2025 (8) TMI 758 - AT - Income Tax

Goodwill from Partnership Revaluation Not Taxable Under Section 28(iv) Without Monetary Benefit

The ITAT Chennai held that the amount credited to the assessee's current account on account of goodwill arising from revaluation of the partnership firm ... Income u/s. 28(iv) - extra profit share received on account of revaluation of the business - income arising from the revaluation of partnership firm and subsequent reconstitution - distinguish between the claim of Family Arrangement and the Business Arrangement - assessee HUF is in receipt of compensation in lieu of relinquishment of its share of business profits in the Firm and continued to be a partner in the same, having share of 0.01%, even after re-constitution of the firm, as per amended deed. Determination of profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals - income on account of extra profits received due to credit of goodwill in its current account (goodwill determined while revaluation) - HELD THAT:- The goodwill generated in the business is an intangible asset that is recorded in the Balance sheet of the assessee. The same is converted into cash and credited into the current account of the assessee. The value of the goodwill that is converted into cash and credited into the current account of the assessee is taxable u/s. 28(iv) of the Act. The revenue tried to distinguish between the claim of Family Arrangement and the Business Arrangement. The claim of the revenue that the arrangement entered into by the partners (beneficiaries) of the firms, namely the HUF and others, is on business matter and not on family dispute or property matter as claimed by the assessee is not acceptable in the eyes of law. We find that the reconstitution of partnership deed has been made by altering the share of profit among the partners based on the family arrangement, wherein all the partners are of one family. Hence, we find that, this agreement is in substance a family arrangement and therefore the same cannot be called as 'Business Arrangement' as claimed by the revenue. As concerned to the applicability of clause (iv) of section 28 the Act to the captioned A.Y. 2014-15, the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable to tax under the head Profit and gains of business or profession. The said provision deal with the taxation of benefits and perquisites in kind i.e., non-monetary benefits arising from business or profession. Our above view is based on the decision of Mahindra and Mahindra [2018 (5) TMI 358 - SUPREME COURT] Hence, the AO is not justified in holding that the assessee has withdrawn monies from the partnership firms for the reason that no money has been withdrawn by the assessee, even if considered as withdrawn, the provisions of section 28(iv) would not come into play given that no non-monetary perquisites were received by the assessee. We also find that the revaluation of business and subsequent withdrawal by the partners cannot be regarded as income u/s. 28(iv) of the Act. Thus, we are of the considered view that the AO has erred in treating the amount withdrawn from the partner as a result of the reconstitution as income chargeable to tax u/s. 28(iv) of the Act. Hence, there is no reason to interfere in the order of the ld.CIT(A) and thus dismiss the grounds of appeal raised by the revenue. Reopening of assessment u/s 147 - Reasons to believe - HELD THAT:- AO has miserably failed to supply reasons recorded for the reopening of the assessment where from one can see whether the legislative scheme is fulfilled. The Income-tax Officer can clothe himself with the jurisdiction to assess or reassess u/s. 147(a) of the Act only if he records the reasons which can stand the test of relevance in accordance with the judicial pronouncements and after obtaining necessary sanction. This has been further fortified in the case of Kavee Enterprises (P.) Ltd. [2007 (9) TMI 219 - JHARKHAND HIGH COURT] as held as no reasons have been assigned by the Assessing Officer while issuing notice u/s 148 of the Act nor the assessee was furnished the detailed reasons for issuance of notice under the provisions of the said section of the Act. In the present case AO has neither provided any reasons for reopening of the assessment to the assessee except vaguely mentioned it in his notice issued u/s. 143(2) of the Act dated 29.09.2020 nor disposed of the objections raised by assessee in his reply filed on 15.10.2020. We find that the AO has made a passing remarks by stating the objections disposed of in his draft assessment order, no speaking order has been made by the AO for disposing the objections before commencing the reassessment proceedings as law laid down by the hon’ble courts as discussed above. Therefore, on examination of records we have not come across any proper valid reasons recorded by the AO for reopening said reassessment for both the assessment years 2015-16 and 2016-17. Assessee was not able to take or challenge other legal issues emanating from the said purported reasons recorded by the AO. Meaning thereby the assessee was barred from taking any other legal actions arising from purported reasons recorded for the default attributable to the AO. We hold that the omission on the part of the AO to comply with the directions of M/s.GKN Driveshafts (India) Ltd [2002 (11) TMI 7 - SUPREME COURT] strikes at the root of the jurisdiction of the AO to re-open the assessment and consequent passing of reassessment orders are held to be non-est in the in the eyes of law. Assessee appeal allowed.   