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2018 (2) TMI 1368 - AT - Income TaxAddition on share of goodwill received by the assessee on his retirement from the partnership firm - Held that - There was no transfer of any asset or goodwill by the assessee on his retirement to the partnership firm. The amount received by the assessee as full and final settlement on dissolution of firm could not give rise to any capital gain chargeable to tax as there was no transfer of any capital asset. See case of Ajay Kumar Doshi 2015 (12) TMI 1750 - ITAT KOLKATA - Decided in favour of assessee.
Issues Involved:
1. Addition of ?33,35,781/- made by the Assessing Officer to the total income of the assessee on account of goodwill. 2. Enhancement of the addition by the Commissioner of Income Tax (Appeals) to ?44,25,000/-. 3. Determination of whether the amount received by the assessee on retirement from the partnership firm is taxable as capital gain. Issue-wise Detailed Analysis: 1. Addition of ?33,35,781/- by the Assessing Officer: The Assessing Officer added ?33,35,781/- to the total income of the assessee, representing the excess amount received over his capital account balance upon retirement from the partnership firm, M/s. Process Chemicals Co. The officer rejected the assessee's claim that this excess amount was towards his share of goodwill, which should not be taxable as the cost of acquisition of goodwill is nil according to section 55(2)(a) of the Income Tax Act. The officer concluded that the amount received in excess of the capital account balance constituted taxable income. 2. Enhancement to ?44,25,000/- by the Commissioner of Income Tax (Appeals): The Commissioner of Income Tax (Appeals) issued a show-cause notice to the assessee to explain why the addition should not be enhanced to ?44,25,000/-, the amount credited to the assessee's capital account as goodwill. The assessee argued that the creation of goodwill in the books did not constitute a transfer, and thus no capital gain tax should be levied. The CIT(A) dismissed these arguments, relying on the Hyderabad Bench Tribunal decision in the case of Smt. Girija Reddy, which held that the amount received by a retiring partner for relinquishing their share in the partnership firm is taxable as capital gains. 3. Determination of Taxability as Capital Gain: The Tribunal examined whether the amount received by the assessee on retirement from the partnership firm is taxable as capital gain. The Tribunal noted that the goodwill was created and credited to the assessee's capital account during the year, and the assessee withdrew the entire amount, including goodwill, upon retirement. The Tribunal referred to various judicial pronouncements, including the Karnataka High Court's decision in the case of Karnataka Agro, which held that no capital gain tax is applicable if there is no transfer of goodwill. The Tribunal also considered the decision of the Hyderabad Bench in the case of ACIT vs. N. Prasad, which supported the assessee's claim that no capital gain arises from the withdrawal of goodwill on retirement. Conclusion: The Tribunal concluded that the issue is covered in favor of the assessee by previous judicial decisions, including the Coordinate Bench's decision in the case of Ajay Kumar Doshi. The Tribunal held that the amount received by the assessee as his share of goodwill on retirement from the partnership firm is not chargeable to tax as capital gain. Consequently, the addition made by the Assessing Officer and enhanced by the CIT(A) was deleted, and the appeal of the assessee was allowed. Order: The appeal of the assessee is allowed, and the addition made on account of goodwill is deleted. The order was pronounced in the open Court on 19th February 2018.
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