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TMI Blog2022 (7) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... with Sobha Developers Limited on 16.05.2007. The partnership firm named 'Sobha City', was formed for development of residential and commercial projects at Thrissur, Kerala. The initial capital contribution by the assessee company was Rs. 20 crores from out of a total capital of Rs. 40 crores. The partnership profits were agreed to be shared in the ratio of 70:30 in favour of Sobha Developers Limited and the assessee respectively according to the partnership deed. 4. As per clause 8.1 of the partnership deed, all real and/or personal property acquired by the partnership firm shall be owned by the partnership firm. The said clause also states that the partners have waived the right to require the partition of any partnership property or any part thereof. Clause 8.1 is reproduced below:- "8.1 All real or personal property acquired by the Partnership (including the Properties) shall be owned by the Partnership, such ownership being subject to the other terms and provisions of this Deed. Each partner hereby expressly waives the right to require partition of any Partnership property or any part thereof." 5. At the beginning of the year 2012, the assessee had expressed its des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in J.K. Kashyap v ACIT (2008) 302 ITR 255 (Del) which held that if an assessee relinquishes his rights in the property for a consideration, it amounts to transfer under section 2(47) of the Act and liable to capital gain tax under section 45 of the Act. 10. On appeal, the Commissioner of Income Tax (Appeals) noted that Sobha City held a piece of land and that the assessee had a share of 30% of such land. It was concluded that the assessee relinquished its share in such land in favour of other partners of the firm. Therefore, it was a case of transfer of immovable property to the remaining partners of the firm. In view of the above, the CIT(Appeals) upheld the action of the AO in treating the impugned amount as income chargeable to tax under the head Capital gains. 11. Aggrieved, the assessee is in appeal before us. 12. The ld. AR submitted as follows:- (a) The amount of Rs.12.84 crores received is towards share of goodwill which arises on the revaluation of the property. (b) The assessee does not own the property of the firm and has no rights on the partition as per clause 8.1 of the partnership deed. Therefore, the assessee has not given up any right so as to attract capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax in his hands. The liability, if any, for tax is on the partnership firm u/s. 45(4). He therefore submitted that the case relied upon by the ld. DR in Sudhakar M. Shetty (supra) is distinguished by the Bombay High Court in Hemlata S. Shetty's case (supra). 16. We have heard the rival submissions and perused the material on record. To appreciate the rival submissions on the issues, it is appropriate to go through certain relevant provisions of the Act. Section 45(1) of the Act brings to tax any capital gain that accrues or arises on transfer of a capital asset. The capital gain is charged to tax in the previous year in which the transfer takes place. 17. Section 2(47) of the Act reads as under:- "(47) "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed below - 20. The contention of the Ld AR was that the difference between the total amount standing to the credit of the capital account, in the form of capital contribution, interest and accumulated profits and the final amount paid to the assessee at the time of retirement is goodwill. The goodwill as per the submissions of the Ld AR is the assessee's share (30%) in the gain on revaluation of the land, which is treated as stock in trade in the books of the partnership firm. 21. We notice that, the revaluation of the inventory carried out by the firm on 10.2.2012 (pages 156 to 158 of Paperbook) was not accounted in the books by the firm, nor the same is reflected in the capital accounts of the partners. The computation of the gain is not disputed by the lower authorities, though the assessee has not produced any supporting document to show how the original cost of the land was arrived at. The important fact to be noted here is that, neither the stock in trade (land) is reflecting the revalued amount nor the capital account of the partners is credited with the gain on revaluation. 22. The Ld AR's submission in this regard is that as per Accounting Standard 26 (AS-26) internally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and interest does not result in capital gain. It is settled proposition that, when the assets are revalued and the gain is credited to the capital account of the partners, there is no capital gain and the goodwill so credited when paid to the retiring partner as part of settlement does not result in capital gain. The assessee's case is clearly distinguishable since the revalued amount is not accounted in the books of accounts. Most of the judgments relied by the Ld AR do not appl to the facts of in assessee's case because either they are rendered prior to 01/04/1989, or, goodwill on revaluation is credited to the capital account of the partner's in those cases. 