Ashwin Jain v. The Income-tax Officer, Ward 6(3), Hyderabad Now ITO, Ward-14(2), Hyderabad
[Citation -2016-LL-0914-17]

Citation 2016-LL-0914-17
Appellant Name Ashwin Jain
Respondent Name The Income-tax Officer, Ward 6(3), Hyderabad Now ITO, Ward-14(2), Hyderabad
Court ITAT-Hyderabad
Relevant Act Income-tax
Date of Order 14/09/2016
Assessment Year 2008-09
Judgment View Judgment
Keyword Tags distribution of capital asset • income from other source • acquisition of goodwill • computing capital gain • capital contribution • cost of acquisition • accumulated income • sale consideration • deed of retirement • fair market value • share in goodwill • value of goodwill • capital gain tax • intangible asset • capital receipt • share capital • future date • trade mark
Bot Summary: During the year under consideration, the assessee had retired from the partnership firm of M/s. S.R. Batliboi Co. Upon his retirement, he was paid, inter al ia, a sum of Rs.22,56,250/- in lieu of the goodwill from the said firm and the same was claimed to be exempt by the assessee from tax being in the nature of capital receipt. 31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. the Firm and that none of the partnership would have any right , t i t le or interest in goodwill of the Firm of whatsoever nature. Sec.10(2A) of the Act invoked by the appellant cannot help him as said sect ion deals with share of a partner in the total income of the firm and not share of goodwill of the firm. Sub-section 4 of this section deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital asset on dissolution or otherwise of a firm, and brings to tax the capital gains in the hands of the firm. The goodwill belonged to the firm and continued to remain with the firm. In the instant case, it is not disputed that the said firms were having self generated goodwill which was valued by them during the present assessment year There has been no transfer of such goodwill by the said firms. In lieu of goodwill from the firm by the partner is casual receipt in the nature of income which is not taxable in the hands of the firm.


IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.No.31/Hyd/2016 Assessment Year 2008-2009 Mr. Ashwin Jain, Income Tax Officer, Hyderabad 34. vs. Ward 6(3), Hyderabad Now PAN ADTPJ4485C ITO, Ward-14(2), Hyderabad. (Appellant) (Respondent) For Assessee : Mr. Laxminivas Sharma For Revenue : Mr. A. Sitarama Rao Date of Hearing : 30.08.2016 Date of Pronouncement : 14.09.2016 ORDER PER SMT. P. MADHAVI DEVI, J.M. This is assessees appeal for A.Y. 2008-09. In this appeal, assessee is aggrieved by order of CIT(A) in sustaining addition of Rs.5,79,990 towards goodwill received at time of retirement from partnership firm. According to Learned Counsel for assessee, it does not come into purview of capital gain, as it is capital receipt, and there is no transfer of any asset as contemplated by expression transfer as defined in section 2(47) of I.T. Act, 1961. 2. Brief facts of case are that assessee, individual, filed his return of income for relevant assessment year on 19.11.2008 declaring income of Rs.3,62,183. During assessment proceedings under section 143(3) of Act, Assessing Officer observed that assessee has retired from 2 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. firm, Serinity Work Space, and at time of retirement, assessee has received goodwill of Rs.5,79,990. He observed that where outgoing partners of firm surrendered their rights in firm in consideration of amount paid to them by firm, there is transfer of capital asset and resultant capital gain is liable to tax as capital gain in hands of each partner. Further, he also observed that in case of assessee sum of Rs.5,79,990 is paid in lieu of share of goodwill on retirement of partner and therefore, according to him, it amounts to transfer and is liable to capital gains tax since his right in firm is capital asset and extinguishment of such right in firm is transfer . Accordingly, he brought it to tax as short term capital gain under section 45 of I.T. Act, 1961. 3. Aggrieved, assessee preferred appeal before CIT(A) who confirmed order of Assessing Officer and assessee is in second appeal before us. 4. Learned Counsel for assessee for assessee, while reiterating submissions made by assessee before authorities below, has drawn our attention to various decisions of Coordinate Benches of this Tribunal, wherein under similar circumstances it has been held that goodwill received on retirement from partnership firm is not chargeable to tax, as it is capital receipt. 5. Ld. D.R. however, supported orders of authorities below. 