, there was no element of transfer of interest in partnership assets by the retiring partner to the continuing partners and the amount received by him was not liable for capital gains. In view of the above judgements, it is abundantly clear that when a partner retires from the partnership firm, whatever amount received by the partner over and above his capital account is not liable for capital gain tax. Though, there is no transfer within the meaning of section 2(47)(v) of the Act, the assessee himself offered the capital gain on account of relinquishment of his right in the partnership firm, therefore, we are of the view that there is no prejudice is caused to the revenue and hence the CIT was not correct in coming to the conclusion that the order passed by the A.O. is prejudicial to the interest of the revenue. - Decided in favour of assessee.

Issues Involved:
1. Validity of the assessment order under section 143(3) of the Income Tax Act, 1961.
2. Examination of the computation of capital gains on relinquishment of share in partnership firms.
3. Jurisdiction of the CIT under section 263 of the Income Tax Act, 1961.
4. Treatment of the amount received over and above the capital account as goodwill.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order under Section 143(3) of the Income Tax Act, 1961:
The assessee filed a return of income for the assessment year 2008-09, which was converted into scrutiny, and the assessment was completed under section 143(3) on 27.12.2010. The CIT issued a show cause notice proposing to revise the assessment order, alleging that the A.O. did not properly examine the computation of capital gains on relinquishment of the assessee's share in two partnership firms. The CIT argued that the assessment order was erroneous and prejudicial to the interest of the revenue.

2. Examination of the Computation of Capital Gains on Relinquishment of Share in Partnership Firms:
The CIT observed that the A.O. failed to examine whether the computation of capital gains by the assessee, particularly the deduction of the cost of acquisition, was correct. The CIT contended that the amount received over and above the capital account should be treated as goodwill and not as capital gains. The assessee argued that the A.O. had examined the issue in detail during the assessment proceedings and had made necessary adjustments, including re-determining the capital gains.

3. Jurisdiction of the CIT under Section 263 of the Income Tax Act, 1961:
The CIT assumed jurisdiction under section 263, asserting that the A.O. had not conducted a proper inquiry before completing the assessment, thus rendering the order erroneous and prejudicial to the revenue. However, the tribunal found that the A.O. had indeed examined the issue during the assessment and had taken a conscious decision. The tribunal held that the CIT could not assume jurisdiction under section 263 merely because he had a different opinion on the issue.

4. Treatment of the Amount Received Over and Above the Capital Account as Goodwill:
The CIT argued that the amount received by the assessee over and above his capital account should be treated as goodwill and fully taxable without any deductions. The assessee contended that there was no transfer of interest in the partnership assets upon retirement, and thus, no capital gains tax should be applicable. The tribunal supported this view, citing precedents from the ITAT, Hyderabad, and the Hon’ble Supreme Court, which held that no element of transfer is involved when a partner retires from a partnership firm.

Conclusion:
The tribunal concluded that the assessment order passed by the A.O. was not erroneous or prejudicial to the interest of the revenue. The tribunal set aside the CIT's order under section 263 and restored the assessment order passed by the A.O. under section 143(3). The appeal filed by the assessee was allowed.

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