GOOD WILL-RETIRING PARTNERS

[Gnanamuthu samidurai]

DISCUSSION ON LIABLIITY ON GOOD WILL -CONSIDERATION TO RETIRING PARTNERS

The Authority for Advance Ruling , Tamilnadu in it’s order no. TN/06/ARA/2021 dated 16-03-2021 issued in the case of IN RE: M/S. SHIV SANKARA HEALTH CARE ENTERPRISES [2021 (4) TMI 838 - AUTHORITY FOR ADVANCE RULING, TAMILNADU], the following matter was discussed on the Advance Ruling sought for  by the above applicant

The applicant has stated that they are a partnership firm functioning in the name and style -SHIV-SANKARA HEALTH CARE ENTERPRISES- acting as C&F agents and distributors for Pharma Products and other business consisting of the following partners with effect from 15/10/2008 as per partnership deed dated, 14/10/2008-

a) R. SELVARAJ; b) R. SANKAR; c) S. SIVAPRAKASAM

 (with profit sharing ratio of 1/31d each)

2) They have stated that the above partnership was modified and the following two partners were admitted in addition to the existing partners vide partnership deed dated 15/10/2010 with effect from the same date and with profit sharing ratio of 20 % each-

a) D. KARPUKKARASI ; b) V. RANI.

3)The applicant has stated that as per Deed of Retirement dated 30/03/2019 it was decided that with effect from 31/03/2019 the newly admitted partners: a) Mrs. D. KARPUKKARASI & b) Mrs. V. RANI will be retired from the partnership and the other three partners will continue as “Continuing Partners”. It was agreed by the continuing partners that the retiring partners will be paid a consideration of ₹ 1,40,00,000/-each in total. The break-up of the consideration is as under:

Retiring partners	Share of profit	Good will	Total
Mrs V.Rani	82,73,000/-	57,27,000/-	1,40,00,000/-
Mrs.D.KARPUKKARASI	82,23,000/-	57,77,000/-	1,40,00,000/-
	1,64,96,000/-	1,15,04,000/-	2,80,00,000/-

They have further stated that the above amount of ₹ 1,64,96,000/-in total will be towards share of profit standing to their credit in the books of accounts as on the date of retirement and the balance amount of ₹ 1,15,04,000/- will be towards good will. The share of profit ₹ 1,64,96,000/-and Goodwill ₹ 1,15,04,000 /-will be non-taxable in the hands of retiring partners. The appropriate tax if any shall be paid by the partnership firm/continuing partners and also both the amount mentioned above were paid to the retiring partners by way of Cheque/RTGS on 25/04/2019.

The applicant is of the view that the amount paid to retiring partners as good will amounting to ₹ 1,15,04,000/- cannot be considered as a "supply" under Section 7 of the CGST Act, since this transaction cannot be treated as "in the course of or for the furtherance of business". Further, they have stated that Goodwill is not mentioned in any of the Schedules prescribed under the GST Act. Hence, the applicant is of opinion that this "Supply " is not liable to tax under the GST Act. They have also stated that the goodwill generated is an intangible asset, eligible for depreciation under section 32 of the Income Tax Act. However, it cannot be described as an 'asset' within the terms of section 45 of the IT Act, 1961 (or of section 12B of the Indian IT Act, 1922). The applicant has referred to the case COMMISSIONER OF INCOME-TAX VERSUS R. LINGMALLU RAGHUKUMAR [1997 (1) TMI 74 - SUPREME COURT], wherein, it was held that amount paid to a partner upon retirement after taking accounts and upon deduction of liabilities did not involve an element of transfer within meaning of section 2(47) and not chargeable to income tax following the decision in the case of PRASHANT S. JOSHI AND DATTARAM SHRIDHAR BHOSALE VERSUS INCOME-TAX OFFICER [2010 (2) TMI 271 - BOMBAY HIGH COURT] In view of the above facts, the applicant has sought the authority to clarify whether the goodwill paid to retiring partners is liable to GST.