6. Having regard to rival contentions and material on record, we find that Coordinate Bench of this 3 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. Tribunal at Kolkata in case of Ajay K. Doshi in ITA.No.1866/Kol/2012 for A.Y. 2003-2004, vide orders dated 11th December, 2015, has considered issue at length and taking into consideration of decisions of various High Courts on issue, has held as under : 8. During year under consideration, assessee had retired from partnership firm of M/s. S.R. Batliboi & Co. Upon his retirement, he was paid, inter al ia, sum of Rs.22,56,250/- in lieu of goodwill from said firm and same was claimed to be exempt by assessee from tax being in nature of capital receipt. claim made by assessee in this regard was that said amount could not be taxed even as capital gains since there was no transfer of goodwill . This claim of assessee was not accepted by Assessing Officer and sum of Rs.22,56,250/- received by assessee as his share of goodwill from M/s. S.R. Batliboi & Company on his retirement was brought to tax by Assessing Officer in hands of assessee under head income from other sources for following reasons given in paragraph no. 5.1 of assessment order :- 5.1. firm created goodwill and apportioned same amongst partners and credited value of goodwill to accounts of partners according to profit sharing ratio. On creation of goodwill , i t does not ipso facto become any income in hands of firm but value of goodwill depends on reputation and quantum of income generated/earned in post. Therefore, when i t is paid to partner on retirement, partner's share in profit and loss ratio assumes character of distribution of firm' s accumulated income in form of goodwill which was not taxed in firm's hands. money received from firm by partner on account of his capital is capital receipt because what is received by partner is his own capital which 4 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. was either contributed by him or was out of accumulation of profit subjected to tax. But when it is received on account of goodwill, it is not his capital contribution or out of income accumulation subjected to tax in firm's hands . As he receives any money in lieu of goodwill, said money becomes his income as he gets it by virtue of his being partner and in exercise of his profession. Moreover, any income has to be taxed either in hands of earner or receiver of income in beneficial capacity. Therefore, I do not agree with assessee's contention that his share in goodwill received on retirement is capital receipt, rather it is casual receipt in nature of income which was not taxed in hands of firm. Moreover, this receipt is not liable to be taxed under any of heads from to E of section 14 of Act . In view of opening sentence of sect ion 56 of Act , such receipt of income is liable to be taxed as income from other sources. Accordingly, I treat assessee s share of goodwill of Rs .22,56,250/- as income from other sources and include same in assessee s total income . 9. On appeal , ld. CIT(Appeals) confirmed said addition made by Assessing Officer after recording following observations in paragraph no. 6 of his impugned order :- 6.1. I have considered A.O.'s findings as well as submissions made by appellant carefully including number of case laws cited in written submission. Goodwill though not defined in I.T. Act, 1961 (the Act) i t is capital as set for purpose of computing capital gain as is clear from section 55(2)(a) of Act which provides for cost of acquisition of Goodwill trade mark etc. for purpose of computation of capital gain. In present case it is admitted fact that terms of partnership of M/s.S.R. Batliboi & Co. (the Firm) there is provision since inception that Goodwill, if any, of Firm shall always belong to 5 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. Firm and that none of partnership would have any right , t i t le or interest in goodwill of Firm of whatsoever nature. Inspite of this term, during year under appeal firm created goodwill as asset in its books by debiting to Goodwill Account and crediting to account s of then partners in their profit sharing ratio. Accordingly in previous year ended on 31-03-2003 Firm credited Rs.22,56,250/- to accounts of appellant on account of goodwill apart from other credits on account of interest on capital and share of profit. Out of total credit appellant withdraw Rs.2,41,71,614/- overdrawing by Rs.7,32,237/-. Thus credit in appellant 's account is for goodwill Rs.22,56,250/- of Firm which is clearly liable to be taxed as capital gain. Here, issue may be raised that goodwill so created by Firm in its books will be/ can be sold by firm only as appellant has not sold goodwill to anyone. But Firm on sale of goodwill at future date will claim deduct ion against sale consideration as cost of acquisition total amount credited to all partners as goodwill during year under reference and can avoid payment of capital gain tax substantially, in terms of sect ion 55(2)(a)(i) of Act. Sec.10(2A) of Act invoked by appellant cannot help him as said sect ion deals with share of partner in total income of firm and not share of goodwill of firm. In appellant's case he is being credited his share in goodwill which credit goes in creation of goodwill in Firm's assets. In such case provisions of section 55(2)(a)(i) which provides that in cases where there is no purchase of goodwill cost of acquisition will be considered as "nil" as appellant has not purchased goodwill which is covered by sub-clause (i) of clause (a) of section 55(2). In view of above no intervention is called for in A.O.'s action except that in place of income from other source it is to be taxed as long term capital gain as amount is for goodwill received by appellant from Firm . 