1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether amounts credited to the assessee’s current account and/or withdrawn as a consequence of revaluation of partnership firms and subsequent reconstitution and family arrangement constitute taxable 'the value of any benefit or perquisite' arising from business within the meaning of section 28(iv) of the Income-tax Act. 1.2 Whether the transaction effected by the Memorandum of Family Arrangement and amended partnership deeds — entailing drastic reduction of profit‑sharing ratios to 0.01% while credits for revaluation (goodwill) were reflected in partners’ accounts and partial payments made to trusts — amounts to a 'transfer' or alienation attracting capital gains provisions (section 45(4) read with section 2(47) / section 47) or is non‑taxable as a family arrangement. 1.3 Whether the reassessment proceedings under sections 147/148 were validly initiated and conducted, having regard to mandatory procedural safeguards — specifically the obligation to furnish recorded reasons for reopening, to allow filing of objections and to dispose of those objections by a speaking order before completing reassessment (judicial guidance in GKN Driveshafts and subsequent authorities) — and whether failure to comply vitiates jurisdiction and renders the reassessment orders non‑est. 2. ISSUE‑WISE DETAILED ANALYSIS 2.1 Issue 1 — Applicability of section 28(iv) to amounts credited/withdrawn on revaluation and reconstitution 2.1.1 Relevant legal framework and precedents: Section 28(iv) taxes 'the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.' The Tribunal considered Supreme Court and High Court rulings including Mahindra & Mahindra (holding that section 28(iv) does not apply to receipts in the form of money), Mafatlal Gangabhai & Co. (interpretation of 'whether convertible into money or not'), Chetanaben B. Sheth (Gujarat HC) and ITAT decisions (Manish M. Chheda) that revaluation‑linked increase in partner's capital lacks nexus with business so as to attract section 28(iv). Recent Bombay High Court authority (Ramona Pinto v. DCIT) reinforcing that monetary settlements on relinquishment/retirement are not taxable under section 28(iv) was also considered by the Tribunal. 2.1.2 Court’s interpretation and reasoning: The Tribunal accepted the principle that section 28(iv) is principally directed at non‑monetary benefits or perquisites arising in the course of business. A monetary receipt standing as settlement or withdrawal consequent to revaluation and alteration of profit‑sharing was not a perquisite in kind within section 28(iv). The Tribunal held that a necessary condition — nexus with the business as a non‑monetary benefit arising in the course of business — was not satisfied here. 2.1.3 Key evidence and findings: The material showed revaluation of one firm producing goodwill of approx. Rs. 712.27 crores, credit of goodwill amounts to partners’ current accounts in 2013‑14, amended profit‑sharing reducing the assessee’s share from 50%/30% to 0.01%, and subsequent withdrawals/credits alleged by the AO (part amounts routed to trusts). The assessee contended that credits were capital realignments under a family arrangement and that no non‑monetary perquisite was received. 2.1.4 Application of law to facts: Applying the precedents, the Tribunal found the credits/withdrawals to be akin to settlement/realignment resulting from revaluation or retirement/reconstitution and not a non‑monetary perquisite arising from business activity. The Tribunal distinguished the Revenue’s submission that the revaluation was a business arrangement producing taxable perquisites, on the ground that all partners were family members and the reconstitution was effected by a family arrangement; increase in partner’s capital following revaluation lacked requisite nexus with business under cited authorities. 2.1.5 Treatment of competing arguments: Revenue argued the revaluation and deliberate maintenance of 0.01% share were colorable devices to avoid section 45(4) and that credits were convertible benefits taxable under section 28(iv), relying on decisions treating waiver/settlement as taxable perquisites. The Tribunal examined RAMANIYAM HOMES (loan waiver as perquisite) and McDowell (restrictions on colourable devices) contentions but distinguished Mahindra & Mahindra and related precedents to hold that receipt in cash or equivalent on relinquishment/retirement does not fall within section 28(iv). The Tribunal accepted authorities that revaluation‑credited amounts to partner’s capital/current account are not perquisites taxable under section 28(iv). 2.1.6 Conclusion on Issue 1: The Tribunal concluded that section 28(iv) did not apply to the amounts in issue; therefore, the AO erred in treating the sums as income under the head 'profits and gains of business or profession'. The CIT(A)’s deletion of additions under section 28(iv) was upheld. 2.2 Issue 2 — Whether the transaction is a 'transfer' attracting capital gains (section 45(4)/2(47)) or a non‑taxable family arrangement 2.2.1 Relevant legal framework and precedents: Section 45(4) (as applicable prior to later amendments) and section 2(47) deal with 'transfer' of capital assets on dissolution/partnership reconstitution. Jurisprudence (Mafatlal; Additional CIT v. Mohanbhai Pambhal; National Company and others) delineates when allotment/realignment on retirement/reconstitution constitutes transfer/realization of capital asset versus being merely the retiring partner’s share in partnership assets not attracting capital gains. The Tribunal also noted decisions where family arrangements effecting realignment among family members were held not to be transfers for capital gains purposes. 