2014 (11) TMI 606 - HC - Income Tax

Effect of amendment u/s 55(2) treatment of amount included in total income on goodwill received on retirement capital gains tax or not Held that - The AO found that the assessee was entitled to receive an amount of ₹ 67,50,000/- from M/s. Jyoti Estate out of which the assessee had already received ₹ 28,00,000/- on 24.6.1989 and the balance was to be paid to him by 24.2.1990 - the assessee also contended that the amount received from the two firms was capital receipts which was exempt from income-tax - The Tribunal rightly considered CIT VS. MOHANBHAI PAMABHAI 1971 (9) TMI 56 - GUJARAT High Court wherein it has been held that the interest of a partner in a partnership is not interest in any specific item of the partnership property - It is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. 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 is 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 consideration for transfer of his interest 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, 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 partners the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Interpretation of tax law regarding the taxation of goodwill received on retirement.
2. Determination of whether the amount received on account of settlement of civil suits constitutes a transfer and is assessable to capital gains tax.

Analysis:
Issue 1:
The appellant challenged the Income-tax Appellate Tribunal's order regarding the taxation of goodwill received on retirement. The Tribunal held that the amount of Rs. 33,50,000 included in the total income of Rs. 73,00,000 received by the assessee on account of goodwill on retirement was not liable to be assessed to capital gains tax. The appellant contended that the receipts should have been taxed as long-term capital gains since they were received in lieu of goodwill, which is considered a long-term capital asset. The assessing officer initially treated the entire amount of Rs. 73,00,000 as short-term capital gains, leading to a dispute. The Commissioner of Income-tax (Appeals) directed the assessing officer to tax the entire amount received by the assessee from the firms as income from undisclosed sources. However, the Income-tax Appellate Tribunal allowed the assessee's appeal, citing relevant legal precedents from the Gujarat High Court and the Supreme Court. The High Court upheld the Tribunal's decision based on the legal principles established in previous cases, concluding that the revenue authorities were not justified in taxing the amount received by the assessee on retirement from the firms.

Issue 2:
Regarding the amount received by the assessee towards settlement of civil suits, the Commissioner of Income-tax (Appeals) opined that since the nature of these disputes was unspecified, the assessing officer should tax the entire amount received by the assessee as income from undisclosed sources. However, the Income-tax Appellate Tribunal disagreed and allowed the assessee's appeal, following legal precedents from the Gujarat High Court and the Supreme Court. The Tribunal held that when a partner retires from a firm and receives an amount in respect of his share in the partnership, there is no transfer of interest in the goodwill of the firm, and thus no part of the amount received would be assessable to capital gains tax under section 45 of the Income Tax Act. The High Court, in line with previous decisions, upheld the Tribunal's decision, ruling in favor of the assessee and dismissing the appeal by the Revenue.

In conclusion, the High Court upheld the Tribunal's decision in both issues, citing legal precedents and established principles, and ruled in favor of the assessee, dismissing the appeal by the Revenue.