Mere reduction in profit-sharing ratio of existing partners upon new partner's admission into firm, without retirement, does not constitute transfer u/s 2(47); amount credited from new contribution not taxable as capital gains prior to AY 2021-22 amendments.

आदशे/ORDER 

PER PADMAVATHY.S, A.M:

This appeal by the revenue is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short "CIT(A)") passed u/s. 250 of the Income Tax Act, 1961 (in short "the Act") dated 26.08.2025 for Assessment Year (AY) 2017-18. The assessee raised the following ground of appeal:

“1. The order of the ld CIT(A) is contrary to law and facts and circumstances of the case.

2 The ld CIT(A) erred in deleting the addition made by the AO of an amount of Rs.2,98,29,315/- credited in assessee's capital account by M/s CRCL LLP, in which assessee is a partner, for sacrificing / relinquishing his share of good-will in the firm, consequent to admission of new partner viz., M/s Elior India Catering LLP, deeming such transfer as defined in Sec.2(47) and taxing the same u/s 45(3) as Short Term Capital Gains.

3. In the relied upon decision of the jurisdictional ITAT in the case of Gokulakrishna in ITA No.1088/Chny/2025, the Tribunal made a reference to the decision of the Mumbai Tribunal in the case of Smt Paru D. Dave (110 ITD 410), wherein it was held that on realignment of profit sharing ratio, there is no relinquishment of any non-existent share in partnership assets since assets remained with the firm and therefore, no capital gain arises on realignment of a part of profit sharing ratio on introduction of new partners in the firm. The ld CIT(A) ought to have appreciated that this decision of the Mumbai Tribunal is not applicable to the present case, since the assessee received the impugned amount for sacrificing / relinquishing his share of good-will (which is an asset) in the firm, thus the present case is not a mere case of only realignment of profit sharing ratio, but an element of relinquishment of share of goodwill is there.

4. The ld CIT(A) failed to note that the assessee received the impugned consideration for relinquishment of portion of a right (goodwill) in the partnership firm in which he is one of the partners, and accordingly, the AO has rightly treated the transaction as transfer of capital asset as defined u/s 2(47), attracting tax under Section 45 of the Income Tax Act.”

2. The assessee is an in individual and partner of M/s. CRCL LLP (CRCL). The assessee filed the return of income for A.Y 2017-18 declaring total income of Rs. 48,24,760/-. The A.O received information during the course of scrutiny proceedings in the case of CRLC that the said firm has credited certain amounts received as contribution from M/s. Elior India Catering LLP towards sacrificing ratio as per the terms of conditions of the amended LLP agreement in the respective accounts of the partners. The A.O further noticed that the assessee being one of the partners of CRCL has received a sum of Rs. 2,98,29,315/-. The A.O held that the amount received by the assessee is to be classified as goodwill. The A.O accordingly reopened the assessment of the assessee u/s. 147 of the Act. The A.O was of the view that the right to receive profit in a partnership firm is a capital asset u/s. 2(14) of the Act and relinquishment of the right of receive the profit is transfer within the definition section 2 (47) of the Act. Accordingly, the A.O treated the entire amount received by the assessee as short term capital gains in the hands of the assessee. Aggrieved, the assessee filed further appeal before the CIT(A).

3. The CIT(A) gave relief to the assessee by placing reliance on the decision of the Coordinate Bench in the case of another partner of CRLC Mr. Gokulakishna vs. DCIT in ITA No.1088/Chny/2025 dated 17.06.2025. The revenue is in appeal before the Tribunal against the order of the CIT(A).

4. We have heard the parties, and perused the material available on record. The