TaxTMI 
TaxTMI 
2025 (6) TMI 1400
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....against the sacrificing ratio on admission of 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 Assess....
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.... in, whether financially or otherwise, in Non-compete Business in any form or invest in. hold 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 inform....
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....eement between the partners it was decided that M/s. Elior India Catering LLP would have 51% stake in M/s. CRCL LLP. * That there was no valuation report to support the basis for 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 t....
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....reduced to that extent. The compensation for the same would, therefore, partake of the character of a capital receipt in the hands of the assessee. * It is now well-settled that when the shareholding of an assessee gets reduced in any partnership business, 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 sectio....
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....will upon reconstitution. By referring to the Investment Agreement dated 17.11.2016 as well as the Amended and Restated Agreement of LLP dated 02.02.2017, the ld. Counsel for the assessee has submitted that the said agreement does not specify that the income of partner's contribution 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 go....
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.... 1. Sudhakar M Shetty v. ACIT [2011] 130 ITD 197 (Mumbai) 2. Samir Suryakant Seth v. ACIT in ITA Nos. 2919 & 3092/Ahd/2002 dt. 25.01.2012. 3. B. Raghurama Prabhu Estate v. JCIT [2012] 20 taxmann.com 390 (Karnataka). 13. We have heard both the sides, perused the material available on record and gone through 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....
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....supra) has proceeded on the assumption that the partnership firm has no legal existence. The partnership property will vest in all the partners and in that sense, every partner has an interest in the property of the partnership. The partnership firm under the Indian Partnership Act 1932 is not a distinct legal entity apart from the partners constituting it 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 ....
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....of, or acquiring shares in, or co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation - For the purpose of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA;]" 8. Section 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 1....
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.... of the firm's rights in the partnership assets when distribution takes place upon dissolution. In order to attract S.34(3)(b) it is necessary that the sale or transfer of asset must be by the assessee to a person. Dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the Firm. Upon dissolution the firm ceases to 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 become....
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....the value of the share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by 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 judgme....
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....h such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax 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,....
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....ontinue to assets own, including. this, landed property. The erstwhile partners withdrew the money brought in by the incoming partners as drawings, They did not retire from the partnership firm. They continued to be the partners of the firm. However, their share got reduced. In other words, 50% of their share held before reconstitution became the share of the incoming partners. As the property was not owned by this erstwhile partners, it cannot be said they transferred 50% in favour of incoming partners and any amount represents the consideration received for such transfer and as such it is liable for payment of capital gains under Section 45 (1) of the Act. It is because 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 fact....
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....ch has not relinquished its interest in favour of the incoming partners. On the contrary, by inducting them, they are also entitled to interest in the said assets and therefore, the said judgment has no application to the facts of this case. 20. Further, reliance was placed on the judgment of this Court in the case of CIT v. Gurunath Talkies [2010] 328 ITR 59/189 Taxman 171, where it was held as follows: - "Section 47 of the Income-tax Act, 1961, was introduced to take out certain transactions which otherwise are transfers of capital assets and otherwise taxable under section 45, from being taxed. On the reintroduction of sub-sections (3) and (4) by the Finance Act, 1987 in section 45 clause (ii) 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,....
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....v. Mansukh Dyeing and Printing Mills 449 ITR 439 (SC). We have carefully gone through the above judgement of the Hon'ble Supreme Court and find that on admission of three new partners, their existing partners have retired and thereafter reconstituted the partnership firm, whereas, in the present case, on induction of new partner, erstwhile partners continued in the partnership firm along with new partner. In the case law relied on by the ld. Counsel for the assessee in the case of CIT v. P.N. Panjawani (supra), the Hon'ble High Court noted that the erstwhile partners in that case have not retired and they also continued to be the partners along with the income partners, thereby, held that reduction in the share of existing partners due to 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 Esta....
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....tax under section 45(1) of the Act. 18. In the case on hand, the asset of the partnership firm was revalued by the partners and the difference on account of revaluation of asset was credited to the partners' account. The revaluation of partnership firm's asset was anterior to the introduction of new partners. Thus, in view of our above discussions as well as judicial precedents, we are of the considered opinion that the revaluation of assets by CRCL does not attract capital gains. The revaluation of assets of CRCL and the credit of revalued amount to the capital account of partners in their respective share ratio does not entail any transfer as defined under section 2(47) of the Act. The induction of Elior India to CRCL and the amount received 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 ch....