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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition made by the AO. The addition was on account of Rs.1,98,86,210/- received by the assessee from Elior India Catering LLP, which the AO treated as "Goodwill" receipt.
Held
The Tribunal held that the amount received was for the reduction in the profit-sharing ratio and not goodwill. The Tribunal further noted that there was no transfer of assets that would attract capital gains tax under Section 45.
Key Issues
Whether the amount received by the assessee due to reduction in profit-sharing ratio is taxable as goodwill or capital gains, and if the amendments made by the Finance Act, 2021, are applicable.
Sections Cited
147, 148, 45, 45(4), 9B, 2(47)
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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S.R. RAGHUNATHA
Year: 2017-18 The Dy. Commissioner of Sathyabama Ramachandran, Income Tax, Vs. No. 15/16/17, Vision Towers, IInd Non Corporate Circle-8, Floor, Yogam Garden, Chennai. Alwarthirunagar, Tiruvallur 600 087. [PAN:ASOPS4400J] (अपीलाथ�/Appellant) (��यथ�/Respondent) अपीलाथ� की ओर से/ Appellant by : Shri A. Raghava Simhan, C.A. ��थ� की ओर से /Respondent by : Ms. Gouthami Manivasam, JCIT सुनवाई की तारीख/Date of Hearing : 26.06.2025 घोषणा की तारीख /Date of Pronouncement : 23.09.2025 आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member): The captioned appeal filed by the revenue is directed against order of the Ld. Commissioner of Income Tax (Appeals) (NFAC), Delhi [CIT(A)] dated 08.02.2025 for Assessment Year 2017-18.
The revenue has raised the following legal grounds of appeal:
1. The order of the learned Commissioner of Income Tax (Appeals) in ITA. dated 08.02.2025 for the ITBA/NFAC/S/250/24- 25/1073052177(1) Assessment year 2017-18 is erroneous in law, facts and circumstances of the case.
2. The Ld.CIT(A) erred in deleting the additions made by the AO by accepting the claims of the assessee in violation to clause 3 of Rule Sathyabama Ramachandran :- 2 -: 46A considering that there was no compliance in course of the assessment proceedings and the said claims were being made for the first time before the Ld. CIT(A).
The Ld. CIT(A) failed to appreciate that "transfer" includes relinquishment or extinguishment of rights and therefore reduction in the assessee's share of profits in M/s CRCL LLP amounted to transfer and accordingly the amount received on this account by the assessee was clearly taxable.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing officer be restored.
5. The appellant craves leave to add or amend any ground of appeal
before it is finally disposed off.
3. Brief facts are that the assessee has filed an appeal before the Income Tax Appellate Tribunal (ITAT) challenging the addition made by the Assessing Officer (AO) to the returned income under section 147/148 of the Income Tax Act, 1961. The key dates and events in the timeline of the assessee's proceedings are under:
On 04 November 2017, the appellant filed the original Return of Income (ROI), declaring an income of Rs.76,00,680/-. On 01.03.2018 a revised ROI was filed by the assessee, declaring an income of Rs.77,68,620/- and claiming a refund of Rs.800/-. Further, pursuant to notice u/s.148, on 11.03..2021 the assessee filed return declaring income of Rs.77,68,620/- and seeking a refund.
The core issue revolves around the amount of RS.1,98,86,210/- received from Elior India Catering LLP, allegedly as part of the sacrifice in Sathyabama Ramachandran :- 3 -: the profit-sharing ratio in the CRCL LLP. The Assessing Officer added this amount to the income of the assessee, considering it as "Goodwill" receipt, which is included in the income from "Other Sources."
During the reassessment proceedings, the assessee contended that this sum was received for the reduction in the profit-sharing ratio and not as goodwill, and hence, should not be treated as income from other sources. The CIT(A) in his ruling, agreed with the assessee’s contention, stating that such receipt does not amount to goodwill under the provisions of the Income Tax Act and should not be included in the total income.
The assessee contends that there was a reduction in their profit- sharing ratio in the CRCL LLP (a limited liability partnership), specifically from 10% to 4.90%. The reduction in profit-sharing resulted in the assessee receiving Rs.1,98,86,210/-, which was credited to their account. The assessee asserts that this amount was part of the reduction in profit-sharing and is not taxable as income. Additionally, the assessee argues that Elior India, which joined as a partner in CRCL LLP, contributed to the reduction in the profit-sharing ratio, which further supports the claim that the amount was not a gift but compensation for the sacrificed profit share. The assessee further explains that, due to the Sathyabama Ramachandran :- 4 -: impact of the COVID-19 pandemic, there was a steep decline in the business and profitability of CRCL. Elior India, as a partner, relinquished their ownership interest and partnership in the firm. This occurred along with the settlement agreement executed in April 2021, which resulted in the phased exit of Elior India, affecting the business structure and financial situation of CRCL.
