IMPORTANT POINT
The court established that amounts received by a retiring partner as settlement of their share do not constitute a taxable transfer of capital assets under the Income Tax Act.

JUDGMENT :

P. Sam Koshy, J.

The instant is an appeal preferred by the appellant under Section 260-A of the Income Tax Act, 1961 assailing the order passed by the Income Tax Appellate Tribunal (for short, ‘the Tribunal’) in I.T.A.No.297/Hyd/2012, dated 25.05.2012 (for short, ‘the impugned order’).

2. Heard Mr. C.V. Narsimham, learned counsel for the appellant and Mr.Vijhay K. Punna, learned Senior Standing Counsel for the respondent - Department.

3. Vide the impugned order, the Tribunal partly allowed the appeal and dismissed the stay application filed by the appellant.

4. The brief facts of the case are that the appellant herein was a partner in the firm, viz., M/s.Montage Manufacturers. The appellant stood retired from the said firm w.e.f. 26.12.2007. While retiring from the said firm, the appellant received a sum of Rs..8,22,17,952/- towards her share of capital gain of the firm. However, the respondent-Department held that the right of the appellant in the firm is a capital asset and extinguishment of the right in the said firm stands transferred, and therefore, the receipt against the capital asset is taxable under Section 45 of the Act.

5. Alleging that the appellant has received an amount of Rs..8,2217,952/- on 26.12.2007 towards share of good will and capital, an order of assessment was passed on 27.12.2010 by the respondent-Department under Section 143(3) of the Act raising a demand of Rs..2,39,33,680/- payable by the appellant on the aforesaid amount.

6. Aggrieved by the said order, the appellant preferred an appeal before the Commissioner of Income-Tax (Appeals)-IV, Hyderabad. Vide order dated 31.01.2012, the Commissioner of Appeals dismissed the appeal preferred by the appellant, which was again subjected to challenge before the Income Tax Appellate Tribunal vide I.T.A.No.297/Hyd/2012. Vide order dated 25.05.2012, the appeal preferred by the appellant was partly allowed and the stay application filed by the appellant therein was dismissed.

7. Aggrieved, the present appeal has been filed by the appellant.

8. On 28.09.2012, the appeal stood admitted on the following substantial questions of law, viz.,

“(1) Whether the Income Tax Appellate Tribunal was correct in law in holding that the payment of the credit balance in her capital account with the firm received by the appellant upon retirement from the partnership firm is taxable as capital gains under the Act ?

(2) Whether the Income Tax Appellate Tribunal was correct in law in holding that the receipt of the share in value of goodwill by the appellant is taxable as capital gains under the Act ? and

(3) Whether the Income Tax Appellate Tribunal was correct in law in holding that there was transfer of capital asset by the appellant upon retirement from the partnership firm ?

9. Considering the three questions framed earlier by this Court, what is required to be answered is Question No.1 where the substantive question is as to whether the Income Tax Appellate Tribunal was justified in holding that the payment of the credit balance in her capital account with the firm received by the appellant upon her retirement from the partnership is taxable as capital gains under the Income Tax or not.

10. Learned counsel for the appellant contended that there is in fact no transfer of capital asset by the appellant in favour of the firm, viz., M/s.Montage Manufacturers upon her retirement. He also contended that of the amount so received by the appellant is only the balance of the capital account standing in the name of the appellant. He further contended that receipt of the share value of goodwill cannot be subjected to capital gains tax as there was no transfer of goodwill to the firm by the appellant.

11. However, learned Senior Standing Counsel for the respondent-Department, was of the firm stand that the right of the appellant in the partnership firm is a capital asset and the extinguishment of the right in the said firm is in fact a transfer of the receipt against capital asset, and therefo