2018 (8) TMI 516 - AT - Income Tax

Capital gain tax u/s 45 - shares distributed in family settlement - Held that - Under normal circumstances, when the asset of the firm was distributed to the partners on retirement, it is liable for capital gain tax under Section 45. There was a family settlement by which all the coparceners agreed to pay specified sum to the retiring partner - This family settlement was to protect the family business among the coparceners of the Hindu Undivided Family. Therefore, this Tribunal is of the considered opinion that there is no transfer of capital asset, hence, it is not taxable for capital gain tax under Section 45 of the Act. Moreover, it is also not a case of the Revenue that capital gain tax is leviable. AO found that it is not an expenditure relatable to the business or the royalty. This Tribunal is of the considered opinion that it is not a payment made towards business expenditure or towards royalty, but it is only a distribution of asset of the partnership firm on retirement of the partner due to family settlement. Since the business and its assets were kept by the coparceners intact, Shri Rengasamy and Smt. Vellaiammal were compensated by making payment of ₹ 2, 03, 40, 000/- and a sum of ₹ 22, 60, 000/- respectively. Therefore, even though it cannot be construed as expenditure for business or for royalty, certainly it is a division / distribution of partnership firm s asset by way of paying compensation to Shri Rengasamy and Smt. Vellaiammal. Merely because the payment was made to financial institutions and banks at the instructions of Shri Rengasamy and Smt. Vellaiammal, that may not change the character of payment. Since the capital of the assessee was kept intact and the business was continued by other coparceners / partners, this Tribunal is of the considered opinion that this payment made to Shri Rengasamy and Smt. Vellaiammal, consequent to family settlement, is allowable / deductible while computing the taxable income. Disallowance made by the Assessing Officer as confirmed by the CIT(Appeals) is deleted. - decided in favour of assessee.

Summary

Issues:
1. Disallowance of genuine business expenditures by the Assessing Officer.
2. Disallowance of a specific amount incurred by the assessee-firm due to a family settlement.
3. Whether the payments made to retiring partners are deductible while computing taxable income.

Analysis:

Issue 1: Disallowance of genuine business expenditures
The appellant contended that the Assessing Officer disallowed legitimate business expenses incurred during the course of business activities. The representative argued that the disallowed amount was related to a family settlement following the retirement of a partner. The appellant provided detailed information regarding the establishment of the business by the deceased founder, subsequent partnership reconstitution, and royalty income received from overseas franchise operations.

Issue 2: Disallowance of amount due to family settlement
The appellant explained that a family settlement was reached to resolve disputes among family members regarding the business and property of the partnership firm. Payments were made to the retiring partner as part of the settlement agreement. The Departmental Representative argued that these payments were not related to business or royalty and were not subject to TDS. The Assessing Officer disallowed the claim, stating that the payments were not business-related expenditures.

Issue 3: Deductibility of payments to retiring partners
The Tribunal noted that the partnership firm was a family business, and payments to retiring partners were part of a family settlement to protect the business among coparceners. It was clarified that these payments were not taxable under capital gain tax as there was no transfer of capital assets. The Tribunal concluded that the payments were not business expenditures or royalties but a distribution of partnership assets due to retirement. As the business and assets remained intact, the payments were deemed deductible while computing taxable income, overturning the decisions of the lower authorities.

In conclusion, the Tribunal allowed the appeal, setting aside the disallowance made by the Assessing Officer and the CIT(Appeals). The payments to the retiring partners were considered deductible, emphasizing the unique circumstances of the family settlement and the nature of the partnership firm as a family business.