The CIT(A) examined the appellant's argument and noted that the amount received did not qualify as goodwill and, therefore, should not be included in the assessee’s total income.
On further appeal before us, the assessee also highlighted that reassessment proceedings were initiated in the case of other partners of CRCL, with similar issues being raised by the AO. The assessee mentioned that the other partners had also filed appeals against their respective reassessment orders, which were pending before the ld.CIT(A). The assessee argued that the amount received was in consideration of sacrificing the profit-sharing ratio in CRCL LLP, not goodwill. The assessee further claimed that there was no transfer of assets and, hence, no capital gains tax could be applied under section 45. The appellant provided several legal precedents in support of their case:
Sathyabama Ramachandran :- 5 -: 1. Kettlewell Bullen & Co. Ltd. (1964) 53 ITR 261 SC 2. Rajendra Babubhai Modi (1993) 200 ITR 98 (Guj HC) 3. CIT v. P.N. Panjawani (2013) 21 taxmann.com 458 (Kar HC) 4. ITO v. Paru D. Dave (2008) 110 ITD 410 (Mumbai ITAT) 5. ITO v. Fine Developers (2012) 26 taxmann.com 202 (Mumbai ITAT) 6. Anik Industries Ltd. (2020) 116 taxmann.com 385 (Mumbai ITAT) 7. Radhu Palace v. ACIT (2014) 41 taxmann.com 281 (Mumbai ITAT) 8. dated 17.06.2025 in the case of Gokulakrishna Vs The DCIT (Chennai Benches). These cases were cited to support the argument that amounts received for the sacrifice of profit-sharing ratios in a partnership or LLP do not qualify as goodwill or taxable income under the provisions of the Income Tax Act. We have reviewed the submissions of both parties, along with the order of the ld.CIT(A), which has been found to be well-reasoned and in accordance with the provisions of the Income Tax Act. The case law referred to by the assessee, including judicial precedents, supports the view that amounts received in the nature of sacrifice of the profit-sharing ratio in a partnership or LLP arrangement do not qualify as goodwill. Furthermore, it is important to note that the assessee does not possess any rights over the assets of the firm, nor was there a transfer of assets that could attract capital gains tax under section 45.
Sathyabama Ramachandran :- 6 -: 9. We have also gone through the above-referred cases and also order of the coordinate bench of the Tribunal referred supra, wherein on akin facts the Tribunal accepted the view of the assessee and deleted the addition by holding as under: 16. We have also considered the contention of the ld. DR that pursuant to reconstitution of assessee’s partnership firm, assets of assessee were revalued and revalued amount was credited to partners account in their profit-sharing ratio, the asset so revalued and credited into capital accounts could be said to be “transfer” which would attract the provisions of section 45(4) of the Act and the said amount would be chargeable to capital gains. For the above proposition, the ld. DR placed reliance on the judgement of the Hon’ble Supreme Court in the case of CIT v. Mansukh Dyeing and Printing Mills 449 ITR 439 (SC). We have carefully gone through the above judgement of the Hon’ble Supreme Court and find that on admission of three new partners, their existing partners have retired and thereafter reconstituted the partnership firm, whereas, in the present case, on induction of new partner, erstwhile partners continued in the partnership firm along with new partner. In the case law relied on by the ld. Counsel for the assessee in the case of CIT v. P.N. Panjawani (supra), the Hon’ble High Court noted that the erstwhile partners in that case have not retired and they also continued to be the partners along with the income partners, thereby, held that reduction in the share of existing partners due to admission of new partners did not amount to a transfer of capital assets and was not taxable. Thus, the judgement of the Hon’ble Supreme Court relied on by the ld. DR has no application to facts of the present case, as well as the order of the Mumbai Benches in the case of Sudhakar M. Shetty v. ACIT 130 ITD 197, being on similar facts, has no application. Moreover, the reliance placed on record by the ld. DR in the case of B. Raghurama Prabhu Estate v. JCIT 335 ITR 394 (Karnataka) as well as judgement of Hon’ble Supreme Court in the case of Vatsala Shenoy v. JCIT reported in AIR 2016 SUPREME COURT 5299 [Civil Appeal No. 1234 of 2012 & Ors dated 18.10.2016] (partners of MGBW), in both partners’ cases of same partnership firm, the erstwhile partnership firm MGBW has been winded up and the amount received by the outgoing partners has been treated as “transfer”, chargeable to capital gain tax under section 45 of the Act. Thus, the case law relied on by the ld. DR has no application to the facts of the present case. Further, in the case of Samir Suryakant Sheth v. ACIT in & 3092/Ahd/2002 dated 25.01.2012, the facts are entirely different, wherein, the newly admitted partner Ciba had privately made two separate payments to the old partners for reduction in profit share in the firm and non-competition agreement, thus, the case law has no application to the facts of the present case.
