2019 (3) TMI 1292 - AT - Income Tax

Taxability of Goodwill,share capital and accrued profit received on retirement of firm - liable for capital gains tax or not? - exemption from tax u/s 10(2A) - amount paid to a partner upon retirement after taking accounts and upon deduction of liabilities there is no involvement of an element of transfer within section 2(47) - payment made to the assessee in realisation of his share in the net value of the assets of the firm on his retirement - HELD THAT - The issue of whether the goodwill received by the assessee on retirement is liable for capital gains tax or not has been concluded by the Hon ble Jurisdictional High Court in the case of Prashant S. Joshi 2010 (2) TMI 271 - BOMBAY HIGH COURT wherein it was held that when an amount paid to a partner upon retirement after taking accounts and upon deduction of liabilities there is no involvement of an element of transfer within section 2(47) of the Act. The full bench decision in the case of CIT v. Dynamic Enterprises 2013 (11) TMI 731 - KARNATAKA HIGH COURT has taken a similar view that when retiring partner took cash towards value of his share in partnership firm, there was no distribution of capital assets among the partners and there was no transfer of capital asset and therefore no profits or gains are chargeable to tax u/s. 45(4). We observe that the decision relied on by the Assessing Officer in the case of A.N. Naik Associates 2003 (7) TMI 46 - BOMBAY HIGH COURT is distinguishable on facts and has no application to the assessee s case. Therefore, in view of our above discussion, the share of capital along with accrued profit, goodwill and brokerage / commission which were received / receivable in terms of consent deed entered among the partners on account of retirement of the assessee from the partnership firm and the payment made to the assessee in realisation of his share in the net value of the assets of the firm on his retirement are not liable to be taxed as capital gains and also u/s. 28(v) in view of the judicial pronouncements. Thus, we direct the Assessing Officer to delete the additions made towards, goodwill, share capital and share of profit and the brokerage/commission and recompute the income for the year under consideration. Grounds raised by the assessee are allowed. Addition u/s. 68 - HELD THAT - Assessing Officer brought to tax ₹ 9,41,63,126/- being the amount credited in capital account of M/s. D Silva Enterprises and capital credited to assessee James P. D Silva account as undisclosed income u/s. 68 of the Act. We see no justification at all in treating such amounts as addition u/s. 68 of the Act. We find that major part of these amounts have been received as part of settlement in terms of consent terms entered into by the assessee for withdrawing his share of capital / profits from the firm BCI. These amounts represent ₹ 4.67 Crores credited to capital account of M/s. D Silva Enterprise and ₹ 4.79 Crores withdrawn from BCI as share of profit by the assessee as stated in Para 18 above. Therefore, these amounts cannot be taxed as undisclosed income u/s. 68 of the Act. Additions made by the AO towards goodwill, share capital and share of profit, brokerage/commission received by the assessee on retirement from BCI. Since, we have deleted the addition made by the Assessing Officer which were treated as income of the assessee and for the reasons explained above, the other grounds in the appeal of the Revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition of ?48,65,000 on account of advances received.
2. Confirmation of ?8,08,60,000 out of ?22,14,63,126 received from M/s Blue Circle Infratech.
3. Taxability of ?1,00,00,000 on account of goodwill.
4. Taxability of ?12,73,00,000 on account of brokerage and commission.
5. Addition of ?9,41,63,126 under section 68 of the Income Tax Act.
6. Treatment of amounts received on retirement from the partnership firm.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?48,65,000 on Account of Advances Received:
The Revenue contested the deletion of ?48,65,000 made by the Assessing Officer (AO) under section 68 of the Income Tax Act. The CIT(A) found that ?37.40 lakhs of this amount was received in earlier years and only ?11.25 lakhs was received during the current assessment year. The CIT(A) concluded that the advances were received in the course of business and could not be considered as unexplained cash credits. The Tribunal upheld the deletion of ?37.40 lakhs but restored the issue of ?11.25 lakhs to the AO for fresh adjudication, directing the AO to provide the assessee an opportunity to explain the source of this amount.

2. Confirmation of ?8,08,60,000 out of ?22,14,63,126 Received from M/s Blue Circle Infratech:
The Revenue argued that the CIT(A) erred in confirming only ?8,08,60,000 out of the total addition of ?22,14,63,126 made by the AO. The CIT(A) held that only the amount actually received by the assessee was liable to tax, as the remaining amount was subject to further litigation and uncertainty. The Tribunal upheld this view, noting that the amounts received on retirement were not taxable as they were in the nature of capital withdrawals and share of profits, not revenue receipts.

3. Taxability of ?1,00,00,000 on Account of Goodwill:
The AO taxed ?1,00,00,000 received by the assessee as goodwill on retirement from the partnership firm M/s Blue Circle Infratech as long-term capital gain. The CIT(A) and the Tribunal, relying on the jurisdictional High Court's decision in Prashant S. Joshi v. ITO, held that the amount received as goodwill on retirement did not constitute a transfer under section 2(47) and was not taxable. The Tribunal noted that the amount was part of the settlement on the assessee's retirement and was not a taxable receipt.

4. Taxability of ?12,73,00,000 on Account of Brokerage and Commission:
The AO added ?12,73,00,000 as brokerage and commission income. The CIT(A) and the Tribunal found that this amount was part of the settlement on the assessee's retirement from the firm and was not received during the assessment year under consideration. The Tribunal held that the amount was not taxable as it was received on retirement and there was no transfer of assets within the meaning of section 2(47).

5. Addition of ?9,41,63,126 under Section 68 of the Income Tax Act:
The AO added ?9,41,63,126 as unexplained cash credits under section 68. The CIT(A) and the Tribunal found that this amount represented the assessee's share of capital and profits from the partnership firm, which was exempt under section 10(2A). The Tribunal directed the AO to delete the addition, noting that the amount was part of the settlement on retirement and not an unexplained cash credit.

6. Treatment of Amounts Received on Retirement from the Partnership Firm:
The Tribunal extensively discussed the treatment of amounts received on retirement from a partnership firm, relying on various judicial precedents including the jurisdictional High Court's decision in Prashant S. Joshi v. ITO. It was held that amounts received on retirement, including share of capital, profits, goodwill, and brokerage/commission, were not taxable as they did not constitute a transfer under section 2(47) and were not revenue receipts. The Tribunal directed the AO to delete the additions made on this account.

Conclusion:
The Tribunal allowed the appeal of the assessee and partly allowed the appeal of the Revenue. It upheld the deletion of ?48,65,000 (except for ?11.25 lakhs which was remanded for fresh adjudication), confirmed the CIT(A)'s decision on the non-taxability of amounts received on retirement, and directed the AO to delete the additions made under sections 68 and 28(v). The Tribunal's decision was based on a thorough analysis of the facts and applicable legal principles, particularly the treatment of amounts received on retirement from a partnership firm.