Tree Hill Estates Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-7(1)(1), Bangalore

ITA 1395/BANG/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2031 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 30-04-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Capital Gains
• Section: 2(14); 274; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER ITA No.1395/Bang/2018 Assessment year : 2013-14 Tree Hill Estates Private Ltd., Nadathur Palace, 3 rd Floor, Plot No.23, Jayanagar 3 rd Stage, Bengaluru – 560 017. PAN: AACCT 5170F Vs. The Deputy Commissioner of Income Tax, Circle 7(1)(1), Bengaluru. APPELLANT RESPONDENT Appellant by : Shri Padamchand Khincha, CA Respondent by : Shri Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru. Date of hearing : 25.04.2022 Date of Pronouncement : 18.05.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is at the instance of assessee directed against the order of the CIT(Appeals)-10, Bengaluru dated 01.02.2018 for the assessment year 2013-14. 2. The issue that arises for consideration in this appeal out of the various grounds raised by the assessee is, whether the amount received by the assessee in excess of the amount standing to the credit of the partnership firm which is paid towards the notional gain on revaluation ITA No.1395/Bang/2018 Page 2 of 20 of land held as stock in trade is ‘goodwill’ as the and therefore not liable to tax. 3. Brief facts of the case are that the assessee is a private limited company engaged in the business as well as investment in real estate and other activities. It entered into a partnership with Sobha Developers Limited on 16.05.2007. The partnership firm named 'Sobha City', was formed for development of residential and commercial projects at Thrissur, Kerala. The initial capital contribution by the assessee company was Rs. 20 crores from out of a total capital of Rs. 40 crores. The partnership profits were agreed to be shared in the ratio of 70:30 in favour of Sobha Developers Limited and the assessee respectively according to the partnership deed. 4. As per clause 8.1 of the partnership deed, all real and/or personal property acquired by the partnership firm shall be owned by the partnership firm. The said clause also states that the partners have waived the right to require the partition of any partnership property or any part thereof. Clause 8.1 is reproduced below:- “8.1 All real or personal property acquired by the Partnership (including the Properties) shall be owned by the Partnership, such ownership being subject to the other terms and provisions of this Deed. Each partner hereby expressly waives the right to require partition of any Partnership property or any part thereof." 5. At the beginning of the year 2012, the assessee had expressed its desire to exit from the above partnership. At the time of retirement, it was entitled to receive the initial capital contribution, accumulated ITA No.1395/Bang/2018 Page 3 of 20 interest, current account balance and share in other assets of the partnership firm, valued on a notional basis. 6. On 25.04.2012, a deed of reconstitution was entered into between Sobha Developers Limited (Continuing partner), the assessee (Outgoing partner) and Sobha Developers Pune Pvt Ltd (Incoming partner). The assessee retired from the partnership and Sobha Developers Pune Pvt Ltd joined the partnership, with effect from 0l.04.2012. The reconstitution deed is filed at pages 114 to 131 of the Paperbook compilation. 7. In order to determine the value of the assets of the firm, the firm undertook valuation of certain immovable properties held by subsidiary and associate companies of the firm. The valuation reports obtained by the firm as on 10.02.2012 with respect to the said immovable property are available at pages 156 to 158 of the Paperbook compilation. 8. Assessee submitted that the aggregate fair market value of the aforesaid immovable properties was arrived at Rs. 55,60,22,025. The book value of such immovable properties prior to the determination of the fair market value was determined at Rs. 12,80,00,275. Consequently, the increase in value of land of Rs . 42,80,21,750 was ascertained and termed as goodwill for the purposes of accounting and settlement. It is submitted that the amounts due to the assessee upon retirement from partnership, including the aforesaid portion of ITA No.1395/Bang/2018 Page 4 of 20 goodwill, was discharged by the firm. It is submitted that the following amounts were due to the assessee at the time of retirement:- Particulars Amount (Rs) a) Initial capital contribution 20,00,00,000 b) Current account balance as on 01.04.2012 15,10,45,344 c) Interest payable on unsecured loan 7,13,94,521 d) Share of goodwill (as explained above) 12,84,06,526 Total 55,08,46,391 9. The Assessing Officer [AO] however considered such amount as consideration for transfer of capital asset resulting in income chargeable to tax under the head 'Capital Gains'. The AO held that, there is a transfer by the assessee by way of relinquishment of rights in the assets of the firm. He also held that there is a transfer by way of extinguishment of rights, as a partner in the firm. The AO relied upon the decision in