TaxTMI 
TaxTMI 
2025 (6) TMI 1400
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.... new partner. 3. Brief facts of the case are as follows: 4. The assessee is one of the partners in M/s. CRCL LLP [CRCL], a Limited Liability Partnership (LLP). The firm was incorporated on 15.07.2016 with an objective to carry on-site and off-site contract catering services. For the AY 2017-18, the assessee filed his return of income on 06.11.2017 declaring total income at Rs..10,06,350/-. Subsequently, the return of income was revised on 15.03.2019 declaring the total income at Rs..9,98,850/-. On the basis of information collected during the course of assessment proceedings in the case of CRCL, where the assessee is a partner, the Assessing Office reopened the assessment for AY 2017-18 under section 147 of the Act by recording reasons as reproduced under para 2 of the assessment order. Against statutory notices, the assessee furnished the details called for. The Assessing Officer asked the assessee to furnish the purpose of receipt of Rs..2,98,29,315/- from the CRCL during AY 2017-18 along with supporting documentary evidence and to provide the treatment of the amount in assessee's ROI. Against various queries raised by the Assessing Officer, the assessee has furnished the repli....
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.... direct or indirect interest in or otherwise benefit economically from, facilitate or enter into any arrangement or agreements with any person that competes directly or indirectly with the Non-compete business. f. as per clause 11.3 of the Investment Agreement dt. 17.11.2016 which is reproduced here under: "The designated Partners and Working Partners will enter into fixed term employment agreements with the LLP in substantially the form attached herewith as Annexure 2 at Closing.......", the partner has to enter into an Executive Employment Agreement wherein the partner who is an Executive has to agree to comply with the Non-compete and Non Solicitation clause and the same is reproduced hereunder: "..... The Executive agrees to comply with the obligations set forth in Clause 19 of the Investment Agreement and Schedule H of the LLP Agreement during the period the Executive is in the employment of the LLP and during the Restricted period....." 6. On perusal of the Amended and Restated Agreement of LLP dt.02.02.2017, the Assessing Officer gathered information and narrated under para 3.5.2 are reproduced herein under: a. M/s. Elior India Catering LLP has been inducted into ....
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....contribution of Rs. 31,76,03,000/- against taking over 51% share in the firm, M/s. CRCL LLP. Hence no basis for arriving at the amount of Rs. 31,76,03,000/- to be paid by M/s. Elior India Catering LLP. * That the assessee's profit sharing ratio has changed from 12% to 5.88% on induction of new partner, M/s. Elinor India Catering LLP and thus the assessee relinquished 6.12% of the profit sharing ratio as well as the share in the goodwill of the firm. * The contention of the assessee that the profit sharing ratio has remained in the same proportion to the capital infused into the firm is nothing but camouflaging his reduction in the profit sharing ratio and the share in the goodwill of the firm. * The assessee has not justified as to why he received Rs. 2,38,63,452/- when his contention is that his profit sharing ratio has remained in the same proportion to the capital infused and there is no change in his capital in the firm M/s. CRCL LLP. * In this case of the assessee, there is admission of a new partner and the share of the assessee in profit of firm got reduced from, 12% to 5.88% and in lieu of this reduction of his right to receive profit and goodwill, he had receiv....
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....siness, that reduction without special features as were noted by the Supreme Court in Gangadhar's case [1972] 86 ITR 19, would reflect impairment in assessee's capital asset, meaning an income-yielding apparatus which the assessee had with him prior to such reduction. * It cannot be doubted that, because of reduction of the share of the assessee in the reconstituted firm from 12% to 5.88% the trading structure of the assessee was impaired and such cancellation would result in proportionate loss of an income-yielding asset. Consequently, the payment made to him as compensation for such impairment has to be treated as a capital receipt. 8. In view of the above observations, the Assessing Officer was of the opinion that the right to receive profit in a partnership firm is a capital asset under section 2(14) of the Act and relinquishment of the right to receive profit is a transfer within the definition of section 2(47) of the Act. Accordingly, the Assessing Officer treated the amount of Rs..2,38,63,452/- received from Elior India as income from short term capital gains and added to the total income of the assessee. On appeal, the CIT(A) confirmed the order of the Assessing ....