23. We notice that the coordinate bench of the Tribunal in the case of Savitri Kadur (supra) has laid out clear principles applicable in various scenarios of a partner's retirement i.e. on dissolution, reconstitution etc. This Tribunal in the said order dealt with a situation where the firm continues and there is reconstitution whereby a partner retires and the retiring partner is paid :- (a) on the basis of amount lying in his/her capital account; (b) on the basis of amount lying in his/her capital account + amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had served on the other two partners a notice of dissolution of the firm with effect from 31- 12-1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of court and under a deed dated January 19, 1962, the assessee retired from the firm with effect from 31-8-1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement, the assessee was paid: (1) 1 lakh as his share of profits of the firm for the broken period ended 31-8-1961, (2) Rs. 50,000 as his share of the value of the goodwill, and (3) Rs. 4,77,941 as his share in the remaining assets of the firm. The issue with regard to taxability of the sum of Rs. 4,77,941 or any part thereof to capital gains tax arose for consideration before the Hon'ble Court. The Hon'ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the decision of the Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) the Assessee preferred appeal before the Hon'ble Supreme Court and the Hon'ble Supreme Court in the case of Thirubhuvandas G. Patel v. CIT [1999] 236 ITR 515 framed three questions of law for consideration and the following two questions (Question No.2 & 3) which are relevant for the present case were decided as follows: "2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 received by the assessee as his share of the value of the goodwill or any part thereof was liable to tax as capital gain? 3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,77,941 or any part thereof was liable to tax as capital gain by reason of section 47(ii) of the Act?" So far as question No. 2 is concerned, it has already been answered in favour of the assessee. In view of the decision of this court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 the said question must be held to have been rightly answered in favour of the assessee. So far as question No. 3 is concerned the assessee invoked clause (ii) of section 47 to contend t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution, the manner in which the accounts have been settled and whether the same includes any amount in excess of the share of the partner on the revaluation of assets and other relevant factors which will throw light on the entire scheme of retirement/reconstitution. 29. In the case of Sudhakar M.Shetty (supra), the ITAT came to the conclusion after taking into consideration the sequence of events in that case (Paragraph-40 of the said order) which lead to ultimately the partner retiring from the firm. A Partnership firm in that case came into existence on 1.8.2005 between the Assessee and another as partners. On 16.9.2005 another partner joined the partnership. On 23.9.2005 the firm purchased a property for a consideration of Rs.6.5 Crores with 81 tenants therein to be vacated by the firm. On 26.9.2005 two more partners were inducted into the Partnership firm. On 8.3.2006 a sanction was obtained for setting up a 5 Star hotel over the property purchased by the firm. Thereafter On 26.3.2006 one partner retired from the firm. Prior to such retirement a revaluation of the assets of the firm which was the land that was purchased by the firm took place. There was surplus of Rs.154,39, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners and it was agreed that the Assessee would retire from the firm w.e.f. 1.4.2007 and a sum of Rs.339.50 lakhs would be paid to the Assessee. On 9.6.2007 deed of retirement was signed. The Assessee gave up all her rights as partner of the firm and its assets nor was the Assessee liable to pay any of its liabilities. The capital account of the Assessee as on 1.4.2006 showed an opening balance of Rs.1,64,14,044. Profit for the year of Rs.46,20,591 was credited to his account. Similarly on revaluation of the land and building on 15.1.2007, a sum of Rs.53,26,462 and Rs.9,24,650 respectively was credited to her account. Another sum of Rs.18,12,528 was also credited as interest on capital in her capital account. After reducing the Partner's drawing and other payments made the balance to the credit of Assessee's capital account as on 31.3.2007 was Rs.2,77,88,200/-. On 9.6.2007 the Assessee's was paid Rs.38,38,200 towards Goodwill and another sum of Rs.2,39,00,000/- being part of the consideration of Rs.339.50 lacs payable on retirement. The difference between the sum of Rs.3,39,50,000 and the sum of Rs.2,77,88,200 viz., a sum of Rs.61,61,800 was taxed as capital gain by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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