2018 (5) TMI 1594 - AT - Income Tax

Whether the goodwill created in the books of account is liable to be taxed in the hands of assessee as short term capital gain? - Held that - firms were having self generated goodwill which was valued by them during the present AY - there has been no transfer of such goodwill by the said firms - mere creation of goodwill in the books does not mean any transfer, which could be charged as short term capital gain - thus CIT(A) was not justified in holding goodwill created in the books of account is liable to be taxed as STCG - Decided in favor of assessee.

Issues Involved:
1. Whether the CIT-A was justified in confirming the orders of the AO by holding that goodwill created in the books of account is liable to be taxed in the hands of the assessee as short-term capital gain.

Issue-wise Detailed Analysis:

1. Taxability of Goodwill as Short-Term Capital Gain:
The primary issue in both appeals was whether the goodwill created in the books of account should be taxed as short-term capital gain. The Tribunal examined similar cases, including the case of Amit Kumar Choudhury, where it was held that the amount received on account of a share of goodwill is not chargeable to tax as capital gain. The Tribunal also referred to the case of Ajay Kumar Doshi, where it was decided that the amount received by the assessee as a share of goodwill on retirement from the firm is not chargeable to tax under the head capital receipt.

2. Tribunal’s Observations and Rationale:
The Tribunal noted that the goodwill of the partnership firm was created based on a valuation report and credited to the capital account of the assessee. The assessee withdrew the entire amount of his capital, including the goodwill, upon retirement. The assessee argued that the goodwill remained with the partnership firm and there was no transfer of goodwill, relying on the decision of the Karnataka High Court in Karnataka Agro and CBDT Circular No. 495.

3. CIT(A)’s Distinction and Tribunal’s Counter:
The CIT(A) distinguished the Karnataka High Court’s decision, stating it was rendered in the case of a partnership firm, not a partner. However, the Tribunal countered that the provisions of section 45(4) were held to be not attracted as there was no transfer of any right in the capital asset by the partnership firm to the retiring partners. The Tribunal also considered the Hyderabad Bench’s decision in Smt. Girija Reddy, which was distinguishable on facts.

4. Supporting Judicial Pronouncements:
The Tribunal relied on several judicial pronouncements, including the case of ACIT vs. N. Prasad, where it was held that there was no transfer of any asset or goodwill by the assessee upon retirement. The Tribunal also cited the decision of the Andhra Pradesh High Court in Chalasani Venkateswara Rao, which held that the amount received as full and final settlement on dissolution of a firm could not give rise to any capital gain chargeable to tax.

5. Consistency with Previous Tribunal Decisions:
The Tribunal referenced its own decisions in cases like Ajay Kumar Doshi and Nawshir H. Mirza, where it was consistently held that the amount received by a retiring partner for goodwill is a capital receipt not chargeable to tax. The Tribunal emphasized that the creation of goodwill in the books does not constitute a transfer liable to short-term capital gain tax.

Conclusion:
The Tribunal concluded that the CIT-A was not justified in holding that the goodwill created in the books of account is liable to be taxed as short-term capital gain. The Tribunal directed the AO to delete the impugned addition, allowing the appeals filed by the assessee for both assessment years.

Result:
The appeals filed by the assessee in ITA Nos. 1358/Kol/2015 & 149/Kol/2016 for the A.Ys 2009-10 & 2010-11 were allowed. The order was pronounced in the open court on 23-05-2018.

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