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....ontribution is towards goodwill and moreover there was no revaluation. To support his arguments, the ld. Counsel relied on the following case law: 1. CIT v. Kunnamkulam Mill Board 257 ITR 544 (Kerala) 2. CIT v. P.N. Panjawani 356 ITR 676 (Kar.) 3. ITO v. Smt. Paru D. Dave [2008] 110 ITD 410 (Mum.) 4. ITO v. Fine Developers [2013[] 55 SOT 122 5. Radhu Palace v. Addl. CIT 148 ITD 424 (Delhi) 12. He further argued that there is no legal requirement to obtain a valuation report between two unrelated parties when there is an agreement for the price. He argued that there is no element of transfer so as to attract the provision of section 2(47) of the Act and hence there cannot be any levy of tax on capital gain under section 45 of the Act on the event of introduction of a new partner. He has further submitted that even if the amount of Rs..2,38,63,452/- is considered as goodwill, the same cannot be treated as income in the hand of the assessee as a partner does not have any right over the assets of the firm when the firm is still in existence and at best, the said transaction could be envisaged under section 45(4) of the Act to tax in the hands of the firm and not in the hands....
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.... the orders of authorities below as well as case law relied by both the parties. The assessee is one of the partners in M/s. CRCL LLP with a 12% profit- sharing ratio. M/s. Elior India Catering LLP has been inducted into assessee's partnership firm as a partner with 51% stake by contributing Rs..31.75 crores into CRCL of which Rs..19.88 crores has been credited to the existing partners' current account in their respective sacrificing ratio. The assessee got 12% profit-sharing ratio before admission of Elior India as a partner in CRCL and the same has been reduced to 5.88% after induction of Elior India and Rs..2,38,63,452/- has been credited to the assessee's current account held in CRCL towards sacrificing profit share. The Assessing Officer erroneously held that the amount credited to the current account of the assessee is in the nature of goodwill on admission of new partner and treated the same as income chargeable to tax, which was confirmed by the CIT(A) on further appeal. 14. In this case, the contention of the ld. Counsel for the assessee is that no goodwill existed at the time of Elior India's investment in CRCL, making it impossible for the assessee to receive a share of....
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.... and equally in law, the firm as such has no separate rights on its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is properties or assets in which all the partners have a joint or common interest. Therefore, he was of the view that the ownership of the properties vest in all the partners of the firm and no partner of a firm has got any independent interest in respect of the assets of the firm. But at the same time, the firm as such has no will of its own although, it is an assessable entity under the provisions of the Act. Therefore, he was of the view that when the existing three partners having a share of 1/3rd each in the assets of the firm have relinquished their 50% share i.e., from 1/3rd to 16.67% in favour of the four new partners on account of which each of the three partners were able to a sum of in a capital gain accrued even though the firm continued after its reconstitution. Further, he held that the capital gains arising in the hands of the partners of the erstwhile firm computed on the basis of reduction in their respective shares consequent to the admission of the new partners has to be brought to t....
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....tion 14 of the Indian Partnership Act, 1932 deals with the property of the firm, which reads as under:- "14. The property of the firm - Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm." 9. The Apex Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 dealing with the concept of partnership held as under:- "The Whole concept of partnership is to embark upon a joint venture and in as capital money or even property including immovable property. Once that is done, whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share. The pe....
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....exist; then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division, or allotment of assets of the erstwhile partners, it not done by the dissolved firm." 11. The Apex Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W at pages 518, 519, 520 and 522 held as under:- "When a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately. It is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner's interest takes place only when there is a dissolution of the firm or upon his retirement from it. It has some times been said....
