PURANJIT MUKHERJEE,KOLKATA vs. DCIT, CIR-26, KOLKATA, KOLKATA

The issue raised in both the appeals are similar on same set of facts, and, therefore, we proceed to hear both the appeals together and pass a consolidated order for the sake of convenience.

The only issue is to be decided as to whether the CIT-A is justified in confirming the orders of the AO by holding that goodwill created in the books of account is liable to be taxed in the hands of ITA No. 149/Kol/2016 2 Puranjit Mukherjee . assessee as short term capital gain in the facts and circumstances of the case.

After hearing both the parties and perusing the record, we find that this Tribunal on an identical issue in for the A.Y 2009-10 vide its order dt. 19-02-2018, copy of the said order is on record, in the case of Amit Kumar Choudhury, where an amount received on account of share of goodwill is held to be not chargeable to tax as capital gain. The Co-ordinate Bench came to such conclusion by following the order dt. 11-12-2015 of another Co-ordinate Bench of this Tribunal in the case of Ajay Kr. Doshi in ITA No. 1866/Kol/2012, wherein similar issue was decided by holding the amount received by assessee therein as a share of goodwill on retirement from the firm is not chargeable to tax under the head capital receipt. Relevant portion of order dt.19-02-2018 is reproduced herein below for better understanding:-

The ld. counsel for the assessee has also relied in support of the assessee’s case on the issue under consideration on the decision of Coordinate Bench of this Tribunal in the case of Ajay Kumar Doshi –vs.- ACIT (ITA No. 1866/KOL/2012 dated December 11, 2015) wherein a similar issue was decided by the Tribunal vide paragraphs no. 10 to 13 of its order, which read as under:- “10. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As agreed by the ld. Representatives of both the sides, this issue involved in Ground No. 2 of the assessee’s appeal is squarely covered in favour of the assessee by the various judicial pronouncements including the decisions of the Coordinate Benches of this Tribunal. In one such decision rendered in the case of Shri Amitabh Singh (ITA No. 1996/DEL/2006), Hon’ble Delhi Bench of this Tribunal decided the similar issue in favour of the assessee in the identical facts and circumstances for the following reasons given in paragraph no. 5 of its order:- “5. We have considered the facts of the case and rival contentions. The revenue’s case is primarily based on the provision contained in section 55(2) under which the cost of goodwill has to be taken as nil if it has not been purchased from a previous owner. Such i the case here nonetheless, this cost is for the purpose of sections 48 and 49, which deal with the mode of computation of the income chargeable under the head capital gains. Before coming to the mode of computation it has to be seen whether any amount is chargeable to capital gains tax u/s 45, which is the charging section. The ld. DR was not able to explain how provisions of section 45 were applicable in the instant case. Sub- section 4 of this section deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital asset on dissolution or otherwise of a firm, and brings to tax the capital gains in the hands of the firm. However, we are dealing with a case of the partner here. The firm a quired goodwill over a period of time, which was brought into the books and distributed amongst existing partners before the new partners were taken in and some existing partners retired. The asset of the firm already existed and it was quantified and credited to the accounts of existing partners. Similarly, when the assessee retired from the firm, he did not transfer any goodwill to the film as he did not have any individual goodwill. The goodwill belonged to the firm and continued to remain with the firm. As clarified by the ld. Counsel, nothing was charged from the incoming partners by way of goodwill and, thus, there is no question of even indirect realization of the value of goodwill by the assessee from the incoming partner through the firm in a number of cases, referred to above, it has been held that what a partner gets at the time of retirement is nothing but his own share in the assets of the firm. In such a scenario, there cannot be any transfer of an asset and such has been the decision of Hon'ble Supreme Coon in the case of Mohanbhai Pamabhai and Tribhuvandas G. Patel (supra). The fact is that a provision corresponding to sub-section (3) regarding levy of capital gain tax when a partner brings in a capital asset to the firm does not exist on the statute book in case of retirement of the partner and, thus, general provisions of law, namely. that what he takes is his share in the assets of the firm continues to apply with the exception that under sub-section (4), when a capital asset is distributed to the partner on dissolution of the firm or on his retirement at less than the fair market value, then, the firm becomes liable to pay capital gains tax. Such is not the case here, as we are dealing with the case of a partner. Therefore, we concur with the ld. CIT(Appeals) that nothing was taxable in the hands of the assessee”.

