TaxTMI 
TaxTMI 
2014 (2) TMI 679
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.... law, the amount of Rs.39,60,000/- and of Rs.5,40,000/- received by the appellant from the firm of Dalal & Shah, Mumbai and Dalal & Shah, Ahmedabad, respectively should not be taxed as 'Capital Gains'. II. The appellant prays for relief." During the course of appeal assessee raised the following additional ground, being legal in nature. The same was admitted. "1. The ld. CIT(A) ought to have held that AO has erred in computing capital gains of Rs.51,06,697/-(Rs.45,00,000/-) for goodwill + Rs.6,06,697/- for assets) without appreciating that the appellant ha already offered capital gain of Rs.6,06,607/- in the computation of income while disclosing capital gains at Rs.6,67,842/-." 4. Briefly stated facts are, The assessee was a partner in Dalal & Shah, Mumbai and Dalal & shah Ahmedabad who has retired from these partnership firm on 11th day of August 2007 w.e.f. 31-07-07. The AO noted that the following amounts were received on his retirement from the aforesaid firms. S.No. Name of the firm Retirement Deed dated Right to share in Partnership (goodwill) (Rs.) Right to share in partnership assets (Goodwill) (Rs.) Total amount rece....
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....his share in the net profit, till the date of his retirement to be paid by the firm and the partners passes on are under obligation to pay the retiring partners his share of surplus in the estimated value of the net partnership assets over the blocked value and the value of rights into share capital (goodwill). The assessee retired from both the firms as per deed of retirement executed on 1.8.2007, 23.7.2007 respectively and clauses of both the agreements are identical /except for minor necessary changes. It has been mentioned in clause 2 as under:- "Pursuant to clause 16 of the Deed of partnership dated 3rd November, 2006, the share in the partnership of the Retiring Partner, all and any effects in the said share and all and any titles, interests, claims and demands whatsoever of the Retiring Partner in the absence of any nomination is to pass on to the Continuing Partners in their respective proportions in the Right to Share in the Partnership (Goodwill)". In terms of the same, it is now agreed that in full and final settlement of the rights of Kuntal Dave, he has been paid on or before the date of execution of these presents the following sums: ....
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....aid by the assessee to the firms at the time of becoming partner of the said firms apart from his contribution to the capital account - blocked amount. It may be mentioned here that the assessee after making the payments of these amounts of Rs. 5,16,150/- and Rs. 13,153/- respectively has acquired the rights in the partnership deed (not only his right to share in partnership asset but also the other non separable right). Therefore, this cost of acquisition also pertains to his right to share in the partnership (goodwill). The AO noted that in view of above aspect, there is transfer of assessee's right to share in partnership to the continuing partners though the share in partnership Goodwill and share in net partnership asset are valued independently. The total consideration for transfer of assessee's right to share in partnership is therefore Rs. 50,24,000/- (39,60,000 + 10,64,000) in respect of M/s. Dalal & Shah, Mumbai and Rs.6,12,000/- (5,40,000 + 72,000) in respect of MIS. Dalal & Shah, Ahmedabad. The short term capital gain is therefore worked out as under :- (A) In respect of transfer of right to shore in M/s. Dalal & Shah, Mumbai Sale proceeds Rs. 50,2....
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....r that portion. 6. After considering the detailed discussions of the assessee ld. CIT(A), did not accept and confirmed the order of Assessing Officer by stating as under :- 1.3 I have considered the facts, findings of the AO and material on record and submission of the appellant. It is seen that the CI.9(a) of the partnership deed of M/s.Dalal & Shah, Mumbai dated 31.3.2005 provides that the share in partnership firm comprises of inherent non-separable but recognisable rights and remuneration to partners, the right to share in net partnership, the right to share in net partnership asset and the right to share in the partnership (goodwill) which shall be computed and distributed as detailed in the chart 1 to 4 of the said clause and unless the partners mutually decided to change the sharing proportion in any manner whatsoever in writing. Similar provisions were also made in partnership deed in cl.9(e) of partnership deed dated 31.3.2005 executed in respect of Dalal & Shah, Mumbai. Thus, the appellant is one of the partners who was entitled to share in net partnership assets, and therefore he was required to maintain aggregate credit balance in his capital account ....