Now, coming to other case law placed on record by the ld. Counsel for the assessee in the case of ITO v. Smt. Paru D. Dave 110 ITD 410 (Mumbai), we Sathyabama Ramachandran :- 7 -: find, the Mumbai Benches of the Tribunal held that on introduction of new partners, there is realignment of sharing ratio between partners only to an extent of sharing profit and loss of firm, on such realignment of profit sharing ratio, there is no relinquishment of any nonexistent share in partnership assets as assets remained with firm and therefore, no capital gain arises on alignment of a part of profit sharing ratio on introduction of new partners in firm. Further, in the case of ITO v. Fine Developers in dated 12.10.2012 reported in 55 SOT 122 (Mumbai), the Tribunal held that mere admission of new partner into partnership firm without there being any transfer of asset of firm in his favour would not attract provisions of section 45(4) of the Act. In the case of Anik Industries Ltd. v. DCIT [2020] 116 taxmann.com 385 (Mumbai), by following the decision in the case of CIT v. P.N. Panjawani (supra) and distinguishing the orders in the case of Sudhakar M. Shetty v. ACIT (supra), Samir Suryakant Sheth v. ACIT (supra) & other case law, the Mumbai Benches of the Tribunal held that compensation received by assessee-partner from other existing partners for reduction in profit sharing ratio would not tantamount to capital gains chargeable to tax under section 45(1) of the Act.
In the case on hand, the asset of the partnership firm was revalued by the partners and the difference on account of revaluation of asset was credited to the partners’ account. The revaluation of partnership firm’s asset was anterior to the introduction of new partners. Thus, in view of our above discussions as well as judicial precedents, we are of the considered opinion that the revaluation of assets by CRCL does not attract capital gains. The revaluation of assets of CRCL and the credit of revalued amount to the capital account of partners in their respective share ratio does not entail any transfer as defined under section 2(47) of the Act. The induction of Elior India to CRCL and the amount received from Elior India towards 51% of shares and consequent reduction in the share ratio of present partners does not entail any relinquishment of their rights in CRCL. On introduction of Elior India, there is realignment of share ratio inter se between the partners only to the extent of sharing the profits or losses, if any, of CRCL LLP. When any new partner is introduced into an existing partnership firm, the profit sharing ratios undergo a change, which does not amount to transfer as defined under section 2(47) of the Act, as there is no change in the ownership of assets by the partnership firm. As during the subsistence of the partnership firm, the partners have no defined share in the assets of the partnership firm and thus on realignment of profit-sharing ratio, on introduction of new partners, there is no relinquishment of any non-existent share in the partnership firm’s assets as the asset remained with the firm. Such an arrangement is not covered by the provisions of section 45(4) of the Act, which covers the case of dissolution of partnership firm. Accordingly, no capital gains arise on such relinquishment of share ratio in the partnership firm.
However, we find that in order to bring the profit or gains from receipt of money or capital asset or both by the specified person from a specified entity on reconstitution of the specified entity shall be chargeable to income-tax as Sathyabama Ramachandran :- 8 -: income of such specified entity under the head “Capital Gains”, the legislation amended the provisions of section 45(4)] vide Finance Act, 2021, shall come into force on the 1st day of April, 2021, which is prospective in nature. Similarly, the provisions of section 9B of the Income Tax Act has been inserted w.e.f. A.Y. 2021-22 vide Finance Act, 2021 to bring under the tax net the income on receipt of a capital asset or stock in trade by a specified person from the specified entity in connection with the dissolution or reconstitution of such specified entity, shall come into force on the 1st day of April, 2021, which is prospective in nature. In fact, transfer of capital asset is common in both section 9B and section 45(4) of the Act. In the present case, the assessment year under consideration is 2017-18 and accordingly, the amendments vide Finance Act, 2021 have no application in the present case.
Under the above facts and circumstances of the case as well as judicial precedents, the addition made by the Assessing Officer towards levy of short term capital gains tax at ₹.2,38,63,452/- and confirmed by the CIT(A) stands deleted. Thus, the grounds raised
by the assessee are allowed.
10. Based on the facts and legal arguments presented before us and citation referred above, we accept the reasoning of the ld.CIT(A). Hence, the addition made by the Assessing Officer of Rs.1,98,86,210/- to the income of the assessee is rightly deleted by the ld. CIT(A).
In result, the appeal of the revenue is dismissed.
Order pronounced on 23rd day of September, 2025 at Chennai.