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....y the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal asset into the partnership firm as his contribution to its capital it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a business man would understand as real income or gain." 12. From the aforesaid judgments, it is clear that under the provisions of the Indian Partnership Act, 1932, the firm is not recognised as a legal entity. However, the Income Tax Act recognises the firm as a distinct legally assessable entity apart from its partners. This is clear from Sections 45(1), (3) and (4), of the Income Tax Act which reads as under: "45. [(1)] Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections [***] [54, [54B, [***], [54D, [54....
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....x as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as result of the transfer]" 13. Section 2(31) of the Income Tax Act defines 'person' as follows:- "person" includes- (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub- clauses; [Explanation - For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;]" 14. Therefore, from the aforesaid provisions, it is clear that in the context of the Income Tax Act, the identity of the firm....
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.... they did not transfer the capital assets. Insofar as arguments with regard to the reconstitution, their share got reduced and the amount which was withdrawn and partnership represents inducted partners along with erstwhile partners. As rightly pointed by the appellate authorities in the scheme of the Income Tax Act, there is no provision for levying capital gains on such consideration received for reduction of the share in the partnership firm. The provisions of Section 45(3) or 45(4) is not applicable to the facts of the case. Insofar as the contention that this is a colourable device adopted by the firm as well as the assessee's to avoid payment of tax is concerned, it has no substance because tax planning is legitimate. However, it has to be done within the frame work of law. 17. The partnership firm came into existence in the year 1962. It acquired property in the year 1967. It carried on business up to 1992-93 and returns were filed from time to time. It is only in the year 1995, revaluation was done, four new new partners inducted who brought in cash and the firm was not dissolved, the incoming partners did not retire from the firm and it only reduced their share in the pa....
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....) of section 47 has been expressly omitted removing the protective umbrella. The legislative intent is quite clear and this takes care of any situation where in effect there is transfer of a capital asset, by any mode and to ensure the gain being taxed." 21. In the aforesaid case, a reconstitution of the firm took place in July 1994 by addition of two partners to the firm, who brought in about Rs. 17 lakhs towards their capital contribution to the firm. Thereafter, again the firm was reconstituted with the erstwhile four partners retiring from the partnership and newly added partners remaining in the firm and continuing the firm. It is in that context, it was held that the series of transactions such as reconstitution of firm twice; once in July 1994, and again in December 1994 and entire assets retained in the hands of the newly added two partners, resulted in transfer of assets of the firm in the sense that the assets of the firm as had been held by the erstwhile partners were transferred to the newly added two partners though all along the assets of the firm continued in the hands of the firm. Therefore, it was held that there was transfer of capital assets within the meaning ....
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....o admission of new partners did not amount to a transfer of capital assets and was not taxable. Thus, the judgement of the Hon'ble Supreme Court relied on by the ld. DR has no application to facts of the present case, as well as the order of the Mumbai Benches in the case of Sudhakar M. Shetty v. ACIT 130 ITD 197, being on similar facts, has no application. Moreover, the reliance placed on record by the ld. DR in the case of B. Raghurama Prabhu Estate v. JCIT 335 ITR 394 (Karnataka) as well as judgement of Hon'ble Supreme Court in the case of Vatsala Shenoy v. JCIT reported in AIR 2016 SUPREME COURT 5299 [Civil Appeal No. 1234 of 2012 & Ors dated 18.10.2016] (partners of MGBW), in both partners' cases of same partnership firm, the erstwhile partnership firm MGBW has been winded up and the amount received by the outgoing partners has been treated as "transfer", chargeable to capital gain tax under section 45 of the Act. Thus, the case law relied on by the ld. DR has no application to the facts of the present case. Further, in the case of Samir Suryakant Sheth v. ACIT in ITA Nos. 2919 & 3092/Ahd/2002 dated 25.01.2012, the facts are entirely different, wherein, the newly admitted part....
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....eived from Elior India towards 51% of shares and consequent reduction in the share ratio of present partners does not entail any relinquishment of their rights in CRCL. On introduction of Elior India, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any, of CRCL LLP. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under section 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership firm and thus on realignment of profit-sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership firm's assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains arise on such relinquishment of share ratio in the partnership firm. 19. However, we find that....