TaxTMI 
TaxTMI 
2014 (1) TMI 1681
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....the partnership firm M/s Square Projects Associates on 20-4-2005. On retirement, the assessee apart from his share capital of Rs. 1 crore had received Rs. 25 lakhs surplus from the partnership firm. This surplus of Rs. 25 lakhs was not offered for taxation. When queried by the Assessing Officer the assessee relying upon a decision of Hon'ble Supreme Court in case of CIT vs. R. Lingamallu Raghu Kumar (247 ITR 801) submitted that the amount is not taxable as there is no transfer. The Assessing Officer however rejected the contention of the assessee by holding that surplus received by assessee from the firm is nothing but goodwill paid to him for leaving the firm. The goodwill is taxable under the head capital gains income. He further held that the decision relied upon by the assessee being prior to the amendment of sec. 55(2) it is not applicable. Accordingly, the Assessing Officer by treating the cost of acquisition as nil treated the amount of Rs. 25 lakhs as the short term capital gain for the year. 4. Being aggrieved of the assessment order so passed the assessee preferred an appeal before the CIT (A). The CIT (A) relying upon the judgment of the Hon'ble Supreme Court in case ....
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....xed as transfer of goodwill and the excess amount received by partners on retirement or dissolution will not be liable for capital gains tax in the hands of retiring partner. In support of such contention the learned AR relied upon the following decisions. ITO vs. Prabhuraj (6 SOT 415) ITO vs. Amitabh Singh (16 SOT 453) 7. The learned AR submitted that a larger bench of Karnataka High Court in a judgment dated 16-9-2013 in ITA No.1414/2006 in case of CIT vs. Dynamic Enterprises held that on retirement of partner there is no transfer of capital asst. He submitted that though High Court did not answer the issue of taxation in the hands of retiring partner but the natural inference from the findings would be when there is no transfer at all the question of transferor and transferee does not arise, hence there is no occasion to tax anyone. The learned AR relied upon a decision of Smt. Durdana Khatoon vs. DCIT [93 ITD 15] wherein the Tribunal held as under:- "Thus, when a partner receives her share in the assets of the partnership firm or when she receives something in excess of her share in the assets of the partnership firm, and even in a case where the partner receives a ....
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....ed to be good law. He submitted that the jurisdictional High Court in case of CIT vs. P.H. Patel (171 ITR 128) dissented from the decision of the Mumbai High Court and held as under:- " We may also refer to the decision of a Division Bench of this Court in CIT Vs. L. Raghu Kumar[1983] 141 ITR 674. In identical circumstances, this Court held that when a partner retires from the partnership, and receives his interest either in lump sum or otherwise, there is no element of transfer of interest in the partnership assets by the retiring partner to the continuing partner". 11. He further referred to a decision of Madras High Court in case of CIT vs. Palaniappani (143 ITR 343) wherein the court held as under. " Whether the retiring partner receives a lump sum consideration or whether the amount is paid to him after a general taking of accounts and after an ascertainment of his share in the net assets of the partnership as on the date of his retirement the result in terms of the legal character of the payment as well as the consequences thereof, is precisely the same". 12. The learned AR submitted that the jurisdictional High Court in case of Chalasani Venkateswara Rao (25 Taxm....
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....ating it as a transfer of goodwill, the CIT (A) deleted the addition by holding that there is no 'transfer' when a partner received his share in the partnership business. Keeping in view the aforesaid basic facts we will now examine the legal issue whether there at all is a 'transfer' within the meaning of sec. 2(47) of the Act. 15. The Hon'ble Supreme Court in case of CIT vs. R. Lingamallu Raghu Kumar (supra) while considering the issue of excess amount received by the assessee on retirement from partnership firm whether is assessable to capital gains upheld the view of the Hon'ble A.P. High Court and that of Gujarat High Court in case of CIT vs. Mohanbhai Pamabhai (91 ITR 393) wherein it was held that there was no transfer of any asset as contemplated by the expression 'transfer' as defined in section 2(47) of IT Act. The Hon'ble Kerala High Court in case of CIT vs. Kunnikulam Mill Board (supra) held that where there is a reconstitution of the firm consequent to the retirement of some of the partners it cannot be said that there was any transfer of any right in immovable property in favour of continuing partner. The larger bench of Karnataka High Court in case of CIT vs.....
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....ansfer is involved when a retiring partner receives at the time of retirement from the firm, his share in the partnership assets either in cash or any other asset. It further held that for the purpose of Section 45 of the I.T. Act, no distinction can be drawn between an amount received by the partner on the dissolution of the firm and that received on his retirement, since both of them stand on the same footing. 21. In P.H. Patel (supra), a Division Bench of the AP High Court noticed that the judgment in Mohanbhai Pamabhai (supra) was approved by the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 and following the judgment in L. Raghukumar (supra) held that when a partner retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. 22. In the light of the above decisions, which are binding on us, we hold that the I.T.A.T. was not correct in confirming the orders passed by the C.I.T. (Appeals) and the respondent. When the appellant was paid Rs. 15.00 lakhs by Y. Kalyana Sundaram in full and final settlement towards his 50....
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....pproved the view of their earlier decision holding that the amount received by the partner on the dissolution of the firm or on his retirement stand on the same footing and no distinction can be drawn. The Hon'ble High Court further referred to the decision of jurisdictional High Court in case of CIT vs. P.H. Patel (171 ITR 128) wherein it was held that when a partner retires from a partnership taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. The aforesaid ratio laid down by the jurisdictional High Court clearly apply to the facts of the assessee's case. However, we need to mention here that the Income-tax Appellate Tribunal, Hyderabad Bench in case of Smt. Girija Reddy vs. ITO (52 SOT 113) has taken a contrary view by holding that lump sum payment received by a retiring partner assigning or relinquishing his/her right in the partnership and its asset in favour of the continuing partner will attract capital gain tax. The Income-tax Appellate Tribunal, Hyderabad Bench while coming to such conclusion had mainly relied upon the following decisions. i) CIT vs. Tribhuv....