Gokulakrishna Vs DCIT (ITAT Chennai)
The solitary issue is with regard to confirmation of addition made under short term capital gain on the amounts credited to the partners’ current account as a consideration against the sacrificing ratio on admission of new partner.
Assessee is one of the partners in CRCL, a Limited Liability Partnership (LLP). Consequent upon induction of Elior India(EI) as a partner with 51% stake by contributing ₹.31.75 crores into CRCL of which ₹.19.88 crores has been credited to the existing partners’ current account in their respective sacrificing ratio in AY 2017-18. Assessee got 12% profit-sharing ratio before admission of EI as a partner in CRCL & the same has been reduced to 5.88% after induction of EI & ₹.2,38,63,452/- has been credited to the assessee’s current account held in CRCL towards sacrificing profit share.
AO held that the amount credited to the current account of the assessee is in the nature of goodwill on admission of new partner & treated the same as income chargeable to tax.
Before the Tribunal, assessee argued that the assets belonging to CRCL are not transferred from the assessee on account of admission of a new partner as the assets continue to be held by the CRCL & no partner has got any independent or specific interest in respect of the assets of the firm. Assessee’s share in the partnership firm’s assets of CRCL, inter alia, goodwill would be crystallized only on dissolution of the LLP of retirement of the assessee & in the event of admission of Eliar India, the goodwill did not exist. Thus, the assumption of AO that the credited amount represents goodwill does not hold good. Further the reconstitution agreement indicates that none of the existing partners retired or there was any distribution of assets, thereby, the credit amount represents goodwill is not correct. The relationship between partners is governed by sec 23 of the LLP Act, 2008, which allows parties to agree on mutual rights & duties without requiring the determination of goodwill upon reconstitution. By referring to the Investment Agreement & the Amended & Restated Agreement of LLP , assessee submitted that the said agreement does not specify that the income of partner’s contribution is towards goodwill & moreover there was no revaluation. There is no legal requirement to obtain a valuation report between two unrelated parties when there is an agreement for the price. There is no element of transfer so as to attract the provision of sec 2(47) & hence there cannot be any levy of tax on capital gain u/s 45 on the event of introduction of a new partner. Even if the amount of ₹.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 & at best, the said transaction could be envisaged u/s 45(4) to tax in the hands of the firm & not in the hands of the partners of the firm.