The Coordinate Bench of the Tribunal at Kolkata also had a occasion to consider the similar issue in the case of Nawshir H. Mirza, wherein the case of the assessee for exemption on account of share of goodwill received on retirement was held to be capital receipt not chargeable to tax by the Tribunal for the following reasons given in its order dated 11.01.2008 passed in ITA No. 1252/KOL/2007:- “9. We have considered the facts of the case and rival contentions and are of the view that the order of the ld. CIT(A) needs to be upheld and does not call for any interference. In the instant case, it is not disputed that the said firms were having self generated goodwill which was valued by them during the present assessment y.ear There has been no transfer of such goodwill by the said firms. The firms still own and hold such goodwill and the assessee who has retired has no interest of any nature whatsoever there n. The revenue's case is primarily based on view that money received in lieu of goodwill from the firm by the partner is casual receipt in the nature of income which is not taxable in the hands of the firm. What the partners got at the time of the retirement including the ITA No. 149/Kol/2016 4 Puranjit Mukherjee . amount credited for the goodwill of the firms is a capital receipt in their hands. The partners did not own the goodwill nor did they transfer the same. The goodwill all along remained with the firm as its asset even after the retirement of the partners. What the partners got on retirement was for the value of their interest in the firm. This view is duly supported by various decision cited by the Ld. Authorised Representative including the decision .of Apex Court in the case of Sunil Siddharthhbhai vs. CIT (supra). 9.1. In the instant case, the firms have not realized any amount on account of goodwill hence the question of any assessment being made in their hands does not arise. The notional valuation of the goodwill in its accounts by the firm does not result in any transfer which can attract capital gains as has also been clarified by the Board in its Circular No.495 dated September 27. 1987. Even the amendment made in Section 55(2) of the Act is of no help to the case of the Department in view of the clarification made by the Board. We fail to appreciate how the amount could be assessed in the hands of the partners and that too under the head "Income from other sources. Goodwill is an intangible asset and transfer/surrender of which would attract Section 45 so that the value received would be a capital receipt and assessable if at all only under item 'E' of Section 14. It cannot be treated as a casual receipt and be subjected to tax under Section 56. The argument that even if the income cannot be chargeable u/s. 45, because of the inapplicability of the computation provided u/s. 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed u/s. 45, it cannot be taxed at all as has been held in the case of S.G. Mercantile Corporation (P) Ltd. –vs.- CIT [1972] 83 ITR 700 (SC)”.

As the issue involved in the present case as well as all the material facts relevant thereto are similar to the cases of Shri Amitabh Singh (supra) and Nawshir H. Mirza (supra) decided by the Coordinate benches of this Tribunal, we respectfully follow the decision rendered in the said cases to hold that the amount in question received by the assessee as his share of goodwill on retirement from the firm is not chargeable to tax being capital receipt. The addition made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on this issue is accordingly deleted. Ground No. 2 is accordingly allowed”.

In our opinion, the issue involved in the present case thus is squarely covered in favour of the assessee by the various judicial pronouncements discussed above including the decision of the Coordinate Bench of this Tribunal in the case of Ajay Kumar Doshi (supra) and respectfully following the same, we delete the addition made by the Assessing Officer and enhanced by the ld. CIT(Appeals) on account of his share of goodwill received by the assessee on his retirement from the partnership firm of M/s. Process Chemicals Co.”

In view of above, we are of the view that the Tribunal in the cases of supra has discussed the issue thoroughly after analyzing the facts and circumstances of the case. In the present case, the CIT- A was not justified in holding goodwill created in the books of account is liable to be taxed in the hands of assessee as short term capital gain. He failed to appreciate the facts that there was no transfer. Mere creation of goodwill in the books does not mean any transfer, which could be charged as short term capital gain. In view of aforementioned decisions, the CIT-A is not justified in confirming the order of AO and it is set aside. Thus, we direct the AO to delete the impugned addition. Grounds raised by the assessee in both the appeals are allowed.