2023 (6) TMI 1178 - SCH - Income Tax

Addition u/s 45(1) under the head long term capital gains - Consideration received on retirement from partnership firm - Receipts as full and final settlement of its right, title and interest as a partner as having 50% share in the firm - It is the case of the appellant revenue that this is a case where the AO was right for the reason that the sum of Rs. 15 crores received by the respondent was paid in excess of the amount due to it by way of the share it was entitled under the partnership deed - High Court deleted the additions HELD THAT - As per appellant is not a case where the amount which it has received is attributable in other words to the share which the retiring partner would be entitled in law. The amount is far in excess. Had the amount being the same as the share, the Revenue would not have raised objection. This is in addition to the fact that the amount paid to the respondent was, in fact, brought in by the three new incoming partners. This made the amount exigible to Income Tax under the head income under the capital gains u/s 45 of the Income Tax Act, 1961. As Learned senior counsel, on the other hand, would point out that actually though the amount may appear to be in excess of the share standing to the credit of the capital account of the respondent-assessee, the amount in excess is attributable to the goodwill which, according to him, is subject matter of decisions of this Court and since goodwill under the law as it stood was to be taken into consideration in determining the share of the retiring partner, no part of the amount received by the respondent-assessee was exigible to tax. From the impugned order, we do not find any discussion on any submission on the lines which has been addressed before this Court. We are of the view that the matter should, therefore, be reconsidered by the High Court with reference to the facts as are not in dispute and law which governs the field. The appeal is allowed. The impugned order will stand set aside. The case will stand remitted. The appeals will be reheard.

Summary

Issues involved:
The issues involved in the judgment are the taxability of the amount received by a retiring partner from a partnership firm, specifically focusing on whether the excess amount over the partner's entitled share is subject to income tax under the capital gains provisions of the Income Tax Act, 1961.

Summary:

Issue 1: Taxability of excess amount received by the retiring partner:
The respondent, a retiring partner, received Rs. 15 crores from the partnership firm, which was claimed to be in full and final settlement of its rights as a partner. The appellant argued that this amount was paid in excess of what the respondent was entitled to under the partnership deed, and thus, should be subject to income tax under the capital gains provisions. The Assessing Officer found the respondent had hoodwinked the revenue and sought to tax the amount received. The Commissioner of Income Tax (Appeals) upheld this decision, but the Income Tax Appellate Tribunal (ITAT) allowed the respondent's appeal. The High Court, in the impugned order, did not agree with the appellant's contentions, leading to the appeal to the Supreme Court.

Issue 2: Consideration of goodwill in determining tax liability:
The appellant argued that the excess amount received was not attributable to the retiring partner's share but to the goodwill of the firm, making it subject to income tax. However, the respondent contended that the goodwill should be considered in determining the share of the retiring partner, and thus, no part of the amount received should be taxable. The High Court's decision did not address these submissions, prompting the Supreme Court to remit the case for rehearing with reference to the relevant facts and laws governing the situation.

Conclusion:
The Supreme Court allowed the appeal, setting aside the impugned order and remitting the case for rehearing by the High Court. The Court emphasized the need for reconsideration based on undisputed facts and applicable laws, without expressing any views on the merits of either party's contentions. The Court also highlighted the importance of considering the state of the law and subsequent amendments during the rehearing process.