Additional amounts
paid to retiring partners in excess of the capital account are not in nature of
any profit or income; hence not taxable
Facts:
a) The assessees (i.e. partners) retired from the
firm and at the time of retirement, they were paid amounts in addition to the
amounts lying in their capital accounts.
b) The Assessing Officer invoked section 28(va)
and held that the amount received by partners in excess of the capital account was
to be treated as business income on ground that while retiring from the firm, partners
had agreed not to carry on any activity in relation to any business.
c) The
additional amount was, thus, brought to tax in the respective hands of the
assessees. On appeal, the CIT (A) allowed the appeal of assessees.
The Tribunal held in favour of
assessees as under:
1) The retirement deeds executed by the parties were
not in the nature of any agreement restraining the parties from carrying on
business activities. Therefore, section 28(va) was not applicable if partners were
retiring from the business. That clause was more applicable to situations like
non-competition agreement, etc;
2) The character of additional amounts paid to the
retiring partners represented the share of the retiring partners in the worth
and value of the business in which they were partners. The worth and value
included the standing of the business, the goodwill and many other intangible
virtues;
3) So, what was paid to the retiring partners was
their rightful share in that worth and value of the firm. The only thing was
that their shares in worth and value of business had been separately computed;
4) Therefore, the additional payments made to the
retiring partners were not in the nature of any profit or income within the
meaning of section 28(va); They were non-taxable capital receipts. Thus, the
CIT(A) was right in holding that the amounts were not taxable. – ACIT v. P. Sivakumar (HUF) [2014] 43 taxmann.com 211
(Chennai - Trib.)
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