J.K. Kashyap v ACIT (2008) 302 ITR 255 (Del) which held that if an assessee relinquishes his rights in the property for a consideration, it amounts to transfer under section 2(47) of the Act and liable to capital gain tax under section 45 of the Act. 10. On appeal, the Commissioner of Income Tax (Appeals) noted that Sobha City held a piece of land and that the assessee had a share of 30% of such land. It was concluded that the assessee relinquished its share in such land in favour of other partners of the firm. Therefore, it was a case of transfer of immovable property to the remaining partners of the firm. In view of the above, the CIT(Appeals) upheld the action ITA No.1395/Bang/2018 Page 5 of 20 of the AO in treating the impugned amount as income chargeable to tax under the head Capital gains. 11. Aggrieved, the assessee is in appeal before us. 12. The ld. AR submitted as follows:- (a) The amount of Rs.12.84 crores received is towards share of goodwill which arises on the revaluation of the property. (b) The assessee does not own the property of the firm and has no rights on the partition as per clause 8.1 of the partnership deed. Therefore, the assessee has not given up any right so as to attract capital gain. (c) The goodwill on revaluation of the property is not reflected in the books of accounts as per Accounting Standard AS-26 and hence the same is not credited to the partner’s capital account. 13. The ld. AR relied on the following case laws to submit that the goodwill created by revaluation received by the retiring partner as part of reconstitution is not liable to tax:- (i) Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) (ii) CIT v. Bankey Lal Vaidya (1971) 79 ITR 594 (SC) (iii) Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 (SC) (iv) Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC) (v) CIT v. Karnataka Agro Chemicals (2014) 49 taxmann.com 324 (Kar) ITA No.1395/Bang/2018 Page 6 of 20 (vi) Savitri Kadur v. DCIT (2019) 106 taxmann.com 314 (Bang. Trib.) (vii) New Kamlesh Jewellers v. ITO (2011) 9 taxmann.com 204 (Mum) 14. The ld. DR submitted that the assessee retired from the partnership firm and relinquished all its rights as partner. The assessee was paid a sum of Rs.55,08,46,391 at the time of retirement which shows that the assessee was paid Rs.12,84,06,525 over and above the sum lying in the capital account. He placed reliance on the ITAT Mumbai decision in the case of Sudhakar M. Shetty v. ACIT (2011) 130 ITD 17 (Mum) where it was held that when there is a transfer of interest in the share of the partner in a partnership firm, the same would amount to relinquishment of right over the properties of the firm and hence liable to capital gains. He submitted that in the same decision, it was also held that if the retiring partner is paid something more than what is standing to the credit of his capital account, it would amount to capital gain. He also placed reliance on some of the decisions quoted by the assessee viz., Savitri Kadur (supra) and New Kamlesh Jewellers (supra). 15. In a rebuttal to the ld. DR’s reliance on the decision in the case of Sudhakar M. Shetty (supra), the ld. AR placed reliance on the decision of the Bombay High Court in Pr. CIT v. Smt. Hemlata S. Shetty (2019) 104 taxmann.com 58. He submitted that the assessee in this case is Smt. Hemlata S. Shetty, who is the spouse of Sudhakar M. Shetty i.e., the case relied on by the ld. DR. The ld. AR submitted that on identical facts, the Bombay High Court in Pr. CIT v. Smt. Hemlata ITA No.1395/Bang/2018 Page 7 of 20 S. Shetty (supra) observed that amount received by a partner on his retirement from the partnership firm is not subject to tax in his hands. The liability, if any, for tax is on the partnership firm u/s. 45(4). He therefore submitted that the case relied upon by the ld. DR in Sudhakar M. Shetty (supra) is distinguished by the Bombay High Court in Hemlata S. Shetty’s case (supra). 16. We have heard the rival submissions and perused the material on record. To appreciate the rival submissions on the issues, it is appropriate to go through certain relevant provisions of the Act. Section 45(1) of the Act brings to tax any capital gain that accrues or arises on transfer of a capital asset. The capital gain is charged to tax in the previous year in which the transfer takes place. 17. Section 2(47) of the Act reads as under:- “(47) "transfer", in relation to a capital asset, includes,— (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or ITA No.1395/Bang/2018 Page 8 of 20 (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. **** Explanation 2.