2019 (7) TMI 593 - AT - Income Tax

Tribunal allows exemption under Section 54EC for capital gains, no tax applicable.

Savitri Kadur Versus The Dy. Commissioner of Income-tax, Circle-9 (1), Bengaluru

Savitri Kadur Versus The Dy. Commissioner of Income-tax, Circle-9 (1), Bengaluru - TMI Issues Involved:1. Whether the sum of Rs. 11,61,800 received by the assessee on retirement from a partnership firm is chargeable to tax as capital gains.Issue-wise Detailed Analysis:1. Taxability of the Amount Received on Retirement as Capital Gains:The primary issue in this appeal is whether the sum of Rs. 11,61,800 received by the assessee upon retirement from a partnership firm should be taxed as capital gains. The assessee and D. Venkatesh formed a partnership firm on 1.4.2004, and Miss Suvidha Venkatesh was inducted as a partner on 1.4.2007. An MOU dated 8.6.2007 and a retirement deed dated 9.6.2007 indicated that the assessee would retire from the firm effective 1.4.2007 and receive Rs. 339.50 lakhs. The capital account of the assessee showed a balance of Rs. 2,77,88,200 as of 31.3.2007. The difference between the retirement sum and the capital account balance, Rs. 61,61,800, was taxed as capital gains by the AO, who allowed a deduction of Rs. 50 lacs for investment in specified bonds and brought Rs. 11,61,800 to tax as long-term capital gains.The AO's rationale was that the amount received represented goodwill and was thus liable to capital gains tax under Section 45, as the assessee extinguished her rights in the firm's assets and liabilities. The CIT(A) upheld this view, relying on the Bombay High Court's decision in CIT Vs. A.N Naik Associates, which held that capital gains tax applies when assets are transferred to a retiring partner, even if the firm continues.2. Legal Provisions and Judicial Precedents:The Tribunal referred to several legal provisions and judicial precedents to analyze the issue. Section 45(1) of the Income-tax Act, 1961, taxes capital gains arising from the transfer of a capital asset. Section 2(47) defines 'transfer' to include relinquishment or extinguishment of rights in an asset. The Tribunal noted that the share or interest of a partner in the partnership and its assets constitutes a capital asset.The Tribunal discussed the evolution of partnership law and tax avoidance strategies, such as converting individual assets into partnership assets and distributing assets on dissolution. It highlighted that Section 45(3) and 45(4) were introduced to address these loopholes. The Tribunal also examined the distinction between retirement and dissolution of a partnership, as elucidated in Tribhuvandas G. Patel Vs. CIT and other cases.3. Analysis of the Present Case:The Tribunal compared the facts of the present case with the case of Sudhakar M. Shetty, where revaluation of assets and subsequent retirement led to capital gains tax. The Tribunal concluded that the facts in the present case were similar, as the assessee received a sum over and above the capital account balance, indicating a transfer of rights in the partnership assets.The Tribunal noted that the assessee's claim that the entire sum of Rs. 61,61,800 was goodwill was not substantiated by the books of accounts, which only recorded Rs. 38,38,200 as goodwill. Therefore, the capital gain was recalculated as Rs. 23,23,600 (Rs. 339.50 lakhs minus Rs. 2,77,88,200 + Rs. 38,38,200). Since the assessee had invested Rs. 50 lacs in specified bonds, no capital gain was exigible to tax.Conclusion:The Tribunal upheld the action of the revenue authorities in taxing the excess amount over the capital account balance as capital gain. However, after recalculating the capital gain and considering the exemption under Section 54EC, no capital gain was exigible to tax in this case. The appeal of the assessee was allowed to the extent indicated above. The order was pronounced on 3rd May 2019.