Disputes arose between the partners of a partnership firm and as a result of which the assessee retired from the firm. On retirement, the assessee received a certain amount in respect of his share in the partnership including his proportionate share in the value of the goodwill which constituted an asset of the partnership\u00a0 and thus, liable to be taken\u00a0 into account in determining the share of each assessee\u00a0\u00a0 in the partnership on the date of retirement.<\/p>\n
The ITO held that the amount received by the assessee to the extent it included\u00a0\u00a0 his proportionate share in the value of the goodwill represented capital gains chargeable to tax under section 45. This was confirmed by the\u00a0 Commissioner.\u00a0 The Tribunal however held that goodwill was a self-created asset, which had\u00a0 cost nothing to the firm and its partners and a \u201ctransfer\u201d of it was, therefore, not within the ambit section 45.<\/p>\n
The High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj) (HC)\u00a0 <\/em><\/strong>held that when, a partner retires, what he receives is his share in\u00a0 partnership and not any consideration for transfer of his interest in partnership to continuing partners and therefore, there is no transfer of interest in the partnership assets involved within the meaning of section 2(47). Accordingly, the High Court held that no part of the amount received by any assessee in respect of his share in the value of the goodwill could be regarded ascapital gain chargeable to tax.<\/p>\n \u00a0<\/p>\n Whether the amount received by a partner from the partnership on retirement by way of his share in the goodwill of the firm was liable to be assessed to tax as capital gains?<\/p>\n \u00a0<\/p>\n Interest of a partner in\u00a0 the partnership is\u00a0 not interest in\u00a0 any specific item of the partnership property, rather, it is a right to obtain his share of profits from\u00a0\u00a0 time to time during the subsistence of the\u00a0 partnership and\u00a0 on\u00a0 dissolution of the partnership or his retirement from the partnership, to get the value of his\u00a0 share in the net partnership assets which remain after satisfying the debts and liabilities ofthe partnership. When, therefore, a partner retires from a partnership<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n and amount of his share in net partnership assets after deduction of\u00a0 liabilities\u00a0 and prior charges is determined on taking accounts on footing of notional sale of partnership assets and given to him, what he receives is his share in partnership and not any consideration for transfer of his interest in partnership to continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners. It is true that section 2(47) defines \u201ctransfer\u201d in relation to a capital asset and this definition\u00a0 gives an artificially extended meaning to the term \u201ctransfer\u201d by including within\u00a0 its scope and ambit two kinds of transactions which would not ordinarily constitute \u201ctransfer\u201d in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But,\u00a0 even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership. Therefore, even if goodwill is assumed to be capital asset within the chargingprovision enacted in section 45, there is no transfer of interest of any assessee in the goodwill within the meaning of section 2(47) when the assessee retired from the firm.<\/p>\n \u00a0<\/p>\n The Supreme Court dismissed the appeal of the Revenue having regard to the view taken by it in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. <\/em><\/strong>The order of the High Court stood. (AY.1963-64) (CA Nos. 1856 to 1859 of 1973 dt. 12-2-1987.<\/p>\n Editorial: <\/em><\/strong>Followed in CIT v. R. Lingmallu Raghukumar (2001) 247 ITR 801 (SC)<\/em><\/strong><\/p>\n Ratio is applicable even after the introduction of provision of section 45(4) unless any asset belonging to the firm is allotted to the retiring partner. See CIT v. Dynamic Enterprises (2013) 359 ITR 83 (Karn) (HC) (FB), PCIT v. Electroplast Engineers (2019) 263 Taxman 120 (Bom) (HC).<\/em><\/strong><\/p>\n \u201cThere is nothing that wastes the body like worry, and one who has any faith in God should be ashamed to worry about anything whatsoever.\u201d<\/em><\/p>\n – Mahatma Gandhi<\/p>\n \u00a0<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" S. 45: Capital gains \u2013 Retirement of a partner \u2013 Amount received in respect of his share in the partnership including goodwill \u2013 Amount not taxable as capital gains [S. 2(14), 2(47) ,48]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13347","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3th","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13347","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13347"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13347\/revisions"}],"predecessor-version":[{"id":13348,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13347\/revisions\/13348"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13347"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13347"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13347"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Issue<\/h3>\n
View<\/h3>\n
Held<\/h3>\n
and Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC)<\/h4>\n