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TMI Blog2014 (2) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 55(2b) are not applicable - the facts indicate that the share in assets and goodwill are non-separable rights acquired at the time of admission by paying cost, the same is liable to tax under the provision of capital gain – Decided against Assessee. Error in computation of Capital gain – Held that:- On examination of computation of income, assessee’s contention is found to be correct - Assessee offered short term capital gain on transfer of receipts in share of assets of partnership - Assessing Officer included the consideration received again in his working while determining the capital gains on both rights of share in asset/goodwill - Thereafter, the capital gain offered was again brought to tax (as per statement) - Thus, the amount was brought to tax twice – thus, the AO is directed to exclude the amount at the time of passing order – Decided in favour of Assessee. - ITA No.6981/Mum/2011 - - - Dated:- 28-8-2013 - B Ramakotaiah And Vivek Varma, JJ. For the Appellant : Shri Vijay Mehta For the Respondent : Shri Surinder Jit Singh ORDER:- PER : B Ramakotaiah This is an appeal by the assessee against the order of CIT(A)-3, Mumbai dated 26.08.2011. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon ble Supreme Court, delivered in the case of Malabar Fisheries Co. V/s. 120 ITR 46 @ 59. It was also noticed from the perusal of Income Expenditure a/c. that the assessee has debited a sum of Rs. 3,00,000/- and claimed the same as expenditure on account of irrecoverable invoices received by Dalal Shah, Mumbai. The AO has referred the matter to the JCIT. Rg.11(2) for seeking guidelines and direction within the meaning of section 144A of the Act. The JCIT. has examined the issue and issued his directions vide order dated 23.12.2010 which was reproduced by the AO in the assessment order. The JCIT observed that the case law quoted by the assessee are not applicable in the case of the assessee. Since, in all case law, there was payment by the firm to the retired partner or payment to the partners on dissolution of the firm. In the instant case, the facts are somewhat different. The JCIT has referred clause 9(a) of the partnership deed of Dalal Shah, Mumbai dated 31.3.2005 and noted that the assessee is one of the partner who was entitled to share in the net partnership assets and therefore, he was required to maintain the aggregate credit balance in his capital account i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1st April, 2006 upto 31St July, 2007 amounting to Rs. 1,37,569/-. It is further agreed in terms of clause 16 of the aforesaid Partnership Deed dated 3rd November 29006 that the sum as agreed towards (a) above Rs. 39,60,000/- and Rs. 10,64,000/- respectively is debited to the following specified partners in the following ratio in which the aforesaid share of the retiring partner passes on to them. Specified Partners: Share in the partnership firm 1. Mr. Ashish 3.06% 2. Mr. Shishir 3.06% 3. Mr. Anish 2.38% Aggregating to 8.50% In view of the above, it is clear from clauses of the deed of retirement that 3 partners viz. Mr. Ashish S. Dalal, Mr. Shishir S. Dalal and Shri Anish Praful Amin, took over the assessee s share in the partnership firm on his retirement. Thus, these continuing partners, in other words, purchased the share of retiring partners i.e. assessee for the amount of Rs. 39.60 lakhs and Rs. 10.64 lakhs in respect of Dalal Shah, Mumbai and Rs. 5.40 Lakhs + Rs. 72,000/- in respect of Dalal Shah, Ahemdabad. The payments in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnatively, it was further considered that the amounts of Rs. 39,60,000/- and Rs. 5,40,000/- have to be brought to tax as capital gain on transfer of goodwill by taking the cost of acquisition as Rs. NIL. The assessee has submitted a copy of the valuation of goodwill mutually agreed by the partners of the firms. The total amount of Rs. 45,00,000/- has been mutually arrived at as the valuation of assessee s share of goodwill in Dalal Shah, Mumbai and M/s. Dalal Shah, Ahmedabad and equal amount was received by the assessee from three continuing partners of those firms towards such transfer of assessee s right in goodwill of those firms. The assessee has stated that the cost of acquisition of Rs.5, 16, 150/- and Rs. 13,153/- were in respect of his right to share in the partnership asset in M/s. Dalal Shah, Mumbai and M/s. Dalal Shah, Ahmedabad respectively and that these amounts are not for acquisition of his share in goodwill of those firms. He has separately computed the capital gains in respect of transfer of his share in the partnership assets. Considering this