2020 (9) TMI 1129 - AT - Income Tax

Rectification of mistake u/s 254 - Capital gains chargeable to tax - sum was received by the assessee on his retirement from a partnership firm - Tribunal said that right of a partner in the firm is a capital asset and when that is relinquished, the consideration paid on such relinquishment, over and above the sum credited to the capital account of the concerned partner should be regarded as capital gain and brought to tax. Goodwill was not an asset which was subject matter of transfer and therefore the provisions of section 55(2)(a) of the Act will not apply - HELD THAT - What was subject matter of transfer was right of partner in the partnership firm which comprises of several components, goodwill being one of the components. Apart from the above, we are also of the view that the issue that is sought to be agitated by the revenue in this miscellaneous petition is a highly debatable issue. The jurisdiction u/s. 254(2) of the Act confined only to rectifying mistakes that are apparent on the face of record. In the garb of an application u/s 254(2) of the Act, the assessee cannot seek a review of the order of Tribunal. There is no mistake apparent on the face of the record. We are, therefore, of the view that there is no merit in this petition filed by the revenue and accordingly dismiss the same.

Summary

Issues:
1. Rectification of apparent errors in the order of Tribunal regarding the treatment of a sum as capital gains chargeable to tax upon retirement from a partnership firm.

Analysis:
The only issue in this case was whether a sum received upon retirement from a partnership firm should be treated as capital gains chargeable to tax. The Tribunal considered various factors like the mode of retirement, settlement of accounts, and the presence of any excess amount over the partner's share in the revaluation of assets. The Tribunal concluded that the consideration paid over and above the sum credited to the partner's capital account should be treated as capital gain. Goodwill was not considered a subject matter of transfer, and thus, the provisions of section 55(2)(a) of the Income-tax Act were deemed inapplicable. The Tribunal held that the issue raised by the revenue was debatable and did not constitute a mistake apparent on the face of the record.

The Tribunal emphasized that the right of a partner in a firm is a capital asset, and upon relinquishment, the excess consideration should be taxed as capital gain. The Tribunal dismissed the revenue's petition, stating that seeking a review under section 254(2) of the Act was not appropriate as there was no evident error in the order. Therefore, the petition was dismissed, and the decision of the Tribunal regarding the treatment of the sum as capital gains upon retirement from the partnership firm was upheld.

In conclusion, the Tribunal's decision highlighted the importance of analyzing the components involved in a partner's retirement from a firm to determine the tax treatment of the consideration received. The judgment clarified that goodwill should not be considered as a cost of acquisition and that the excess payment over the partner's capital account should be regarded as capital gain. The Tribunal's thorough analysis and dismissal of the revenue's petition affirmed the original order's correctness in treating the sum as capital gains chargeable to tax upon retirement from the partnership firm.