CA Sandeep Kanoi
ACIT vs Shri N. Prasad (ITAT-Hyderabad)
Brief Facts :- Briefly the facts are, the assessee is an individual. For the impugned assessment year the assessee filed his return of income on 31-10-2006 declaring income of Rs.8,54,47,144/- During the scrutiny assessment proceeding it came to the notice of the Assessing Officer that the assessee during the previous year had retired as a partner from 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.
Held by CIT (A)
CIT (A) deleted the addition by holding that there is no ‘transfer’ when a partner received his share in the partnership business.
Held by ITAT
The Hon’ble Supreme Court in case of CIT vs. R. Lingamallu Raghu Kumar (supra) while considering the issue of excess amountreceived 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. Dynamic Enterprises (supra) while interpreting section 45(4) of the I T Act held that in case of distribution of capital assets on the dissolution of the firm, there is a transfer of capital asset by the firm in favour of the person and resulting profits or gains shall be chargeable to tax as the income of the firm. The larger bench further went on to hold that when cash representing the value of the share in the partnership is given to the retiring partners, no capital asset was transferred by the firm to the partner. The Hon’ble High Court held that to attract section 45(4) there should be a transfer of capital asset from the firm to the retiring partner by which the firm ceases to have any right in the property which is so transferred. In other words, its right to the property should stand extinguished and the retiring partner acquires absolute title to the property. If we apply the aforesaid tests to the facts of the present case, the assessee received a lump sum amount of Rs.1,25,000 from the partnership firm towards his share in the partnership. The partnership firm did not transfer any capital asset to the assessee to the extent by which the firm ceased to have any right in the property. In the present case, according to the Assessing Officer there is transfer of goodwill. The ITAT, Hyderabad Bench in case of Durdana Khatoon vs. ITO (supra) held that when a partner receives her/his share in the assets of the partnership firm or when he receives anything in excess of her/his share in the assets of the partnership firm and even in a case a partner receives a share of profit either in case of retirement or in case of dissolution, the same cannot be brought to tax in view of the decision of Hon’ble Supreme Court in case Tribhuvan Das G. Patel vs. CIT (236 ITR 515) and in case of CIT vs. R. Lingamallu Raghu Kumar (supra). While doing so, the Income-tax Appellate Tribunal, Hyderabad Bench also held that in view of the decisions of Hon’ble Supreme Court, judgments of Hon’ble Delhi High Court and Hon’ble Bombay High Court (supra) are not applicable.
That apart, a reading of clause 4 of the deed of retirement makes it clear that the amount of Rs.1.25 cores was paid to the assessee towards his share capital and not for relinquishing or extinguishing his rights over any assets of the firm. The term ‘goodwill,’ in our view has been loosely used in the aforesaid clause. Furthermore, a plain reading of the clause 4 will not in any manner indicate that payment of Rs.25 lakhs was towards transfer of goodwill as suggested by the Assessing Officer. Therefore, considering totality of facts and the circumstances of the case and applying the ratio laid down by the Hon’ble jurisdictional High Court in the case of Chalasani Venkatesara Rao (supra), which is binding on us, we are of the view that the order passed by the CIT (A) needs to be upheld. Accordingly, we dismiss the grounds raised by the department.