transfer of his share in goodwill of these firms and the cost of acquisition of such goodwill has to be taken at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased (existing) partners passes on, the excluding the situation where the share would vest in circumstances event of vesting, shall pay to the retiring or deceased partners (existing) partner or his estate as the case may be; i. His share of the surplus in the estimated value of the Net Partnership Assets of the firm over the book value of such assets, and ii. Value of his share in the right to share in partnership (goodwill) in accordance with the provisions set out. Thus it is seen that the amount standing in the capital account of the retiring partners and share in the net profit till the date of his retirement are to be paid by the firm and the partners to whom the share of retiring partners passes on are under obligation to pay the retiring partners his share of surplus in the estimated value of the net partnership assets over the block value and value of his right to share in capital. 1.3.1 I find that the Appellant has retired from both the firms as per Deed of retirement executed on 11.8.2007 and 23.7.2007 respectively. The clauses of both the agreements are more or less identical except for bare necessary changes. It has been mentioned in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, there is transfer of right from assessee to these 3 continuing partners as duly mentioned in the partnership deed. Right in the share of the assessee in the partnership deed comprises of the inherent non-separable rights. Therefore, what has been transferred by the assessee s share in the partnership firm at the time of retirement. 1.3.3. I find that the assessee has declared short term capital gain in respect of sale proceeds of Rs. 10,64,000/- and Rs. 72,000/- received from the partners of M/s. Dalal Shah, Mumbai and Ahmedabad. He has show the cost of acquisition at Rs. 5,16,150/- and Rs. 13,153/- as on 1.4.2005 respectively. These are the amounts paid by the assessee to the firms at the time of becoming partner of the said firms apart from his contribution to the capital account blocked amount. It may be mentioned here that the assessee after making the payments of these amounts of Rs. 5.16,150/- and Rs. 13,153/- respectively has acquired the rights in the partnership deed (not only his right to share in partnership asset but also the other non separable right. Therefore, this cost of acquisition also pertains to his right to share in the partnership (goodwill). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00/-. Therefore, this amount of capital gain of Rs. 45,00,000/- alongwith capital gain of Rs. 6,06,697/- declared by the assessee on account of transfer of his share in partnership asset will have to be brought to tax. The total short term capital gain will thus be Rs.51,06,697/-. 1.3.4. In the light of the above facts, I am of the considered opinion that the AC has rightly brought to tax the amount received by the Appellant in lieu of transfer of his right to share in goodwill of both as mentioned above. 1.3.5. It is also noticed that the AC also taken a alternative plea that the amounts of Rs. 39.60 lakhs and Rs. 5.40 lakhs have to be brought to tax as capital gain on transfer of goodwill by taking cost of acquisition as Nil. As per copy of value submitted by the appellant, the total amount of goodwill mutually agreed by the partners of the firm comes to Rs.45 lakhs which has been mutually arrived at as the valuation of assessee s share of goodwill in the aforesaid firms, It is seen that the equal amount was received by the appellant from 3 continuing partners of those firms towards such transfer of assessee s right in goodwill of those firms. Therefore, the AC has cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term goodwill appearing at Cl. (a) should be interpreted in the context and having regard to other similar capital assets appearing under clause (a). Interpreting the term goodwill appearing at clause (a) in this manner will conclude that only the capital assets which are in the nature of goodwill related to a business cannot be applied to the present case. The scheme of the Act clearly distinguishes business as well as profession . Ld. Counsel referred to the definition of business as provided u/s. 2(13) business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whereas the definition of profession as provided u/s. 2(36) reads profession includes vocation . Therefore, the scheme of the Act also clearly maintains independence and distinction between business and profession. The AR also invited attention towards section 44AA, 44AB, 8OQQA, 80R, 8ORR, wherein independence and distinction of the term business and profession is maintained. The AR also cited following case laws wherein, it has been held that term business will not include profession . Janab A. Syed Jalal Sahib v. CIT [39 ITR 66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be apportioned, therefore, the entire amount received at the time of retirement can be taxed. He also supported the order of CIT(A) on application of provision of section 55(2A). 