Savitri Kadur Vs DCIT (ITAT Bangalore)
Conclusion: When the partnership firm paid lump-sum amount to retiring partner, it was paid in consideration of her retirement in the partnership and assignment of her interest to other partners, the transaction would amount to transfer u/s 2(47) and liable to tax excess amount over partner’s capital account under the provisions of Sec 45.
Held: In the present case, on retirement, assessee gave up all her rights as partner of the firm and its assets nor was the assessee liable to pay any of its liabilities. The capital account of Assessee as on 1.4.2006 showed an opening balance of Rs.1,64,14,044. Profit for the year of Rs.46,20,591 was credited to his account. Similarly on revaluation of the land and building on 15.1.2007, a sum of Rs.53,26,462 and Rs.9,24,650 respectively was credited to her account. Another sum of Rs.18,12,528 was also credited as interest on capital in her capital account. After reducing the Partner’s drawing and other payments made the balance to the credit of assessee’s capital account was Rs.2,77,88,200/-. The difference between the sum of Rs.3,39,50,000 and the sum of Rs.2,77,88,200 viz., a sum of Rs.61,61,800 was taxed as capital gain by AO. AO held that when the partnership firm paid lump-sum amount to retiring partner, it was paid in consideration of her retirement in the partnership and assignment of her interest to other partners, the transaction would amount to transfer u/s 2(47) and liable to tax under the provisions of Sec 45. Since assessee had also invested Rs.50,00,000/- in Rural Electrification Corporation Ltd under the provisions of Sec 54 EC, therefore, the capital gains was worked out as under. (61,61,800/- (-) 5000000/- = 11,61,800/-). It was held the action of the revenue authorities in taxing the excess paid over and above the sum standing to the credit of the capital account of the assessee as capital gain was justified. However, the computation of the capital gain had been modified by treating value of goodwill also as part of the credit in the partners capital account. Consequently, the capital gain in question was less than Rs.50 lacs and since assessee had been allowed exemption u/s.54EC to the extent of Rs.50 lacs, no capital gain was exigible to tax.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal by the by the assessee against order dated 4/8/2016 of CIT, Bengaluru-2, Bengaluru relating to asst. year 2008-09.
2. The only issue that arises for consideration in this appeal is as to whether the Revenue authorities were justified in treating sum of Rs.11,61,800/- as capital gains chargeable to tax which sum was received by the assesee on his retirement from a partnership firm by name M/s PSI Hydraulics.
3. The facts and circumstances under which aforesaid issue arises for consideration are that the Assessee and one D.Venkatesh formed a Partnershi by a deed of partnership dated 1.4.2004. Miss.Suvidha Venkatesh, D/O.D.Venkatesh was inducted as partner in the firm w.e.f. 1.4.2007. On 8.6.2007 an MOU was signed by the three partners and it was agreed that the Assessee would retire from the firm w.e.f. 1.4.2007 and a sum of Rs.339.50 lakhs would be paid to the Assessee. On 9.6.2007 deed of retirement was signed. The Assessee gave up all her rights as partner of the firm and its assets nor was the Assessee liable to pay any of its liabilities. The capital account of the Assessee as on 1.4.2006 showed an opening balance of Rs.1,64,14,044. Profit for the year of Rs.46,20,591 was credited to his account. Similarly on revaluation of the land and building on 15.1.2007, a sum of Rs.53,26,462 and Rs.9,24,650 respectively was credited to her account. Another sum of Rs.18,12,528 was also credited as interest on capital in her capital account. After reducing the Partner’s drawing and other payments made the balance to the credit of Assessee’s capital account was Rs.2,77,88,200/-. The difference between the sum of Rs.3,39,50,000 and the sum of Rs.2,77,88,200 viz., a sum of Rs.61,61,800 was taxed as capital gain by the AO. The Assessee had invested a sum of Rs.50 lacs in specified bonds and therefore the AO allowed deduction upto Rs.50 lacs and brought to tax Rs.11,61,800/- as Long term capital gain. The AO was of the view that sum of Rs.61,61,800/- was liable to be taxed as capital gain for the following Reasons:-
“The amount received from the erstwhile firm is nothing but Goodwill which attracts liability of Capital Gains u/s 45.Amount paid to the retiring partner towards goodwill would represent amount paid for her giving up of her right in existing goodwill of the firm and the existing goodwill is, by and large self generated. Further, the assessee has also extinguished her right to claim any share in the fixed assets of the partnership firm. The overall effect of the consent terms(MOU) is that, they provide for the retirement of the assessee from the partnership by way of compensation. There is, in the consent terms (MOU) a clause providing for the assignment of the assessees’ share in the partnership to the continuing partners. Thus, there was a transfer by the assessee within the meaning of Section 2(47) and the liability to Capital Gains exists. When the partnership firm paid lump-sum amount to the retiring partner, it is paid in consideration of her retirement in the partnership and assignment of her interest to other partners, the transaction would amount to transfer u/s 2(47) of the IT Act. Referring to the MOU, it was held that there was a transfer and hence liable to tax under the provisions of Sec 45 of the IT Act. The judicial pronouncements stated above would support the taxability of Goodwill under the provisions of Sec 45 of the IT Act.
However, the assessee had also invested Rs.50,00,000/- in Rural Electrification Corporation Ltd under the provisions of Sec 54 EC as an abundant caution for claiming exemption u/s 54EC. After considering the investment of Rs. 50,00,000/- the Capital Gains is worked out as under. (61,61,800/- (-) 5000000/- = 11,61,800/-)”
4. Accordingly the AO brought to tax a sum of Rs.11,61,800/- as chargeable capital gains.
5. Aggrieved by the aforesaid order of the AO, assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee relied on the decision of the Hon’ble Supreme Court in the case of ACIT Vs. Mohanbhai Pamabhai 165 ITR 166 for the proposition that the amount received by a partner on his retirement from a firm is his share in the partnership firm and not for consideration in transfer of his inters in the partnership to the other partners. There was no transfer of interest in assets of the partnership firm in terms of the definition of the term transfer u/s 2(47) of the Act. Therefore there was no capital gain that could be brought to tax in the hands of the assessee. Before CIT(A) assesee also gave a breakup of his payments made to the assesee which was as follows:-