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....r's Right to share in the Partnership (goodwill) and the right to share in the net partnership assets as defined in clause 9(a) of the Deed of partnership dated 3rd November, 2006, which is mutually agreed in terms of the said Deed at Rs. 39,60,000/- and Rs.10,64,000/- respectively. (c) Unpaid interest in terms of the Partnership Deeds from time to time on the Kuntal Dave Capital account from April, 2006 upto 31 July, 2007 amounting to Rs. 1,37,569/-. It is further agreed in terms of clause 16 of the aforesaid partnership deed dated 3rd November 29006 that the sum as agreed towards (a) above Rs. 39,60,000/- and Rs. 10,64,000/- respectively is debited to the following specified partners in the following ratio in which the aforesaid share of the retiring partner passes on to them. Specified Partners Share in the partnership firm 1. Mr. Ashish 3.06% 2. Mr. Shishir 3.06% 3. Mr. Anish 2.38% Aggregating to 8.50%" 1.3.2 Thus, it is explicitly clear from the clause of the Deed of retirement as reproduced above that 3 partners viz. Mr. Ashish S. Dalal, Mr. Shishir B. Dalal and Shri Ani....
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....,16,150/- Short term capital gain Rs. 45,07,850/- (D) In respect of transfer of rights to share in M/s. Dalal & Shah, Ahmedabad. Sale proceeds Rs. 6,12,000/- Less: Cost of acquisition Rs. 13,153/- Short term capital gain Rs. 5,98,847/- 1.3.4 I also agree with the alternative finding of the AC that the amounts of Rs. ( 39,60,000/- and as capital gain on transfer of goodwill by taking the cost of acquisition as Rs. NIL. The assessee has submitted a copy of the valuation of goodwill mutually agreed by the partners of the firms. The total amount of Rs. 45,00,000/- has been mutually arrived at as the valuation of assessee's share of goodwill in Dalal & Shah, Mumbai and M/s. Dalal & Shah, Ahmedabad and equal amount was received by the assessee from three continuing partners of those firms towards such transfer of assessee's right in goodwill of those firms. The assessee has stated that the cost of acquisition of Rs. 5,16,150/- and Rs. 13,153/- were in respect of his right to share in the partnership asset in Dalal & Shah, Mumbai and M/s. Dalal & Shah, Ahmedabad respectively and that these amounts are not for acquisition of his share....
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....the assessee is concerned, it is noticed that these are related to tax liability of firm when the partner retired, hence, not relevant for the assessee's case. Hence, in the case where the appellant has received goodwill on his retirement from the continuing partners, in lieu of his relinquishment of his share in firm in favour of continuing partners, as well as goodwill for which consideration received by the assessee from partners and not from firm, therefore, the case laws are distinguishable on facts and in law. In the light of above facts, this ground of appeal is dismissed. 7. Referring to the paper book and deed of partnerships at the time of admission on 1.4.2005 and retirement on 31.07.2007 and the deed in between on 3.11.2006, the ld. Counsel fairly admitted that the argument that there is 'no transfer' is not being pressed as assessee admitted that there is transfer of rights, exigible to capital gains. However what is contested is the amounts received as share in assets of firm as goodwill, transfered to three partners as per the deed. It was the contention that rights in firm are separate rights and assessee offered capital gain received on share of assets in the fi....
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....t that the said provision admittedly is not applicable to professional firms. 7.2 With reference to the additional ground ld. Counsel submitted that the amount offered by the assessee was brought to tax twice as under :- S.No. Particulars Declared in return of income (Rs.) As per A.O (Rs.) 1. Gain from sale of transfer of share in partnership assets (5,47,850 + 58,847) = 6,06,697 Gain from sale of shares = 61,145 6,67,842/- 6,67,842 2. Gain from sale of transfer of share in goodwill and gain from sale of transfer of share in assets (45,00,000 + 6,06,697) 51,06,697 (Note 1) 3. Total Addition by Assessing Officer 57,74,539/- 8. Ld. CIT-DR referred to the order of AO and CIT(A) and the terms of deed to submit that there is an element of transfer exigible to tax when the continuing partners paid amounts to relieving partner. He relied on the principles laid down by the following cases. 1. Bishan Lal Kanodia (122 Taxmann 460 Del.) 2. Girija Reddy 23 taxmann.com Hyd. 3. Sudhakar Shetty 130 ITD 197 (Mum.) 8.1 He also referred to the term of share in assets of firm and goo....
