Amount Received for Reduced LLP Profit Share Not Taxable as Goodwill or Capital Gains: ITAT Deletes ₹1.98 Cr Addition [Read Order]
Observing that the CIT(A) has rightly deleted the addition, the tribunal upheld the action and ruled that the amount received for profit share is not taxable as goodwill or capital gains.
Capital Gains
Capital Gains
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) deleted the addition of Rs.1,98,86,210 and ruled that the amount received by the assessee for a reduction in her profit-sharing ratio in a Limited Liability Partnership (LLP) did not constitute Goodwill or a transfer of capital assets and was therefore not taxable.
Sathyabama Ramachandran (assessee) raised the core issue from reassessment proceedings initiated under Section 147/148 of the Income Tax Act, 1961. The assessee had filed a revised Return of Income on March 1, 2018, declaring an income of Rs.77,68,620.
The Assessing Officer (AO) added the amount of Rs.1,98,86,210 to the assessee's income, treating it as Goodwill receipt, which was taxable as "Income from Other Sources". This amount was received from Elior India Catering LLP as part of a settlement for the assessee's sacrifice in the profit-sharing ratio in CRCL LLP.
The assessee's share in CRCL LLP was reduced from 10% to 4.90%. Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee challenged the addition, arguing that the sum was compensation for the reduced profit-sharing ratio and not a taxable income or Goodwill.
The CIT(A) agreed with the contention of the assessee and held that such a receipt did not amount to Goodwill under the Income Tax Act and should not be included in the total income of the assessee. Aggrieved by the CIT(A)’s order, the Revenue filed an appeal before the ITAT.
The two-member bench, comprising Manu Kumar Giri (Judicial Member) and S.R. Raghunatha (Accountant Member) observed by citing judicial precedents that the amount received for the sacrifice of the profit-sharing ratio in a partnership or LLP did not qualify as Goodwill or taxable income.
The tribunal held that the assessee did not possess any rights over the firm's assets, and there was no transfer of assets that would attract capital gains tax under Section 45 of the Act.
The tribunal noted that induction of a new partner (Elior India) and the consequent reduction in the share ratio of the existing partners only entailed a realignment of the share ratio for profit or loss sharing, which does not amount to 'transfer' as defined under Section 2(47) of the Act.
The Tribunal noted that the amendments to Section 45(4) and the insertion of Section 9B by the Finance Act, 2021, which bring profits/gains from money or capital assets received on the reconstitution of a specified entity under the tax net, were prospective in nature, effective from AY 2021-22, and thus did not apply to the present case (AY 2017-18).
The tribunal concluded that the addition of Rs.1,98,86,210 made by the AO was rightly deleted by the CIT(A). As a result, the appeal of the revenue was dismissed.
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