Opinion Of Eminent Legal Luminaries On Controversial Issues

Is Retiring Partner Liable To Tax If He Receives In Excess Of His Capital Account?

QUERY: In case of a Partnership firm, the assets revalued and the amount was credited to the capital account of the partners. After few months, one of the partners retired and the firm paid the amount which was standing to the Capital Account (after revaluation) of the retiring partner. Mumbai ITAT in the case of Sudhaker M. Shetty has taken the view that amount received on retirement is taxable in the hands of partner. What is your view in this matter? There are various judgments wherein it is held that, amount received by partner on retirement is not liable to tax.

(i) Addl. CIT v. Mohanbhai Panabhai [165 ITR 166 (Guj.)(HC)]

(ii) Tribhovandas G. Patel v. CIT [236 ITR 515 (SC)]

(iii) Prasant S. Joshi v. ITO [324 ITR 154 (Bom)(HC)
ANSWER: The manner of settlement of account may decide liability. In Sudhakar M. Shetty v. ACIT [130 ITD 197 (Mum)], the retirement deed conveyed interest in immovable property and after retirement he had no interest over the assets of the firm. Thus, it was a case of lumpsum payment in consideration of the retirement, and the retiring partner had assigned or relinquished his share or right in the partnership and its assets in favour of the continuing partners. Hence, the Tribunal held as under:

“In the instant appeal the retiring partner was paid consideration in cash and he gave up his rights as a partner, including his rights over the assets of the partnership”

“Thus it was a case where instead of quantifying the assessee’s share by taking accounts on the footing of notional sale, parties had agreed to pay a lumpsum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners. Thus, the retiring partner was paid something over and above the sum standing to the credit of his capital account and therefore there was a capital gain”.

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