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....Partner. Messrs. 'Dalal & Shah' the Firm name shall remain vested only in the Promoter Partners and the Senior Partner's. (b) It is agreed that each Partner's Share in the Partnership Firm comprises of inherent non-separable but recognizable rights in differing proportions as specified in Clause 9 herein. 9. (a) It is agreed that the Share in the Partnership Firm comprises of the following inherent non-separable but recognizable rights - Remuneration to Partners, the Right to Share in the Net Profits of the Partnership, the Right to Share in the Net Partnership Assets and the Right to Share in the Partnership (Goodwill), which shall be computed and distributed as detailed in Charts 1 to 4 herein, unless the Partners mutually decide to change the sharing proportions in any manner whatsoever in writing. Each of the Partners shall be entitled to a Remuneration as detailed in Charts I to 4 hereunder, and which. in the aggregate, for all partners. put together, shall not exceed the following limits: On the first Rs.1,00,000 of the book profit or in case of a loss Rs. 50,000 or at the rate of 90 percent of the book profit whichever is....
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....TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (percent) (percent) (percent) (percent) Mr. Amin 1.00 1.00 1.00 1.00 Mr. Vasant 10.00 10.00 10.00 10.00 Mr. Sharad 8.00 8.00 8.00 8.00 Mr. Ashish 24.04 23.50 24.04 24.04 Mr. Shishir 22.04 21.50 22.04 22.04 Mr. Anish 23.92 23.50 23.92 23.92 Mr. Kuntal 11.00 11.00 11.00 11.00 (rupees) Mr. Venkatesh 1,250,000 1.00 0 0 Mr. Mayur 850,000 0.50 0 0 CHART 4-YEAR: 1st April, 2008 ONWARDS EVERY FINANCIAL YEAR Column-1 Column-2 Column-3 Column-4 Column-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (percent) (percent) (percent) (percent) Mr. Amin 1.00 1.00 1.00 1.00 Mr. Vasant 10.00 10.00 10.00 10.00 Mr. Sharad 8.00 8.00 ....
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.... respective 'Share of Profit' account with the Firm on ascertainment of the Net Profits at the Partnership. 16. Subject to and without prejudice to the other provisions of these presents, in case of an exit of a Partner due to death or retirement (including compulsory retirement in terms of Clause 17(a) herein under ) of a Partner, the other Partners shall be entitled to continue the profession. The Share of such retiring or deceased Partner shall, pass on, if he so wishes, except in case Mr. Venkatesh and and Mr. Mayur who are not entitled to pass on their share by way of nomination or otherwise, to a person, who would have been nominated by the exiting Partner (except in case of Mr. Venkatesh and Mr. Mayur) at the time of signing of this Deed. Such a nominee, must be a Chartered Accountant, and can be nominated, if and only if, he/she is acceptable as a future-partner to the Promoter Partners and the Senior Partners of the Firm totally representing a majority in terms of profit sharing, at the time the nomination is intimated the Firm. Each Partner hereto, who has a right under this Deed to (thus) nominate, and wishes to exercise that right, is hereby duty bound t....
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....fits of the Partnership, as if they aggregate to 100% (unless they agree amongst themselves otherwise). Consequently, in the event of an exit of a Partner, (a) the Firm shall pay to the retiring or deceased (existing) Partner or his estate as the case may be: (i) all amounts standing to his credit in the Firm, by way of his Partner's Capital Account - blocked amount, and his Remuneration, if any payable to him under Clause 9 herein till the date of death or retirement or determination. (ii) his Share of the Net Profits of the Partnership for the period since the Close of the previous accounting year till the date of death or retirement or determination which will be based on the accounts for the period from the close of the previous accounting year till the date of death or retirement or determination, which shall be made up on the basis of actual cash received, plus the outstanding fees plus fees for the matters completed but not billed and also proportionate estimated net fees for the work partly completed. In computing above, due allowance shall be made, as estimated b....