2.2.2 Court’s interpretation and reasoning: The Tribunal examined substance over form — whether the arrangement effected real alienation of partnership assets or was an intra‑family reallocation (family arrangement) that did not constitute a taxable transfer. It found the arrangement to be in substance a family arrangement among family members (all partners related), leading to realignment of interests rather than an alienation to outsiders. 2.2.3 Key evidence and findings: The Memorandum of Family Arrangement dated 05.05.2013, amended partnership deeds (06.05.2013), family nexus of partners, and timing of revaluation and credits were scrutinized. The goodwill was reflected in firm’s balance sheet then credited to current accounts. The assessee continued nominally as 0.01% partner and subsequently ceased to be HUF in 2015; capital and current account entries indicated distribution/realignment among family members. 2.2.4 Application of law to facts: On application of authorities, the Tribunal held that the increase in partner’s account due to revaluation and subsequent reallocation under a family arrangement did not amount to transfer within section 2(47) or taxable capital gains under section 45(4). The Tribunal relied on precedent that amounts received on retirement/allotment of partner’s share in partnership assets represent share in partnership and not consideration for transfer, and that family arrangements effecting redistribution among family members are not transfers attracting capital gains. 2.2.5 Treatment of competing arguments: Revenue's contention that retention of nominal 0.01% stake was a device to avoid section 45(4) and that amounts were consideration for relinquishment of exclusive profit rights was considered but rejected because of family context and legal precedents establishing that intra‑family realignments and retirement‑type settlements do not necessarily constitute 'transfer' for capital gains. 2.2.6 Conclusion on Issue 2: The Tribunal concluded that the transaction was a family arrangement effecting reallocation of partnership interests among family members and did not attract capital gains provisions; thus deletions on this ground were affirmed. 2.3 Issue 3 — Validity of reassessment proceedings under sections 147/148: compliance with procedural safeguards 2.3.1 Relevant legal framework and precedents: The Tribunal applied the procedural jurisprudence flowing from GKN Driveshafts (Supreme Court) mandating furnishing of reasons for reopening, right to object, and requirement that the Assessing Officer dispose of objections by a speaking order before proceeding to reassessment; subsequent High Court and Tribunal decisions (including Janak Shantilal Mehta, Home Finders, IDFC First Bank) interpreting the scope of that duty were considered. 2.3.2 Court’s interpretation and reasoning: The Tribunal found that the Assessing Officer issued notice under section 148, the assessee sought reasons and filed objections, but no proper speaking order disposing of objections was provided prior to completion of reassessment. The AO purported to dispose of objections only within the draft/final assessment order and passed the final order within a few days — conduct inconsistent with procedural mandate. The Tribunal held that such omission strikes at the root of jurisdiction to reopen and assess, rendering reassessment orders non‑est. 2.3.3 Key evidence and findings: Chronology: survey (22.05.2019), notice under section 148 (05.11.2019), return filed (03.12.2019), notice under section 143(2) (29.09.2020) seeking details, objections filed (15.10.2020), show‑cause/draft order (10/13.09.2021) wherein objections were disposed within the draft, hearing notices and VC slots (16–17.09.2021), and final reassessment order (18.09.2021). The Tribunal noted absence of timely furnishing of recorded reasons and absence of a prior speaking order disposing objections as mandated by GKN. 2.3.4 Application of law to facts: Applying the GKN principle and its progeny, the Tribunal held that the AO’s manner of disposing objections by embedding the disposal in the draft/final order without furnishing reasons and a prior speaking order violated procedural safeguards. The Tribunal relied on case law holding such procedural non‑compliance to vitiate the reassessment, and distinguished authorities where remedial curative action was available in different factual matrices. 2.3.5 Treatment of competing arguments: Revenue argued that reasons were supplied (notice under section 143(2)) and objections were disposed of (show‑cause notice/draft order) and that procedural safeguards under Madras High Court decisions were satisfied. The Tribunal rejected that submission on record‑based chronology, noting that disposing objections in the body of the assessment/draft did not meet the requirement of a speaking order prior to reassessment completion as envisaged by GKN and subsequent jurisprudence. 2.3.6 Conclusion on Issue 3: The Tribunal held that omission to furnish recorded reasons in time and to pass a speaking order disposing objections before framing the reassessment order vitiated jurisdiction; the reassessment orders for both assessment years were quashed as non‑est. Cross‑objections by the assessee on procedural grounds were allowed. 3. FINAL OUTCOME (as concluded in the Reasons above): The Tribunal dismissed Revenue’s appeals on merits and procedure: (a) section 28(iv) not attracted; (b) reconstitution under family arrangement not a taxable transfer under capital gains provisions; and (c) reassessment proceedings were vitiated for failure to comply with GKN procedural safeguards — reassessment orders quashed. Cross‑objections on procedural validity were allowed accordingly. (See cross‑references in paras 2.1.4–2.1.6 and 2.3.1–2.3.6 above.)