2013 (10) TMI 1231 - HC - Income Tax

Depreciation on amount paid to retiring partner as goodwill from the partnership firm - During the course of its business new partners were introduced and all partners, one after the other, retired from the partnership firm in the successive years - Held that - When one partner retires from the business, there is no severance of status so far as the partnership is concerned, as the retiring partner would take his capital investment and retire from partnership and the others continue to carry on the business. By adopting this method, four partners, who decided to go out of the business, have not transferred the entire business concern to the new partners, but have chosen to continue for some time and at their leisure, they retired from partnership one after the other. Therefore, the assets and liabilities of the firm continued as such without any change including tangible and intangible. Share of the capital came to be paid to the retiring partner and it cannot be treated as cost paid to the retiring partner towards acquisition of any right from him. Partner who retire from the partnership firm takes its initial investment and profit, if any, payable to him. Similarly, if he is accountable for any loss in a particular assessment year, that would also be worked out at the time of retiring from partnership business - In view of the matter, there is no transfer of any interest and the money paid is only towards the share of the capital invested by that partner along with some profit - Therefore, the question of each year some money paid towards the goodwill would not arise in the facts of the present case, therefore, the Income Tax Appellate Tribunal was justified in disallowing goodwill claimed by the appellant assessee Decided against the Assessee.

Summary

Issues:
- Claiming depreciation on transfer of goodwill paid to a retiring partner by a partnership firm.

Analysis:
The judgment revolves around the issue of whether a partnership firm can claim depreciation on the money paid as transfer of goodwill to a retiring partner in a particular assessment year. The appellant partnership firm, engaged in pharmaceutical distribution, claimed depreciation on the goodwill paid to partners who retired in successive years. The firm contended that the money paid towards goodwill should be allowed as depreciation. However, the Income Tax Appellate Tribunal disallowed this claim, leading to the appeal before the High Court.

The High Court analyzed the facts of the case, emphasizing that the partnership firm did not involve a transfer of interest to new partners at once. Instead, the initial partners retired successively over four years, with the business continuing with new partners. The court highlighted that the retiring partners received their capital investment and profits, if any, upon retirement, without any transfer of the entire business concern. The court concluded that the money paid to retiring partners was towards their share of capital and profit, not for acquiring any rights or goodwill. Therefore, the court held that the claim for depreciation on goodwill payments was not justified.

In reaching its decision, the High Court distinguished the present case from a previous case involving a proprietary concern transfer, emphasizing the unique nature of partnership firms and the absence of a complete transfer of business to new partners. The court clarified that the retiring partners did not transfer any interest in the firm, and the payments made were only towards their capital and profits. As a result, the court upheld the decision of the Income Tax Appellate Tribunal to disallow the goodwill claimed by the appellant partnership firm.

Therefore, the High Court dismissed the appeal, ruling against the partnership firm's claim for depreciation on the money paid as transfer of goodwill to retiring partners. The judgment underscores the distinction between partnership firms and proprietary concerns in determining the treatment of payments made to retiring partners and the eligibility for depreciation claims in such scenarios.