445
June 29 To July 5, 2019 u Taxmann’s Corporate Professionals Today u Vol. 45 u 33property of any kind held by an assessee,
whether or not connected with his business or
profession. Further, section 55(2)(a) provides
mode of computation of cost of acquisition in
relation to the capital asset being goodwill.
Whether distribution of goodwill to
partner would be a transfer?
- When the ownership over an asset, including
goodwill, changes hands, on distribution of
asset from the firm to the partner, there will
be a “transfer” u/s 2(47). [refer - Asstt. CIT
v. Vijay Talkies [2007] 16 SOT 370 (Mum.)]
But so long as firm holds the goodwill as
its asset, and some amount is paid to the
retiring partner in lieu of relinquishing all
his rights in the assets of the firm, there
will not be any transfer u/s 2(47), as re-
tiring partner does not have any right or
share in any specific asset of the firm. But
where out of three partners of the firm, two
retire, and the third takes over all the assets
including goodwill of the firm, then there is
a dissolution and it would fall within the
scope of section 45(4). [refer - CIT v. Shastha
Pharma Laboratories [2014] 43 taxmann.com
197/224 Taxman 180 (Kar.) (Mag.); CIT v.
Southern Tubes [2008] 171 Taxman 254/306
ITR 216 (Ker.)]. For invoking section 2(47),
the asset must be specified, in which rights,
by way of modes specified in that section,
are transferred from one person to another.
Once there is no capital asset held by retiring
partner and there is no transfer of any asset
(by the partner to the firm or to the existing
or incoming partners) within the meaning of
section 2(47), capital gains cannot be charged.
Existence of goodwill
- Where goodwill is accounted for in the
balance sheet, then it is easier for the AO
to invoke section 45(4), on transfer of good-
will to any partner, by determining FMV of
the goodwill and treating it as full value
of consideration. But where no goodwill
is accounted for in the balance sheet and
only the existing accounted for assets are
distributed, the charging of capital gains on
notional transfer, by the firm, of goodwill is
unlikely to be upheld unless dissolution deed,
or retirement deed, clearly specifies certain
goodwill, or trademark, or brand name, or
rights to manufacture or to produce, or
right to carry on business and certain sum
is specified against these intangible assets.Taxability of capital gains in the hands of
the firm on distribution of goodwill- Where ownership over goodwill changes
hands from the firm to the partner on dis-
solution of the firm [such change of owner-
ship from firm to partner can take place on
retirement of partner also, which situation
will also be covered u/s 45(4), due to the
expression “otherwise” mentioned in that
section], the dissolved firm can be taxed
for capital gains by invoking section 189(1).
[refer- Southern Tubes (supra)]
Existing position
- Here the issue is how the taxability can
be affixed on payment of money to the re-
tiring partner for relinquishing all his rights
in the assets of the firm. No partner has any
identified or specified share in the assets of
the firm. As per section 2(14) capital asset
would be “property.... held by an assessee”.
Unspecified share of a partner in the assets
of the firm cannot be called property held by
an assessee (i.e., partner). He does not hold
any property (i.e., asset) in the firm except
his credit balance. Share of the partner in
the assets of the firm can be defined and
specified only on a future date at the time
of dissolution of the firm. Further, Section
45(4) cannot be invoked for taxing firm on
payment of money to the retiring partner, as
there is no transfer of any capital asset by the
firm and, thus, no capital gains would arise
in the hands of the firm. [refer - Pr. CIT v.
TAX ON GOODWILL RECEIVED BY RETIRING PARTNER SHOULD BE CLARIFIED