Retiring Partner receiving amount in excess of amount due to him

[Basavaraj S]

Mr. 'A' a partner of a firm had invested say Rs.5 lakhs. The firm have been incurring losses for several years. Due to loss the Capital balance of the partner has reduced to say Rs.2 lakhs. The firm is now contemplating to pay the original investment of Rs. 5 lakhs on retirement of Mr. A. Is the excess amount paid by the firm of Rs. 3 lakhs amounts to a taxable income or is this treated as a Capital receipt? If so please provide us the relevant section/caselaw/article. 

AI Summary

Retiring Partner's Excess Capital Repayment: Tax Implications and Goodwill Considerations Under Income Tax Act A partner in a firm, who initially invested Rs. 5 lakhs, faces a reduced capital balance of Rs. 2 lakhs due to ongoing losses. Upon retirement, the firm plans to repay the original Rs. 5 lakhs, raising questions about the tax implications of the Rs. 3 lakhs excess. One response suggests that if the excess is treated as 'goodwill,' it may be taxed as capital gains under the Income Tax Act. Another response questions the taxability of the excess payment and whether it can be deducted by the firm, emphasizing the need for a partnership deed clause regarding goodwill payments.