9. Per contra, ld. Counsel submits that the consideration was received separately and so separate rights are to be decided separately. Further it was submitted that increase in goodwill is a commercial decision and except assumptions there is no evidence that the assessee paid any amount for acquiring rights in goodwill. It was further contended that the amount paid for acquiring right A can not be apportioned to right B and further a right in goodwill is not a goodwill and nothing was spent by partner for acquiring the goodwill. By virtue of Board circular and provision of section 55(2)(b) the amount received for transfer of goodwill is not taxable. 10. We have considered the issue and rival contentions. The main contention of the assessee is that there are separate rights and the right to share in partnership (goodwill) is separate for which no cost was paid and provisions of section 55(2)(b) are not applicable as it is a professional firm. In order to examine the same one has to refer to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RIGHT TO PARTNER REMUNERATION SHARE IN THE NET PROFITS SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (percent) (percent) (percent) (percent) Mr. Amin 1.00 1.00 1.00 1.00 Mr. Vasant 10.00 10.00 10.00 10.00 Mr. Sharad 8.00 8.00 8.00 8.00 Mr. Ashish 24.67 24.13 24.67 24.67 Mr. Shishir 22.67 22.13 22.67 22.67 Mr. Anish 24.41 23.99 24.41 24.41 Mr. Kuntal 9.25 9.25 9.25 9.25 (rupees) Mr. Venkatesh 1,250,000 1.00 0 0 Mr. Mayur 850,000 0.50 0 0 CHART 2-YEAR: 1st April, 2006 upto31st March, 2007 Column-1 Column-2 Column-3 Column-4 Column-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Amin 1.00 1.00 1.00 1.00 Mr. Vasant 10.00 10.00 10.00 10.00 Mr. Sharad 8.00 8.00 8.00 8.00 Mr. Ashish 23.86 23.32 23.86 23.86 Mr. Shishir 21.86 21.32 21.86 21.86 Mr. Anish 23.78 23.36 23.78 23.78 Mr. Kuntal 11.50 11.50 11.50 11.50 (rupees) Mr. Venkatesh 1,250,000 1.00 0 0 Mr. Mayur 850,000 0.50 0 0 (b) The Remuneration payable to the Partners as shown in Charts 1, , 3 and 4 above, shall be credited to their respective Remuneration account with the Firm, upon ascertainment of book profit. 1-lowever, in case of Mr. Venkatesh arid Mr. Mayur, the Senior Partners have the power and authority under this Deed to instruct a revision in their Remuneration at any time as they deem fit and the same shall be implemented with effect from the date decided by the Senior Partner. (c) No other Partner, except for the Promoter Partners and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representing a majority in terms of profit sharing, at the time the nomination is intimated the Firm. Each Partner hereto, who has a right under this Deed to (thus) nominate, and wishes to exercise that right, is hereby duty bound to intimate his nomination or to intimate the keeping-in-abeyance of his nomination for a future date to the Firm, in writing, at the time, of signing this Deed. In case there is no nomination exercised by a Partner till the date of his exit, then, the Share of such retiring or deceased partner will pass on to the continuing Partners in their respective sharing proportions in the Right to Share in the Partnership (Goodwill) as if they aggregate to 100% (unless they agree amongst themselves otherwise). In the event that., either, at a future date which is nearer to induction of a new Partner who was nominated under this clause and was acceptable as a future Partner under this clause, is then, at such future date, unanimously not acceptable to all Partners, or if under any other circumstances a new incur bent Partner chosen by the exiting Partner (except for Mr. Venkatesh and Mr. Mayur) is not acceptable as a Partner, the Share of such exiting partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the work partly completed. In computing above, due allowance shall be made, as estimated by the Senior Partners, for the expenses necessary or properly allocable for completing such work. The above may be determined on a lump sum basis if the retiring Partner and/or the heirs of the deceased Partner so agree. As to the fees due hut not received the same, unless otherwise agreed, will be shared when received. (after deducting expenses incurred or allocable to such recovery) (b) the nominee or anew partner, or the other continuing