ITO v. Savitri Kadur [MP No. 123/Bang/2019 [in ITA No. 1700/Bang/2016], dt. 28-9-2020] : 2020 TaxPub(DT) 3937 (Bang-Trib)

Amount credited to Partner's capital account prior to retirement for goodwill whether taxable as capital gains with cost of acquisition as per section 55(2)(a) as NIL.

Facts:

This was a miscellaneous petition which arose from the revenue arising out of the order of ITAT in ITA No. 1700/Bang/2016, dated 3-5-2019 : 2019 TaxPub(DT) 3593 (Bang-Trib). It needs to be understood from the original appeal to appreciate the fine print of this MA petition of the department.

Assessee had retired from their firm where her balance stood in the capital account as under --

This went in appeal to Commissioner (Appeals) where the amount paid over and above the Capital account balance to the tune of Rs. 61,61,800 was disclosed by the assessee with the Commissioner (Appeals) as goodwill amount received as under --

Goodwill paid during assessment year 2008-09 -- Rs. 21,64,800

Goodwill paid during assessment year 2009-10 -- Rs. 39,97,000

Adding to Rs. 61,61,800

The retirement deed did not specify any thing on the Goodwill however it was noticed that the goodwill of 38,38,200 was appearing as goodwill in the capital account of the partner. The assessee's claim was that capital gain was 61,61,800 less 38,38,200 = 23,23,600 since the entire capital gain was invested in specified bonds no capital gains tax can further arise.

The Commissioner (Appeals) did not concur with the views of the assessee and sustained the additions of assessing officer. The case went in higher appeal where it was decided in favour of the assessee holding that they were not liable for any capital gains tax.

As against this verdict the revenue moved a miscellaneous petition claiming that Goodwill does not have any cost of acquisition under section 55(2)(a) and thus the order was incorrect to that extent.

Held against the revenue by dismissing the miscellaneous petition that once goodwill was credited it became part of the capital account. Besides this the retirement deed did not specify that goodwill was also involved in the transfer or consideration was paid for the same. The topic of goodwill being a debatable issue also cannot be moved in a MP.

Editorial Note: The original decision is a landmark judgment as it discusses threadbare section 45(4) and 45(3). (Both the original decision and the Miscellaneous petition are enclosed herewith)

It is precisely not explained as to if the goodwill of Rs. 38,38,200 was also credited in the Capital account of the assessee prior to retirement but it appears so thus on an implicit reading.