—For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;” 18. Section 2(14) of the defines "capital asset" as property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession. Therefore the share or interest of a partner in the partnership and its assets would be ‘property’ and therefore, a capital asset within the meaning of the aforesaid definition. To this extent, there can be no doubt. Now, the question before us is, whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under section 45 of the Act. 19. The assessee brought into the partnership firm a sum of Rs.20,00,00,000 as capital account. The profits of the firm got ITA No.1395/Bang/2018 Page 9 of 20 accumulated in the current account of the assessee, and interest also was accrued. The ld. AR has furnished the financials of the partnership firm ‘Shobha City’ for the financial year ending 31.03.2013 and also the capital account of the assessee as it stood in the books of the firm from the financial year ending 31.3.2013 which is reproduced below – 20. The contention of the Ld AR was that the difference between the total amount standing to the credit of the capital account, in the form of capital contribution, interest and accumulated profits and the final amount paid to the assessee at the time of retirement is goodwill. The goodwill as per the submissions of the Ld AR is the assessee’s share (30%) in the gain on revaluation of the land, which is treated as stock in trade in the books of the partnership firm. 21. We notice that, the revaluation of the inventory carried out by the firm on 10.2.2012 (pages 156 to 158 of Paperbook) was not accounted in the books by the firm, nor the same is reflected in the ITA No.1395/Bang/2018 Page 10 of 20 capital accounts of the partners. The computation of the gain is not disputed by the lower authorities, though the assessee has not produced any supporting document to show how the original cost of the land was arrived at. The important fact to be noted here is that, neither the stock in trade (land) is reflecting the revalued amount nor the capital account of the partners is credited with the gain on revaluation. 22. The Ld AR’s submission in this regard is that as per Accounting Standard 26 (AS-26) internally generated goodwill should not be reflected in the books of accounts. To examine the revaluation of stock in trade is an internally generated goodwill to justify the claim of the Ld AR, we will look at the relevant clauses of AS-26 as follows:- “2. If another Accounting Standard deals with a specific type of intangible asset, an enterprise applies that Accounting Standard instead of this Standard. For example, this Statement does not apply to: (a) intangible assets held by an enterprise for sale in the ordinary course of business (see AS 2, Valuation of Inventories, and AS 7, Construction Contracts); (b) deferred tax assets (see AS 22, Accounting for Taxes on Income); (c) leases that fall within the scope of AS 19, Leases; and (d) goodwill arising on an amalgamation (see AS 14, Accounting for Amalgamations) and goodwill arising on consolidation (see AS 21, Consolidated Financial Statements). ******** ITA No.1395/Bang/2018 Page 11 of 20 35. Internally generated goodwill should not be recognised as an asset. 36. In some cases, expenditure is incurred to generate future economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria in this Standard. Such expenditure is often described as contributing to internally generated goodwill. Internally generated goodwill is not recognised as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost.” (emphasis supplied) 21. From the above extract, it is inferred that, when an Accounting Standard deals with a specific intangible asset, then AS-26 does not apply e.g., Valuation of Inventories. Also the internally generated goodwill arises when an enterprise incurs expenditure for future benefits e.g., Scientific Research, development of prototypes, etc., then the enterprise should not recognize any goodwill that may arise out of incurring of such expenditure at a future period as it is beyond the control of the enterprise. 23. We are, therefore, of the view that the claim of the assessee for not routing the revaluation through the capital account of the partners stating it to be a practice as per AS-26 is not tenable. 22. The Ld AR placed reliance on various judgments to substantiate the claim that, the amount paid to assessee over and above the capital contribution is accumulated profits in the current account of the assessee and interest does not result in capital gain. It is settled ITA No.1395/Bang/2018 Page 12 of 20 proposition that, when the assets are revalued and the gain is credited to the capital account of the partners, there is no capital gain and the goodwill so credited when paid to the retiring partner as part of settlement does not result in capital gain. The assessee’s case is clearly distinguishable since the revalued amount is not accounted in the books of accounts. Most of the judgments relied by the Ld AR do not appl to the facts of in assessee’s case because either they are rendered prior to 01/04/1989, or, goodwill on revaluation is credited to the capital account of the partner’s in those cases. 23. We notice that the coordinate bench of the Tribunal in the case of Savitri Kadur (supra) has laid out clear principles applicable in various scenarios of a partner’s retirement i.e. on dissolution, reconstitution etc. This Tribunal in the said order dealt with a situation where the firm continues and there is reconstitution whereby a partner retires and the retiring partner is paid :- (a) on the basis of amount lying in his/her capital account; (b) on the basis of amount lying in his/her capital account + amount over and above the sum lying in his/her capital account; or (c) a lump sum consideration with no reference to the amount lying in his/her capital account. 