Partners whom the Share of such retiring or deceased (exiting) Partner passes on, excluding the situation where the Share would vest in circumstances of Event of Vesting, shall pay to the retiring or deceased (exiting) Partner or his estate as the case may be: (i) his share of the surplus in the estimated value of the Net Partnership Assets of the Firm over the book value of such assets, and (ii) value of his Share in the Right to Share in Partnership (Goodwill) in accordance with the provisions set out below: Subject to and without prejudice as aforesaid: the value of Right to Share in Partnership (GoodWIll) must be, either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause the expression Book Profit shall mean the Book Profits as defined in Sec.40(b) of the Income Tax Act, 1961 or any statutory modification or re-enactment thereof, for the time being in force. CHART 1-YEAR: 1st April, 2005 upto31st March, 2006 Column-1 Column-2 Column-3 Column-4 Column-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWIL L) (rupees) (percent) (percent) (percent) Mr. Amin 0 1.20 1.20 1.20 Mr. Ashish 0 19.60 19.60 32.67 Mr. Shishir 0 19.60 19.60 32.67 Mr. Anish 0 14.05 14.05 24.21 Mr. Bharat 0 26.30 26.30 0 Mr. Jeyur 500,000 5.00 5.00 0 Mr. Viren 500,000 5.00 5.00 0 Mr. Kuntal 0 9.25 9.25 9.25 CHART 2-YEAR: 1st April, 2006 upto31st March, 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 19.01 19.01 31.68 Mr. Anish 0 13.58 13.58 23.44 Mr. Bharat 0 25.20 25.20 0 Mr. Jeyur 500,000 5.00 5.00 0 Mr. Viren 500,000 5.00 5.00 0 Mr. Kuntal 0 12.00 12.00 12.00 (b) The Remuneration payable to the Partners as shown in Charts 1 2, 3 and 4 above1 shall be credited to their respective Remuneration account with the Firm, upon ascertainment of book profit. However, in case of Mr. Jeyur and Mr. Viren, the Senior Partners have the power. and authority under this Deed to instruct a revision in their Remuneration at any time as they deem fit and the same shall be implemented with effect from the date decided by the Senior Partners. (c) No other Partner, except for the Senior Partners, shall have any right over the usage and ownership of the Firm s Name - Dalal Shah and which right, shall vest solely with the Senior Partners. (d) The Net Profits or Losses of the Partnership shall be determined after debiting (deducting) the aggregate Remuneration payable to Partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly in Dalal Shah (Ahmedabad) the share is as under :- Period Remuneration Share in profit Right to share in partnership assets Right to share in partnership (goodwill) From 1.4.05 to 31.3.06 Chart 1. 0 9.25 9.25 9.25 From 1.04.06 to 31.3.07 Chart 2 0 10.00 10.00 10.00 From 1.04.07 to 31.3.08 Chart-3 0 11.00 11.00 11.00 From 1.4.2008 on wards Chart 4 0 12.00 12.00 12.00 10.4 However, the terms of above deeds at the time of admission have been modified vide the deed dated 03.11.2006 when new member was admitted. The share of assessee was modified as under :- Period Remuneration Share in profit Right to share in partnership assets Right to share in partnership (goodwill) Dalal Shah Mumbai 8.50 8.50 8.50 8.50 Dalal Shah Ahmedabad 0 8.50 8.50 8.50 Thus, the original share at 9.25% granted at the time of admission in first year, which was to increase to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no nexus between the cost of acquisition of the free hold land and the right granted under the lease, (iii) there was no question of apportionment of such cost of acquisition , and (iv) since the cost of acquisition of the right granted under the lease could not be determined the computation provisions under the Act could not apply to all and as such section 45 was not attracted. Held Section 2(14) defines capital asset as property of any kind held by an assessee. In the instant case, what was parted with under the terms of the lease deed was the right to exploit the land by extracting clay which right directly flowed from the ownership of the land. The said right evaluated in terms of money formed part of the cost of acquiring the land if transfer of capital asset in section 45 includes grant of mining lease for any perio4 then obviously the cost of acquisition.. of the land would include the cost of acquisition of the mining right under the lease. Undisputedly, the grant of lease being a transfer of an asset there is no escape from the conclusion that there is a live nexus between the cost of acquisition of the land and the rights granted under the lease. