INCOME TAX ACT, 1961

Section 45 Section 2(47) Section 54EC

Capital gains - Chargeability - Deduction under section 54EC - Excess sum paid to partner over and above amount standing credit of capital account

On retirement of assessee from firm the amount standing in credit of her capital account was finally arrived at Rs. 61, 61,800 which was taxed as capital gains by the AO. The assessee had invested a sum of Rs. 50 lac in specified bonds and therefore, the AO allowed deduction up to Rs. 50 lac and brought to tax Rs. 11,61,800 as long-term capital gain. CIT(A) confirmed the action of the AO. Held: 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. After reducing the partner's drawing and other payments made the balance to the credit of assessee's capital account as on 31-3-2007 was Rs. 2,77,88,200. On 9-6-2007 the assessee's was paid Rs. 38,38,200 towards goodwill and another sum of Rs. 2,39,00,000 being part of the consideration of Rs. 339.50 lacs payable on retirement. 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 claim of assessee was that the entire sum of Rs. 61,61,800 was goodwill was not substantiated by entries in the books of account of the assessee and the book entries were only for Rs. 38,38,200 recorded in the assessee's capital account as well as Goodwill Account. The capital gain, therefore, would be Rs. 339.50 lac minus Rs. 2,77,88,200 + 38,38,200 = Rs. 23,23,600. The assessee had invested a sum of Rs. 50 lacs in specified bonds. 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. 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 lakhs and since the assessee had been allowed exemption under section 54EC to the extent of Rs. 50 lakhs, no capital gain was exigible to tax in the present case.

Distinguished:CIT v. P.N Panjawani (2012) 356 ITR 676 (Karn.) : 2012 TaxPub(DT) 2412 (Karn-HC), Asstt. CIT v. Unity Care & Health Services (2006) 103 ITD 53 (Bang.) : 2006 TaxPub(DT) 502 (Bang-Trib), ITO v. Prabhuraj B Appa (2006) 6 SOT 415 (Bang-Trib) : 2006 TaxPub(DT) 953 (Bang-Trib), Asstt. CIT v. P. Sivakumar (2014) 63 SOT 91 (Chen-Trib.), CIT v. A.N Naik Associates (2004) 265 ITR 346 (Bom.) : 2004 TaxPub(DT) 0785 (Bom-HC), D.S. Construction v. ITO [ITA No. 3526 & 2527/Mum/2018, dt. 10-1-2019], and the decision of ITAT Mumbai in the case of James P.D' Silva v. Dy. CIT (2019) 197 ITD 533 (Mum-Trib). Followed:Sunil Sidharthbhai v. CIT (1985) 156 ITR 509 (SC) : 1985 TaxPub(DT) 1358 (SC), Malabar Fisheries v. CIT (1979) 120 ITR 49 (SC) : 1979 TaxPub(DT) 1089 (SC), Tribhuvandas G.Patel v. CIT (1978) 115 ITR 95 (Bom.) : 1978 TaxPub(DT) 639 (Bom-HC), N.A. Modi v. CIT (1986) 162 ITR 420 (Bom) : 1986 TaxPub(DT) 992 (Bom-HC) and CIT v. H.R. Aslot (1978) 115 ITR 255 (Bom.) : 1978 TaxPub(DT) 679 (Bom-HC).

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