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....pply and be operative, and the rights and liabilities of both the transferor Palmer and the transferee Partner shall accordingly be governed by the said Clause 16 and its sub-clauses. Dalal & Shah (Ahmedabad) 9. (a) It is agreed that the Share in the Partnership Firm comprises of the following inherent non-separable but recognizable rights - Remuneration to Partners, the Right to Share in the Net Profits of the Partnership, the Right to Share in the Net Partnership Assets and the Right to Share in the Partnership (Goodwill), I which shall be computed and distributed as detailed in Charts 1 to 4 herein, unless the Partners mutually decide to change the sharing proportions in any manner whatsoever in writing. Each of the Partners shall be entitled to a Remuneration as detailed in Charts I to 4 hereunder, and which. in the aggregate, for all partners. put together, shall not exceed the following limits: On the first Rs.1,00,000 of the book profit or in case of a loss Rs. 50,000 or at the rate of 90 percent of the book profit whichever is more. On the next Rs.1,00,000 Of the book profit At the rate of 60 percent of the book profit On th....
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.... 0 Mr. Jeyur 500,000 5.00 5.00 0 Mr. Viren 500,000 5.00 5.00 0 Mr. Kuntal 0 11.00 11.00 11.00 CHART 4-YEAR: 1st April, 2008 ONWARDS EVERY FINANCIAL YEAR Column-1 Column-2 Column-3 Column-4 Column-5 PARTNER REMUNERATION SHARE IN THE NET PROFITS RIGHT TO SHARE IN THE NET PARTNERSHIP RIGHT TO SHARE IN THE PARTNERSHIP ASSETS (GOODWILL) (rupees) (percent) (percent) (percent) Mr. Amin 0 1.20 1.20 1.20 Mr. Ashish 0 19.01 19.01 31.68 Mr. Shishir 0 19.01 19.01 31.68 Mr. Anish 0 13.58 13.58 23.44 Mr. Bharat 0 25.20 25.20 0 Mr. Jeyur 500,000 5.00 5.00 0 Mr. Viren 500,000 5.00 5.00 0 Mr. Kuntal 0 12.00 12.00 12.00 (b) The Remuneration payable to the Partners as shown in Charts 1 2, 3 and 4 above1 shall be credited to their respective 'Remuneration' account with the Firm, upon ascertainment of book profit. However, in case of Mr. Jeyur and Mr. Viren, the Senior Partners have the power. and authority un....
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....Dave share is specified as under (summarised): Period Remuneration Share in profit Right to share in partnership assets Right to share in partnership (goodwill) From 01.04.05 to 31.03.06 Chart 1. 9.25 9.25 9.25 9.25 From 1.04.06 to 31.03.07 Chart 2 10.25 10.25 10.25 10.25 From 1.04.07 to 31.03.08 Chart-3 11.00 11.00 11.00 11.00 From 01.04.2008 on wards Chart 4 11.50 11.50 11.50 11.50 Similarly in Dalal & Shah (Ahmedabad) the share is as under :- Period Remuneration Share in profit Right to share in partnership assets Right to share in partnership (goodwill) From 1.4.05 to 31.3.06 Chart 1. 0 9.25 9.25 9.25 From 1.04.06 to 31.3.07 Chart 2 0 10.00 10.00 10.00 From 1.04.07 to 31.3.08 Chart-3 0 11.00 11.00 11.00 From 1.4.2008 on wards Chart 4 0 12.00 12.00 12.00 10.4 However, the terms of above deeds at the time of admission have been modified vide the deed dated 03.11.2006 when new member was admitted. The share of assessee was modified as under :- Period Remuneration Share in profit Right....
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....he rights of the owner of a land include a right to grant the lease for exploiting the land. On appeal by special leave, the assessee contented that (i) conceptually there was no 'cost of acquisition' which was attributable to the right of limited enjoyment transferred by the grant of lease, (ii) there was no nexus between the 'cost of acquisition' of the free hold land and the right granted under the lease, (iii) there was no question of apportionment of such 'cost of acquisition', and (iv) since the cost of acquisition of the right granted under the lease could not be determined the computation provisions under the Act could not apply to all and as such section 45 was not attracted. Held Section 2(14) defines 'capital asset' as 'property of any kind held by an assessee. In the instant case, what was parted with under the terms of the lease deed was the right to exploit the land by extracting clay which right directly flowed from the ownership of the land. The said right evaluated in terms of money formed part of the cost of acquiring the land if transfer of capital asset in section 45 includes grant of mining lease for any perio4 th....