Advance Ruling Authority,Tamilnadu as per the decision ,  without going in to the merits of the case, disposed as withdrawn with the following remarks:-

“We have carefully considered the application, various submissions of the applicant, remarks of the jurisdictional officers and the request for withdrawal made by the applicant. The issue on the applicability of GST on the 'Goodwill' extended by the applicant to the retiring partners can be arrived at only after analyzing the details as to how the goodwill was arrived at and the related accounts which have not been furnished by the applicant. The applicant for the reasons that their consultants are not available has requested for withdrawal of the application. In this scenario, we find that the withdrawal is to be permitted as the issue cannot be decided based on the submissions made by the applicant. Therefore, withdrawal is permitted without offering any observation comment on the admissibility of the application under Section 97(2) of the TNGST/CGST Act 2017 and the applicability of the GST on the 'Goodwill”

SHARING OF MY VIEW

I would like to place the above issue before the TMI subscribers for discussion with the following view on my part:-

2) Before going for discussion on  the scope of supply under the GST law, it would be appropriate to  explain some thing about the good will and its accounting procedures. As we know there are two distinct types of good will:

• Purchased: Purchased goodwill is the difference between the value paid for an enterprise as a going concern and the sum of its assets less the sum of its liabilities, each item of which has been separately identified and valued.
• Inherent: It is the value of the business in excess of the fair value of its separable net assets. It is referred to as internally generated goodwill, and it arises over a period of time due to the good reputation of a business. It can also be called as self-generated or non-purchased goodwill.

3) The first category of “good will” normally would be there in the cases of transfer of business as a whole to other units as such in the case of amalgamation  etc., where a new company would purchase the going concern and in such cases, both the liabilities and assets are  transferred and it is no doubt that such type of transaction is admissible for exemption as per notification issued in  2/2017–Central Tax (Rate) dated 28^th June 2017.

4) The second category of “good will” is in the form of inherent , self generated or non-purchased good will. According to section 36(1) of the Indian Partnership Act 1932 when a partner leaves the firm, he gets his share of the assets. Such share generally includes payment for his share of the goodwill also. the assessee retired from the partnership and each of them received a certain amount representing his share in the net partnership assets after deducting debts and liabilities of the partnership. This amount was made up by adding two components : one component represented the proportionate share in the partnership assets other than goodwill after deducting debts and liabilites  and the other represented the proportionate share in the goodwill of the firm

5)  No doubt, since in the money representing the value of the property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property on anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out

6) In the decision KHUSHAL KHEMGAR SHAH VERSUS KHORSHED BANU DADIBA BOATWALLA [1970 (2) TMI 136 - SUPREME COURT] it was held that :-

By section 14 of the Partnership Act, 1932, it is enacted that "Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm or acquired, by purchase or otherwise, by or for the firm or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.Goodwill of the firm is -expressly declared to be the property of the firm. Counsel for the defendants relied upon s. 55 of the Partnership Act which makes a provision with regard to sale of goodwill after dissolution. It is provided by sub-s. (1) of s. 55 that : In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm. But it is not enacted thereby that goodwill may be taken into account only when there is a general dissolution of the firm, and not when the representatives of a partner claim his share in the firm, which by express stipulation is to continue notwithstanding the death of a partner.

7) In decisions in ADDANKI NARAYANAPPA & ANR VERSUS BHASKARA KRISHTAPPA AND 13 ORS [1966 (1) TMI 75 - SUPREME COURT] and COMMISSIONER OF INCOME-TAX, MADHYA PRADESH, NAGPUR AND BHANDARA VERSUS DEWAS CINE CORPORATION [1967 (11) TMI 1 - SUPREME COURT] it was held that  where a partner retires from a partnership :"What is given to him by way of his share in the partnership, whether it be cash or some property of the partnership, is received by him as his share in the net partnership assets, after deducting liabilities and prior charges on settlement of accounts and there is no transfer of any interest in property from him to the continuing partners nor is it for a price. It is merely an adjustment of the rights between the retiring partners and the continuing partners in the assets of the partnership; the share of the retiring partner in the partnership is made over to him."

8) These decisions clearly say that the interest of a partner in the partnership is not interest in any specific item of the partnership property, but as pointed out by the Supreme Court  it is a right to obtain his share of profits from the time to time during the subsistence of the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and labilities of the partnership.

9) Therefore, when a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges in determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideraton for transfer of his interst in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partner

10) In order to bring into the net of taxation under the GST law, the liablity to tax arises only after the satisfaction of the definition given under section  on scope of supply which is absent in this case since there was no transfer of any property or interest .Hence there is no chance to apply the provisions of scope of supply in this case and to bring the activity in to the net of “scope of supply” and then liablity to tax under GST

11) I am of the view that if the Advance Ruling was not withdrawn and if it was  disposed on merits, the above view would be correct in law.

 

G.SAMIDURAI

Retired Dy.Commisioner of Commercial Taxes(Tamilnadu)&

Now VAT/GST Practitioner, Tirupur

E.Mail: [email protected] Mobile no. 944212187