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the partners on dissolution of the firm. In the instant case the facts are some what different. The assessee entered into partnership w.e.f. 01/04/2005 as per partnership deed dtd. 31.3.2005 of M/s. Dalal Shah, Mumbai. This partnership deed was modified subsequently w.e.f. 01/11/206 vide partnership deed dtd. 3/11/2006. Similarly he entered into a partnership of M/s. Dalal Shah, Ahmedabad vide partnership deed dtd. 1/4/2005 w.e.f. 01/04/2005. The terms of this partnership were also revised vide partnership deed dtd. 03/11/2006 w.e.f. 01/11/2006. The terms and conditions of the partnership deed of both the firms are more or less identical with minor changes regarding share of partners and the contribution to the capital account. The clause 9(a) of this partnership deed of M/s. Dalal Shah, Mumbai dtd. 31/03/2005 stated that: It is agreed that the share in the Partnership Firm comprises of the following inherent non separable but recognizable right - Remuneration to Partners, the Right to share in the Net Profits of the Partnership, the right to share in the Net Partnership Assets and the right to share in the partnership (Goodwill), which shall be computed and distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eath or retirement or determination, which shall be made up on the basis of actual cash received, plus the outstanding fees, plus fees for the matters completed but not billed and also proportionate estimated net fees for the Work partly completed. In computing above, due allowance shall be made, as estimated by the Senior Partners for expenses necessary or properly allocable for completing such work. The above may be determined on a lump um basis if the retiring partner and/or the heirs of the deceased partner so agree. As to the fees due but not received, the same, unless otherwise agreed, will be shared when received (after deducting expenses incurred or allocable to such recovery). (b) the nominee or a new partner, Or the other continuing partners to whom the share of such retiring or deceased (existing) Partners passes on, excluding the situation where the share would vest in circumstances of Event of vesting, shall pay to the retiring or deceased (existing) partner or his estate as he case may be: i. his share of the surplus in the estimated value of the Net Partnership Assets of the Firm over the book value of such assets, and ii. value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterests, claims and demands whatsoever of the Retiring Partner in the absence of any nomination is to pass on to the Continuing Partners in their respective proportions in the Right to Share in the Partnership(Goodwill). In terms of the same, it is now agreed that in frill and final settlement of the rights of Kuntal Dave, he has been paid on or before the date of execution of these presents the following sums. (a) Value of the Retiring Partner s Right to share in the Partnership(Goodwill) and the right to share in the Net Partnership Assets as defined in. Clause 9(a) of the Deed of Partnership dated 3rd November, 2006, which is mutually agreed in terms of the said Deed at Rs. 39,60,000/- and,Rs.10,64,000/- respectively, .. (c) Unpaid interest in terms of the Partnership Deeds from time to time on the Kuntal Dave Capital Account from 1st April, 2006 upto 31st July, 2007 amounting to Rs.1,37,59/- It is further agreed in terms of clause 16 of the aforesaid Partnership Deed dated 3rd November, 2006 that the sum as agreed towards (a) above Rs.39,60,000/- and Rs.10,64,000/ - respectively is debited to the following Specified Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of admission, the cost paid at that time can be equally apportioned to the rights, which were termed as separable but non-alienable later on in the revised partnership deeds dt 03-11-06. 10.7 There is no dispute to the fact that the share in profit of the partnership was offered to tax as capital gain and so the share in assets of the partnership (assets and goodwill) also required to be taxed accordingly. Assessee received share in partnership assets and goodwill by transferring the same to the continuing partners only. Firm has not paid any money to the retired partner, so provisions of section 45(4) does not apply, as the assessee transferred the rights to three partners only, not to all of them who paid the consideration. Therefore, the computation as made by AO is approved and assessee s ground in this is rejected. 10.8 Assessee and revenue has relied on various case law which are given in various fact situations. The assessee has relied before the authorities on various case laws stating that there is no transfer involved when a partner retires from the partnership firm. However, this contention was withdrawn and it was admitted that there is transfer involved and asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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