6 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. 10. We have heard arguments of both sides on this issue and also perused relevant material available on record. As agreed by ld. Representatives of both sides, this issue involved in Ground No. 2 of assessee s appeal is squarely covered in favour of assessee by various judicial pronouncements including decisions of Coordinate Benches of this Tribunal . In one such decision rendered in case of Shri Amitabh Singh (ITA No. 1996/DEL/2006), Hon ble Delhi Bench of this Tribunal decided similar issue in favour of assessee in identical facts and circumstances for following reasons given in paragraph no. 5 of its order : - 5. We have considered facts of case and rival contentions. revenue s case is primarily based on provision contained in section 55(2) under which cost of goodwill has to be taken as nil if it has not been purchased from previous owner. Such is case here nonetheless, this cost is for purpose of sect ions 48 and 49, which deal with mode of computation of income chargeable under head capital gains. Before coming to mode of computation, it has to be seen whether any amount is chargeable to capital gains tax u/s 45, which is charging sect ion. ld. DR was not able to explain how provisions of section 45 were applicable in instant case. Sub-section 4 of this section deals with profits or gains arising from transfer of capital asset by way of distribution of capital asset on dissolution or otherwise of firm, and brings to tax capital gains in hands of firm. However, we are dealing with case of partner here. firm acquired good will over period of time, which was brought into books and distributed amongst existing partners before new partners were taken in and some existing partners retired. asset of firm already existed and it was quantified and credited to accounts of existing partners. Similarly, when assessee retired from firm, he did not transfer any goodwill to 7 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. firm as he did not have any individual goodwill. goodwill belonged to firm and continued to remain with firm. As clarified by ld. Counsel, nothing was charged from incoming partners by way of goodwill and, thus, there is no question of even indirect realization of value of goodwill by assessee from incoming partner through firm. In number of cases, referred to above, it has been held that what partner get s at time of retirement is nothing but his own share in as sets of firm. In such scenario, there cannot be any transfer of asset and such has been decision of Hon'ble Supreme Court in case of Mohanbhai Pamabhai and Tribhuvandas G. Patel (supra). fact is that provision corresponding to sub-sect ion (3) regarding levy of capital gain tax when partner brings in capital as set to firm does not exist on statute book in case of retirement of partner and, thus, general provisions of law, namely. that what he takes is his share in asset s of firm continues to apply with exception that under sub-section (4) , when capital asset is distributed to partner on dissolution of firm or on his retirement at less than fair market value, then, firm becomes liable to pay capital gains tax. Such is not case here, as we are dealing with case of partner. Therefore, we concur with ld. CIT(Appeals) that nothing was taxable in hands of assessee . 12. Coordinate Bench of Tribunal at Kolkata also had occasion to consider similar issue in case of Nawshir H. Mirza, wherein case of assessee for exemption on account of share of goodwill received on retirement was held to be capital receipt not chargeable to tax by Tribunal for fol lowing reasons given in its order dated 11.01.2008 passed in ITA No.1252/KOL/2007:- 9. We have considered facts of case and rival contentions and are of view that 8 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. order of ld. CIT(A) needs to be upheld and does not cal l for any interference. In instant case, it is not disputed that said firms were having self generated goodwill which was valued by them during present assessment year There has been no transfer of such goodwill by said firms. firms still own and hold such goodwill and assessee who has retired has no interest of any nature whatsoever therein. revenue's case is primarily based on view that money received. in lieu of goodwill from firm by partner is casual receipt in nature of income which is not taxable in hands of firm. What partners got at time of retirement including amount credited for goodwill of firms is capital receipt in their hands . partners did not own goodwill nor did they transfer same. goodwill all along remained with firm as its asset even after retirement of partners. What partners got on retirement was for value of their interest in firm. This view is duly supported by various decision cited by Ld. Authorised Representative including decision of Apex Court in case of Sunil Siddharthhbhai vs. CIT (supra) . 