24. The present appeal of the assessee is a case, where the assessee paid amounts over and above the sum, standing to the credit of the capital account. i.e., situation (b) referred above. The relevant extract ITA No.1395/Bang/2018 Page 13 of 20 of the decision of coordinate bench of the Tribunal in the case of Savitri Kadur (Supra) is reproduced below for ready reference:- 22. As far as situation (b) & (c) are concerned, this situation has been subject matter of consideration in several cases and there is conflict of opinion amongst Courts on whether there would be incidence of tax or not. We also make it clear that the fact that there was revaluation of the assets of the firm and resultantly the capital account of the firm stood enhanced is also not relevant. What is the credit in the capital account of the partner alone has to be seen. So long as there is no prohibition on revaluation of assets of the firm and there are no tax incidence on revaluation of assets of the firm, the credit to the partners capital account on revaluation cannot be looked at adversely. 23. Capital asset has been defined in section 2(14) of the Act, as meaning "Property" of any kind held by the assessee, whether or not connected with his business or profession. The above exhaustive definition is subject to the following exclusions like stock-in-trade, consumable stores or raw material held for the purpose of business or profession, personal effects agricultural land in India, certain Gold bonds, special bearer bonds and Gold deposit bonds. The share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. The next question is as to whether it can be said that there was a transfer of capital asset by the retiring partner in favour of the firm and its continuing partners so as to attract a charge under section 45 of the Act. 24. The Hon'ble Bombay High Court had an occasion to deal with identical case as that of the Assessee in the present case which was a case of situation (b) referred to earlier in Tribhuvandas G.Patel v. CIT [1978] 115 ITR 95 (Bom.) In the case of Tribhuvandas G. Patel (supra), the assessee was a partner in the firm of KEW. The assessee had served on the other two partners a notice of dissolution of the firm with effect from 31- 12-1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but, ultimately, the disputes between the parties were amicably settled out of court and under a deed dated January 19, 1962, the ITA No.1395/Bang/2018 Page 14 of 20 assessee retired from the firm with effect from 31-8-1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement, the assessee was paid: (1) 1 lakh as his share of profits of the firm for the broken period ended 31-8-1961, (2) Rs. 50,000 as his share of the value of the goodwill, and (3) Rs. 4,77,941 as his share in the remaining assets of the firm. The issue with regard to taxability of the sum of Rs. 4,77,941 or any part thereof to capital gains tax arose for consideration before the Hon'ble Court. The Hon'ble Court took up for consideration as to what is the real nature of the transaction when a partner retires from the partnership. Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of the continuing partners, or does it stand on the same footing as an adjustment of his rights that results upon dissolution of the partnership. On behalf of the assessee it was contended that retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon dissolution of a firm and, therefore, since there was no transfer of any capital asset in the instant case, the sum of Rs. 4,77,941 or any part thereof was not liable to be charged under the head "Capital gains". This was not accepted by Hon'ble Bombay High Court and they held that a clear distinction exists between retirement of a partner from a firm and dissolution of the firm. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the case of dissolution of the firm as such no more exists and the dissolution is between all the partners of the firm. Thereafter the Hon'ble Court held that where accounts are taken and the partner is paid the amount standing to the credit of his capital account there would be not transfer. If, on the other hand, the partner is paid a lump sum consideration for transferring or releasing his interest in the partnership assets to the continuing partners then there would be an element of transfer. The Hon'ble Court held that what one has to see is whether the terms of the deed of retirement constitutes release of any assets of the firm in favour of the continuing partners. Having regard to the particular mode employed by the assessee and the continuing partners to effect and bring about retirement of the assessee from the ITA No.1395/Bang/2018 Page 15 of 20 partnership, the Court held that the transaction will have to be regarded as amounting to "transfer" within the meaning of section 2(47) of the Income-tax Act, inasmuch as the assessee could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners and the transaction cannot be regarded as amounting to any distribution of capital assets upon dissolution of a firm. The above decision was followed by the Hon'ble Bombay High Court in the other two cases of N.A. Modi v. CIT [1986] 162 ITR 420/24 Taxman 219 and CIT v. H.R. Aslot [1978] 115 ITR 255 (Bom.). 