TaxTMI 
TaxTMI 
2018 (2) TMI 1368
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.... reconstitution, the profit sharing ratio of the erstwhile two partners including the assessee was reduced to 5% from 50% with the profit sharing ratio of new partners being 60% and 30% in case of Shri Piyush Chakraborty and Shri Chandralekha Chakraborty. Thereafter the assessee retired from the partnership firm of M/s. Process Chemicals Co. from 01.04.2009. Before his retirement, he received a sum of Rs. 81,81,158/- during the period 01.12.2008 to 30.03.2009 from the partnership firm as against the capital balance amount of Rs. 40,02,377/- as on March 31, 2008. The assessee thus had received a sum of Rs. 41,78,781/- in excess of his capital account balance and since the same was not declared by the assessee in his return of income filed originally on 20.09.2009, the Assessing Officer was of the view that there was escapement of income of the assessee from the assessment to that extent. He accordingly issued a notice under section 148 on 23.03.2012, in reply to which a letter was filed by the assessee on 19.04.2012 requesting the Assessing Officer to treat the return originally filed by it on 29.09.2009, as the return filed in response to the notice under section 148. The assessee ....
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....f goodwill only and there being no transfer of goodwill on the retirement of the assessee from the partnership firm of M/s. Process Chemicals Co., no capital gain tax could be charged on notional basis since there was only a creation of goodwill in the books with no transfer taking place. Reliance in support of this contention was placed on behalf of the assessee on the decision of the Hon'ble Karnataka High Court in the case of CIT -vs.- Karnataka Agro (ITA No. 594 of 2013 dated 29.06.2014), wherein the partnership firm had credited self-generated assets in the form of goodwill of business to the extent of Rs. 7,69,28,000/- and had transferred the same to the current account of four partners proportionately consequent to the reconstitution of the firm. The Assessing Officer brought the goodwill so created to tax under the head "long-term capital gain" and when the matter reached to the Hon'ble High Court, the Hon'ble Calcutta High Court held that when the goodwill was created and credited to the four partners in their profit sharing ratio in the books of the partnership firm and two of the four partners had retired, the goodwill created continued to be with the partnership firm an....
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.... clearly show that the partners intended to retire and for that purpose, the goodwill was valued and credited to the Partners' Capital account and accordingly amounts were withdrawn from the capital accounts. Therefore, the excess payments made to the partners can be regarded as the payments for relinquishing or assigning their rights in the partnership firm. And now the issue is whether the payment on account of goodwill is taxable in the hands of the Retiring Partner or not? Section 55 of the Income Tax has been amended with effect from 01/04/1988 with an intention to bring the transfer of goodwill and the cost of acquisition will be 'nil'. The Authorised Representative(A/R) of the appellant has strongly objected for taxing the goodwill in the hands of the retiring partner. He opined that creation of goodwill cannot be treated as transfer and cannot be taxed under section 45. He argued that the asset goodwill is continued to be the asset of the firm and it has not been transferred to the appellant. No title has been transferred to the appellant. He opined that Section 45(4) is applicable only in case of dissolution of the firm but not on retirement. He also relied ....
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....igning or relinquishing her share or right in the partnership and its assets in favour of the continuing partners. We are of the view that the manner of the retirement in case of the assessee is such that it can be regarded as assigning or relinquishing by the retiring partner of her share or right in the partnership firm and its assets in favour of the continuing partners. Therefore, we are of the view that the assessee satisfies the parameters laid down by the Bombay High Court in the cases referred to above and, therefore, there was a transfer of interest of the retiring partner over the assets of the partnership firm on her retirement and, therefore, there was a liability to tax on account of capital gain. In this case an amount of Rs. 44,25,000/- was credited to the appellant's capital account in the name of goodwill. The above amount was also withdrawn by the appellant from his capital account. This amount was nothing but the payment to retiring partner in consideration of assigning or relinquishing his share or right in the partnership and its assets in favour of continuing partners and accordingly taxable as capital gains in the hands of the appellant as held by Hon&....
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....goodwill by the partnership firm in favour of the retiring partners. A perusal of the impugned order of the ld. CIT(Appeals) shows that he has mainly relied on the decision of the Hyderabad Bench of this Tribunal in the case of Smt. Girija Reddy -vs.- ITO [52 SOT 113], wherein it was held that where a lumpsum payment was made to a retiring partner for consideration of assigning or relinquishing her share over assets of partnership firm in favour of continuing partners, it was a case of transfer and the assessee thus was liable to pay tax on account of capital gain. At the time of hearing before the Tribunal, the ld. counsel for the assessee has contended that the said decision of the Hyderabad Bench of this Tribunal is distinguishable on facts. He has also relied on the subsequent decision of the Hyderabad Bench of this Tribunal in the case of ACIT -vs.- N. Prasad [153 ITD 257], wherein the assessee on his retirement as a partner from the partnership firm had received a surplus amount of Rs. 25,00,000/- in addition to his capital account balance. The said amount was brought to tax by the Assessing Officer in the hands of the assessee under the head "capital gains" being the amount ....
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....ovisions of section 45 were applicable in the instant case. Sub-section 4 of this section deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital asset on dissolution or otherwise of a firm, and brings to tax the capital gains in the hands of the firm. However, we are dealing with a case of the partner here. The firm acquired goodwill over a period of time, which was brought into the books and distributed amongst existing partners before the new partners were taken in and some existing partners retired. The asset of the firm already existed and it was quantified and credited to the accounts of existing partners. Similarly, when the assessee retired from the firm, he did not transfer any goodwill to the film as he did not have any individual goodwill. The goodwill belonged to the firm and continued to remain with the firm. As clarified by the ld. Counsel, nothing was charged from the incoming partners by way of goodwill and, thus, there is no question of even indirect realization of the value of goodwill by the assessee from the incoming partner through the firm in a number of cases, referred to above, it has been held that what a p....
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....e. The goodwill all along remained with the firm as its asset even after the retirement of the partners. What the partners got on retirement was for the value of their interest in the firm. This view is duly supported by various decision cited by the Ld. Authorised Representative including the decision .of Apex Court in the case of Sunil Siddharthhbhai vs. CIT (supra). 9.1. In the instant case, the firms have not realized any amount on account of goodwill hence the question of any assessment being made in their hands does not arise. The notional valuation of the goodwill in its accounts by the firm does not result in any transfer which can attract capital gains as has also been clarified by the Board in its Circular No.495 dated September 27. 1987. Even the amendment made in Section 55(2) of the Act is of no help to the case of the Department in view of the clarification made by the Board. We fail to appreciate how the amount could be assessed in the hands of the partners and that too under the head "Income from other sources. Goodwill is an intangible asset and transfer/surrender of which would attract Section 45 so that the value received would be a capital receipt and asse....