9.1. In instant case, firms have not realized any amount on account of goodwill hence question of any assessment being made in their hands does not arise. notional valuation of goodwill in its accounts by firm does not result in any transfer which can attract capital gains as has also been clarified by Board in its Circular No.495 dated September 27, 1987. Even amendment made in Sect ion 55(2) of Act is of no help to case of Department in view of clarification made by Board. We fail to appreciate how amount could be assessed in hands of partners and that too under head " Income from other sources. Goodwill is intangible asset and transfer/ 9 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. surrender of which would at tract Sect ion 45 so that value received would be capital receipt and assessable if at all only under item 'E' of Section 14. It cannot be treated as casual receipt and be subjected to tax under Section 56. argument that even if income cannot be chargeable u/s. 45, because of inapplicability of computation provided u/s. 48, it could still impose tax under residuary head is thus unacceptable. If income cannot be taxed u/s. 45, it cannot be taxed at al l as has been held in case of S.G. Mercantile Corporation (P) Ltd. vs. CIT [1972] 83 ITR 700 (SC) . 13. As issue involved in present case as well as all material facts relevant thereto are similar to cases of Shri Amitabh Singh (supra) and Nawshir H. Mirza (supra) decided by Coordinate benches of this Tribunal, we respectfully follow decision rendered in said cases to hold that amount in question received by assessee as his share of goodwill on retirement from firm is not chargeable to tax being capital receipt. addition made by Assessing Officer and confirmed by ld. CIT(Appeals) on this issue is accordingly deleted. Ground No. 2 is accordingly allowed. 6.1. Similar issue was also decided by Coordinate Bench of this Tribunal at Hyderabad in ITA.No.1200/Hyd/2010 in case of ACIT, Circle-16(2), Hyderabad vs. Mr. N. Prasad, Executive Chairman, Secunderabad in ITA.No.1200/Hyd/2010 dated 27.01.2014 to which one of us i.e., Accountant Member is signatory, wherein it was held as under : 17. However, it appears decision of Income-tax Appellate Tribunal, Hyderabad Bench in case of Doordana Khatoon vs. ITO (supra) was not placed before Bench. That besides aforesaid decision of Income-tax Appellate Tribunal in case of Smt. Girija Reddy was prior to judgment of Hon ble jurisdictional High Court in case of Chalasani Venkateswara Rao vs. ITO (supra). That apart, 10 ITA.No.31/Hyd/2015 Mr. Ashwin Jain, Hyderabad. reading of clause 4 of deed of retirement makes it clear that amount of Rs.1.25 cores was paid to assessee towards his share capital and not for relinquishing or extinguishing his rights over any assets of firm. term goodwill, in our view has been loosely used in aforesaid clause. Furthermore, plain reading of clause 4 will not in any manner indicate that payment of Rs.25 lakhs was towards transfer of goodwill as suggested by Assessing Officer. Therefore, considering totality of facts and circumstances of case and applying ratio laid down by Hon ble jurisdictional High Court in case of Chalasani Venkatesara Rao (supra), which is binding on us, we are of view that order passed by CIT (A) needs to be upheld. Accordingly, we dismiss grounds raised by department. 6.2. Respectfully following decisions of Coordinate Bench on similar issue, we allow assessee s appeal and direct Assessing Officer to delete addition on account of which impugned sum being capital receipt. 7. In result, assessees appeal is allowed. Order pronounced in open Court on 14.09.2016 Sd/- Sd/- (B. RAMAKOTAIAH) (SMT. P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated 14 th September, 2016 VBP/- Copy to 1. Mr. Ashwin Jain, H.No.8-2-268/S/91/A-2, Sagar Co-op Society, Road No.2, Banjara Hills, Hyderabad 34. 2. Income Tax Officer, Ward 6(3), Now ITO, Ward- 14(2), Hyderabad. 3. CIT(A)-VI, Hyderabad. 4. Pr. CIT-6, Hyderabad. 4. D.R. ITAT Bench, Hyderabad 5. Guard File Ashwin Jain v. Income-tax Officer, Ward 6(3), Hyderabad Now ITO, Ward-14(2), Hyderabad
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