25. As against the decision of the Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) the Assessee preferred appeal before the Hon'ble Supreme Court and the Hon'ble Supreme Court in the case of Thirubhuvandas G. Patel v. CIT [1999] 236 ITR 515 framed three questions of law for consideration and the following two questions (Question No.2 & 3) which are relevant for the present case were decided as follows: "2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 received by the assessee as his share of the value of the goodwill or any part thereof was liable to tax as capital gain? 3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,77,941 or any part thereof was liable to tax as capital gain by reason of section 47(ii) of the Act?" So far as question No. 2 is concerned, it has already been answered in favour of the assessee. In view of the decision of this court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 the said question must be held to have been rightly answered in favour of the assessee. So far as question No. 3 is concerned the assessee invoked clause (ii) of section 47 to contend that the said sum of Rs.4,47,941 does not represent a capital gain. Mr. Sharma, learned counsel for the appellant-assessee, has brought to our notice the decision of this court in Addl.CIT v. Mohanbai Pamabhai [1987] 165 ITR 166 where it has been held, following the decision in Sunil Siddharthbhai v. CIT ITA No.1395/Bang/2018 Page 16 of 20 [1985] 156 ITR 509 (SC), that even where a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of section 47. Therefore, following this decision, this question has to be and is answered in favour of the assessee and against the Revenue." 26. The decision in the case of Tribhuvandas G. Patel (supra) is a case where the deed of reconstitution specifically referred to release of rights of the outgoing partners in the assets of the partnership and further the fact that a specified sum over and above the sum standing to the credit of the partner's capital account was paid to the retiring partner, which excess sum was attributed to the retiring partner giving up his rights over the properties of the firm. It is only because of the provisions of Sec.47(ii) of the Act that the Hon'ble Court held that there was no incidence of tax on capital gain on the transaction. 27. The decision will therefore have to be viewed as not applicable to cases after the amendment to the law w.e.f. 1-4- 1989 whereby Sec.47(ii) of the Act was deleted and simultaneously Sec.45(3) & 45(4) were introduced. 28. Therefore the question whether there will be incidence of tax on capital gain on retirement of a partner from the partnership firm would depend on the upon mode in which retirement is effected as laid down by the Hon'ble Bombay High Court in the cases of Tribhuvandas G. Patel (supra) and N.A. Modi's case (supra). Therefore the decision of the ITAT Mumbai in the case of Sudhakar M. Shetty v. Asstt. CIT [2011] 130 ITD 197/9 taxmann.com 274 (Mum.) following the decision of the Pune Bench of the ITAT in the case of Shevantibhai C. Mehta v. ITO [2004] 4 SOT 94 holding that question of taxability of an amount received by a partner on retirement from firm would depend upon mode in which retirement is effected, holds good. Therefore taxability in such situation would depend on several factors like the intention as is evidenced by the various clauses of the instrument evincing retirement or dissolution, the manner in which the accounts have been settled and whether the same includes any amount in excess of the share of the partner on the revaluation of assets and other relevant factors which will throw light on the entire scheme of retirement/reconstitution. ITA No.1395/Bang/2018 Page 17 of 20 29. In the case of Sudhakar M.Shetty (supra), the ITAT came to the conclusion after taking into consideration the sequence of events in that case (Paragraph-40 of the said order) which lead to ultimately the partner retiring from the firm. A Partnership firm in that case came into existence on 1.8.2005 between the Assessee and another as partners. On 16.9.2005 another partner joined the partnership. On 23.9.2005 the firm purchased a property for a consideration of Rs.6.5 Crores with 81 tenants therein to be vacated by the firm. On 26.9.2005 two more partners were inducted into the Partnership firm. On 8.3.2006 a sanction was obtained for setting up a 5 Star hotel over the property purchased by the firm. Thereafter On 26.3.2006 one partner retired from the firm. Prior to such retirement a revaluation of the assets of the firm which was the land that was purchased by the firm took place. There was surplus of Rs.154,39,90,000/- on revaluation. This was credited in the profit sharing ratio of the partners in their respective capital account. Thereafter on 22.5.2006, the Assessee retired from the partnership firm. The amount standing to the credit of the Assessee's capital account was Rs.4.45 Crores on which interest of Rs.26,85,963 was paid and profit on revaluation of land at