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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 ..... sputed 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. When an Accounting Standard deals with a specific intangible asset, then AS-26 does not apply e.g., Valuation of Inventories. Also the internally generated goodwill arises when an enterprise incurs expenditure for future benefits e.g., Scientific Research, development of prototypes, etc., then the enterprise should not recognize any goodwill that may arise out of incurring of such expenditure at a future period as it is beyond the control of the enterprise. We are, therefore, of the view that the claim of the assessee for not routing the revaluation through the capital account of the partners stating it to be a practice as per AS-26 is not tenable. The Tribunal in the case of Savitri Kadur [ 2019 (7) TMI 593 - ITAT BANGALORE] clearly stated that the goodwill to the extent of the amount recorded in the books is not taxable and the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty 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 desire to exit from the above partnership. At the time of retirement, it was entitled to receive the initial capital contribution, accumulated interest, current account balance and share in other assets of the partnership firm, valued on a notional basis. 6. On 25.04.2012, a deed of reconstitution was entered into between Sobha Developers Limited (Continuing partner), the assessee (Outgoing partner) and Sobha Developers Pune Pvt Ltd (Incoming partner). The assessee retired from the partnership and Sobha Developers Pune Pvt Ltd joined the partnership, with effect from 0l.04.2012. The reconstitution deed is filed at pages 114 to 131 of the Paperbook compilation. 7. In order to determine the value of the assets of the firm, the firm u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 capital gain. (c) The goodwill on revaluation of the property is not reflected in the books of accounts as per Accounting Standard AS-26 and hence the same is not credited to the partner s capital account. 13. The ld. AR relied on the following case laws to submit that the goodwill created by revaluation received by the retiring partner as part of reconstitution is not liable to tax:- (i) Mohanbhai Pamabhai (1973) 91 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation 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 generated goodwill should not be reflected in the books of accounts. To examine the revaluation of stock in trade is an internally generated goodwill to justify the claim of the Ld AR, we will look at the relevant clauses of AS-26 as follows:- 2. If another Accounting Standard deals with a specific type of intangible asset, an enterprise applies that Accounting Standard instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 over and above the sum lying in his/her capital account; or (c) a lump sum consideration with no reference to the amount lying in his/her capital account. 24. The present appeal of the assessee is a case, where the assessee paid amounts over and above the sum, standing to the credit of the capital account. i.e., situation (b) referred above. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon dissolution of a firm and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion 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 that the said sum of Rs.4,47,941 does not represent a capital gain. Mr. Sharma, learned counsel for the appellant-assessee, has brought to our notice the decision of this court in Addl.CIT v. Mohanbai Pamabhai [1987] 165 ITR 166 where it has been held, following the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), that even where a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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.154,39,90,000/- on revaluation. This was credited in the profit sharing ratio of the partners in their respective capital account. Thereafter on 22.5.2006, the Assessee retired from the partnership firm. The amount standing to the credit of the Assessee's capital account was Rs.4.45 Crores on which interest of Rs.26,85,963 was paid and profit on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the AO. Out of the above, Rs.38,38,200 was Goodwill. Therefore to the extent of Rs.2,77,88,200 being closing balance as on 31.3.2007 in the capital account and Rs.38,38,200/- being Goodwill, was the sum payable as per the capital account of the Assessee. The claim of the Assessee that the entire sum of Rs.61,61,800 is Goodwill is not substanti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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