Friday, April 11, 2014

Sums received in excess of capital account by retiring partner were capital receipts

Additional amounts paid to retiring partners in excess of the capital account are not in nature of any profit or income; hence not taxable
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] 43 211 (Chennai - Trib.)