Rs.30,87,98,087/-was also credited. Thus a sum of Rs.35,59,84,050 was standing to the credit of the Assessee's capital account as on 31.3.2006. As per the deed of retirement the Assessee was paid the sum standing to the credit of his capital account and he gave up all his rights as partners and also over the property that the firm had purchased. All these factors were cumulatively considered as nothing but an act by which the Assessee gave up his rights over the property of the firm and therefore the sum of Rs.30,87,98,087/- (gain on valuation of the property of the firm) was construed as a capital gain for giving up rights over the property of the firm liable to tax on capital gain. In such a scenario one has to construe the act of giving up or relinquishing rights as partner as transfer of capital asset and the capital gain will be the sum paid over and above the sum standing to the credit in the capital account. 30. It can be seen from the facts of the case of Sudhakar M.Shetty (supra), the revaluation of the assets took place in AY 2006-07. The Assessee Sudhakar M.Shetty retired in AY 2007-08 and what was taxed was virtually the sum credit to his capital account ITA No.1395/Bang/2018 Page 18 of 20 consequent to revaluation of assets that took place in AY 2006- 07. As we have already observed it should not be taken that the revenue has taxed the gain on revaluation of assets. All cumulative factors will have to be seen to come to a conclusion regarding the real nature of gain before concluding that there was in fact capital gain on relinquishment of right as partner in the firm. 31. Keeping in mind the legal position as set out in the earlier paragraphs, let us examine the facts of the present case. The facts of the case are almost identical to the facts in the case of Sudhakar M.Shetty (supra). The Assessee and D.Venkatesh formed a Partnership by a deed of partnership dated 1.4.2004. Miss.Suvidha Venkatesh, D/o. D.Venkatesh was inducted as partner in the firm w.e.f. 1.4.2007. On 8.6.2007 an MOU was signed by the three partners and it was agreed that the Assessee would retire from the firm w.e.f. 1.4.2007 and a sum of Rs.339.50 lakhs would be paid to the Assessee. On 9.6.2007 deed of retirement was signed. The Assessee gave up all her rights as partner of the firm and its assets nor was the Assessee liable to pay any of its liabilities. The capital account of the Assessee as on 1.4.2006 showed an opening balance of Rs.1,64,14,044. Profit for the year of Rs.46,20,591 was credited to his account. Similarly on revaluation of the land and building on 15.1.2007, a sum of Rs.53,26,462 and Rs.9,24,650 respectively was credited to her account. Another sum of Rs.18,12,528 was also credited as interest on capital in her capital account. After reducing the Partner's drawing and other payments made the balance to the credit of Assessee's capital account as on 31.3.2007 was Rs.2,77,88,200/-. On 9.6.2007 the Assessee's was paid Rs.38,38,200 towards Goodwill and another sum of Rs.2,39,00,000/- being part of the consideration of Rs.339.50 lacs payable on retirement. The difference between the sum of Rs.3,39,50,000 and the sum of Rs.2,77,88,200 viz., a sum of Rs.61,61,800 was taxed as capital gain by the AO. Out of the above, Rs.38,38,200 was Goodwill. Therefore to the extent of Rs.2,77,88,200 being closing balance as on 31.3.2007 in the capital account and Rs.38,38,200/- being Goodwill, was the sum payable as per the capital account of the Assessee. The claim of the Assessee that the entire sum of Rs.61,61,800 is Goodwill is not substantiated by entries in the books of accounts of the ITA No.1395/Bang/2018 Page 19 of 20 Assessee and the book entries are only for Rs.38,38,200/- recorded in the Assessee's capital account as well as Goodwill Account. The capital gain therefore would be Rs.339.50 lacs minus Rs.2,77,88,200 + 38,38,200 = Rs.23,23,600/-. The Assessee had invested a sum of Rs.50 lacs in specified bonds and therefore the AO allowed deduction upto Rs.50 lacs. Therefore there would no capital gain which is chargeable to tax.” 25. The Tribunal in the case of Savitri Kadur (supra) clearly stated that the goodwill to the extent of the amount recorded in the books is not taxable and the goodwill that is not substantiated by entries in the books of accounts of the assessee would become taxable. In assessee’s case though the assessee claims that the difference in the amount as per capital account in the books and the amount settled to the assessee is goodwill, however, the same is not recorded in the books. Hence, respectfully following the above decision of the coordinate bench of the Tribunal, we hold that the amount of Rs.12,84,06,525 being the amount paid in excess of what is standing to the credit of the partner’s capital account is taxable in the hands of the assessee. Thus, the appeal of the assessee is dismissed. 26. In the result, the appeal of the assessee is dismissed Pronounced in the open court on this 18 th day of May, 2022.. Sd/- Sd/- ( BEENA PILLAI ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 18 th May, 2022. / Desai S Murthy / ITA No.1395/Bang/2018 Page 20 of 20 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.