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.... accounts are settled & what from the retirement takes is wholly irrelevant & immaterial. 1.5. I have considered the assessee's arguments. It may be mentioned here that the case laws quoted by the assessee are not applicable in the case of the assessee since in all the above case law, there was payment by the firm to the retired partners or payment to the partners on dissolution of the firm. In the instant case the facts are some what different. The assessee entered into partnership w.e.f. 01/04/2005 as per partnership deed dtd. 31.3.2005 of M/s. Dalal & Shah, Mumbai. This partnership deed was modified subsequently w.e.f. 01/11/206 vide partnership deed dtd. 3/11/2006. Similarly he entered into a partnership of M/s. Dalal & Shah, Ahmedabad vide partnership deed dtd. 1/4/2005 w.e.f. 01/04/2005. The terms of this partnership were also revised vide partnership deed dtd. 03/11/2006 w.e.f. 01/11/2006. The terms and conditions of the partnership deed of both the firms are more or less identical with minor changes regarding share of partners and the contribution to the capital account. The clause 9(a) of this partnership deed of M/s. Dalal & Shah, Mumbai dtd. 31/03/2005 st....
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....se may be: i. All amounts standing to his credit in the firm, by way of his partner's capital account - Blocked Amount and his' Remuneration, if any payable to him under clause herein till the date of death or retirement or determination; ii. His share of the Net Profit of the Partnership for the period since the close of the previous accounting year till the date of death or retirement or determination which will be based on the accounts for the period from the close of previous accounting year till the date of death or retirement or determination, which shall be made up on the basis of actual cash received, plus the outstanding fees, plus fees for the matters completed but not billed and also proportionate estimated net fees for the Work partly completed. In computing above, due allowance shall be made, as estimated by the Senior Partners for expenses necessary or properly allocable for completing such work. The above may be determined on a lump um basis if the retiring partner and/or the heirs of the deceased partner so agree. As to the fees due but not....
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....d the liabilities of both the transferor partner and the transferee partner shall accordingly be governed by the said clause 16 and its sub-clause" Thus, the amount standing in the capital account of the retiring partners and his share in the Net profit till the date of his retirement are o be paid by the firm and the partners to whom the share of retiring partners passes on are under1obligation to pay the retiring partners his share of surplus in the estimated value of the net partnership asset over the block value and the value of his right to share in capital (goodwill). 1.7 The assessee retired from both the firms as per deeds of retirement executed on 11/08/2007, 23/7/2007 respectively and clauses of both the agreements are identical except for bare necessary changes. It has been mentioned in clause (2) as under: "Pursuant t0 to Clause 16 of the Deed of Partnership dated, 3rd November, 2006, the share in the Partnership of the Retiring Partner, all and any effects in the said share and all and any titles, interests, claims and demands whatsoever of the Retiring Partner in the absence of any nomination is t....
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....n the partnership comprises of the inherent nonseparable rights. Therefore, what has been transferred by the assessee to these three continuing partners is the assessee's share in the partnership firm at the time of retirement. 2. The assessee has declared Short Term Capital Gain in respect of sale proceeds of Rs. 10,64,000/- and Rs. 72,000/- received from the partners of M/s.Dalal & Shah, Mumbai and Ahmedabad. He has shown the cost of acquisition at Rs.5,16,150/- and Rs.13,153/- as on 01.04.2005 respectively. These are the amounts paid by the assessee to the firms at the time of becoming partner of the said firms apart from his contribution to the capital account - blocked amount. It may be mentioned here that the assessee after making the payments of these amounts of Rs.5,16,150/- and Rs.13,153/- respectively has acquired the rights in the partnership deed( not only his right to share in partnership asset but also the other non separable right). Therefore, this cost of acquisition also pertains to his right to share in the partnership (goodwill). We agree with the above observations of Assessing Officer/JCIT. Since the assessee obtained non-severable bundle of ....