Recently Honourable High Court of Bombay in the case of "CIT vs. Riyaz A. Sheikh (Bombay High Court)" (for full case law click here) held that amount received by partner on his retirement is not chargeable to tax as capital gains.
In the case, Assesse (partner of the firm) received Rs. 66 lakhs over and above his capital contribution on his retirement from the firm. For which, Assessing Officer held that the retirement had resulted in a relinquishment of his pre-existing rights in the partnership firm and, therefore, the same was in the nature of capital gain on transfer of goodwill and liable to tax under s. 45 read with s. 2(47)(i) & (ii) of the Act, however Assessee understood & claimed that this is the capital receipt thus not chargeable to tax.
Appellate Authorities reversed the Assessing Officer order on the ground that when a partner retires from the firm and receives 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 u/s 45 of the Act.
In consequence of the ITAT order , department approached to the Hon’ble High Court and court held that amounts received on retirement by a partner is not subject to capital gains tax.
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Resource:- (1) INCOME TAX APPEAL NO.1969 OF 2011
(2) www.http://itatonline.org
Disclaimer:- Kindly note that this post is for the purpose of pure knowledge sharing and no one shall use this for commercial purposes.
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