Case Law Details

Case Name : Income-tax Officer Vs Shri Rajnish M Bhandari (ITAT Pune)
Appeal Number : ITA No. 469/PN/11
Date of Judgement/Order : 17/07/2012
Related Assessment Year : 2007- 08
Courts : All ITAT (4773) ITAT Pune (138)

The issue raised by the Revenue in this appeal is as to whether the amount of Rs 54,59,083/- received by the assessee on retirement from the partnership firm is liable to be taxed as long term capital gain arising on transfer of partnership rights.

Hon’ble Supreme court in the case of Mohanbhai Pamabhai (supra) following its judgment in the case of Sunil Siddharthbhai v. CIT 156 ITR 509 (SC) held that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain under section 45 of the Act.

Hon’ble Bombay High Court in the case of Prashant S Joshi (supra) has also noted the omission of section 47(ii) of the Act and insertion of section 45(4) of the Act with effect from 1.4.1988. Considering the entirety of the legal position, it has been affirmed by the Hon’ble High Court that amounts received by the partner on his retirement, are exempt from capital gains tax.

INCOME TAX APPELLATE TRIBUNAL , PUNE

BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND

SHRI R.S. PADVEKAR, JUDICIAL MEMBER

ITA No. 469/PN/11, (Asstt. Year: 2007-08)

Income-tax Officer

Vs.

Shri Rajnish M Bhandari

Date of pronouncement : 17.07.2012

ORDER

PER G.S. PANNU, A.M.:

This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-II, Pune dated 18.1.2011 which, in turn, has arisen from the order dated 31.12.2009 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961, (in short “the Act”), pertaining to the assessment year 2007-08.

2. The issue raised by the Revenue in this appeal is as to whether the amount of Rs 54,59,083/- received by the assessee on retirement from the partnership firm is liable to be taxed as long term capital gain arising on transfer of partnership rights. The facts, in brief, are that the assessee, a partner in various partnership firms , retired from the partnership firm M/s Raviraj Associates w.e.f. 31.3.2007, relevant to the assessment year 2007-08, vide deed of retirement of the same date. He was a partner to the extent of 37.5% of the shares and was paid Rs 54,59,083/- over and above the balance in his capital account. The assessee claimed this amount as capital receipts not liable to tax. The Assessing Officer, however, taxed the said amount as   long term capital gain. The Assessing Officer derived support from a decision of the Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta v. ITPO 83 TTJ 542 (Pune). The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals).

3. Before the Commissioner of Income-tax (Appeals), assessee relied on a subsequent decision of our co-ordinate Bench in the case of Mr Riyaz A Shaikh v. ITO vide ITA No 352/PN/06 dated 29.10.2010, wherein the Tribunal held that amounts received by the partner on his retirement are exempt from capital gains tax. The Commissioner of Income-tax (Appeals) has since deleted the impugned addition and against this decision, the Revenue is in appeal before us.

4. The learned departmental Representative supported the order of the Assessing Officer. According to the learned Departmental Representative, the additional consideration received by the assessee was on account of relinquishment of his pre-existing rights in the partnership firm, and therefore, the same was in the nature of capital gain liable to tax as per the provisions of sections 45 read with section 2(47)(i) & (ii) of the Act.

5. On the other hand, the learned Counsel for the respondent- assessee defended the order of the Commissioner of Income-tax (Appeals) and filed a copy of the order of our co-ordinate Bench in the case of Mr Riyaz A Shaikh (supra) in support of the stand of the assessee.

6. We have carefully considered the rival contentions. We find that the Commissioner of Income-tax (Appeals) has decided the issue in favour of the assessee by following the order of our co-ordinate Bench in the case of Mr Riyaz A Shaikh (supra), wherein on identical issue, the Tribunal has held as under:

“We have carefully considered the rival submissions and perused the orders of the authorities below. As noted earlier, the short point involved in this appeal relates to tax ability of amount received by the assessee on retirement from partnership firm. The   Hon’ble Supreme court in the case of Mohanbhai Pamabhai (supra) following its judgment in the case of Sunil Siddharthbhai v. CIT 156 ITR 509 (SC) held that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain under section 45 of the Act. The judgment of the Hon’ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) reported t 91 ITR 393 (Guj) was affirmed. Subsequently, in the case of CIT v R Lingmallu Raghukumar, 247 ITR 801 (SC), the Supreme Court held, while affirming the principle laid down in the case of Mohanbhai Pamabhai (supra) that when a partner retires from the partnership firm and the amount of his share in net partnership assets after deduction of liabilities is determined, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners and the amount received by the retiring partner is not ‘capital gain’ under section 45 of the Act. Further, the learned counsel for the appellant has correctly pointed out that the decision of the Hon’ble Bombay High Court in Tribhuvandas G Patil (supra) followed in the case of N A Mody (supra) has been reversed by the Hon’ble Supreme court in the case of Tribhuvandas G Patel reported in 236 ITR 515 (SC) on this aspect of the matter. In fact, the Hon’ble Bombay High Court in a recent decision in the case of Prashant S Joshi (supra) has noted the aforesaid legal position. In this circumstances the reliance placed by the authorities below on the judgment of the Hon’ble Bombay High Court in the case of Prashant S Joshi (supra) has also noted the omission of section 47(ii) of the Act and insertion of section 45(4) of the Act with effect from 1.4.1988. Considering the entirety of the legal position, it has been affirmed by the Hon’ble High Court that amounts received by the partner on his retirement, are exempt from capital gains tax. In this view of the matter, we find it appropriate to allow the claim of the assessee and accordingly the order of the CIT(A) is set aside. The AO is directed to delete the impugned addition. Thus, in Ground Nos 2 & 3, assessee succeeds as above.”

Therefore, we do not find any error in the order of the Commissioner of Income-tax (Appeals) and accordingly, affirm his order. The revenue fails on this Ground of appeal.

7. In the result, the appeal of the Revenue fails and is dismissed.

Decision pronounced in the open Court on 17th day of July 2012.

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0 responses to “Amount received by partner on retirement is exempt from capital gains tax”

  1. mukesh shah says:

    Good articles and decesions but what is the position as on today

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