Sri K Koteswara RAo, Gudivada, Hyderabad V. The ACIT, Central Circle, Vijayawada

ITA 185/VIZ/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56800 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 02-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K SINGH
• Keywords: Capital asset; Search and seizure; Capital receipt
• Section: 143(3); 153A; 263; 132; 28

Judgement Text

ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD 1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO S . 184&185 /VIZAG/ 20 11 ASSESSMENT YEAR : 2005 - 06 & 2006 - 07 K. KOTESWARA RAO HYDERABAD VS. ACIT, CENTRAL CIRCLE VIJAYAWADA (APPELLANT) (RESPONDENT) PAN NO.AAETS 4301C APPELLANT BY: SHRI G.V.N. HARI, CA RESPONDENT BY: SHRI R.K. SINGH, DR DATE OF HEARNG: 12.07.2011 DATE OF PRONOUNCEMENT: 23 .08.2011 ORDER PER SHRI S.K. YADAV, JUDICIAL MEMBER:- THESE APPEALS ARE PREFERRED BY THE ASSESSEE AGAIN ST THE ORDER OF THE CIT PASSED U/S 263 OF THE INCOME-TAX ACT (HEREINAFT ER CALLED AS AN ACT) SETTING ASIDE THE ASSESSMENT ORDER FOR THE ASSESSME NT YEAR 2005-06 & 2006- 07 AFTER HOLDING IT TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE WITH A DIRECTION TO THE A.O. TO PASS AN ASS ESSMENT ORDER DENOVO AFTER COLLECTING MATERIAL AND PROPER VERIFICATION. 2. THE FACTS IN NARROW COMPASS BORNE OUT FROM THE O RDER OF THE LOWER AUTHORITIES ARE THAT THE ASSESSEE DR. K. KOTESWARA RAO ALONG WITH THE OTHER MEMBERS OF HIS FAMILY WAS A PARTNER IN FIRM M/S. GO WTHAM RESIDENTIAL JUNIOR COLLEGE WHICH WAS RUNNING RESIDENTIAL JUNIOR COLLEG E AT VIJAYAWADA. DR. K. KOTESWARA RAO AND TWO OTHER PARTNERS RETIRED FROM T HE FIRM AND AS PER THE MOU DATED 1.4.2002 ENTERED WITH THE OTHER CONTINUIN G PARTNERS, THE ASSESSEE WAS TO RECEIVE ` 40 LAKHS BEFORE 15.7.2004 (RELEVANT TO ASSESSMENT YEAR 2005-06) AND ` 20 LAKHS BEFORE 15.7.2005 (RELEVANT TO ASSESSMENT YEAR 2006-07) TOWARDS GOODWILL. AS PER THE MOU, THE ASS ESSEE AND OTHER RETIRING ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 2 PARTNERS SHOULD NOT INVOLVE DIRECTLY OR INDIRECTLY IN THE STARTING OR RUNNING ANY JUNIOR COLLEGE UNTIL 1 ST JULY, 2007. CONSEQUENT TO THE SEARCH AND SEIZURE OPERATION U/S 132 OF THE I.T. ACT CONDUCTED IN THE PREMISES OF K. KOTESWARA RAO, THE OTHER PARTNERS AND M/S. GOWTHAM RESIDENTIA L JUNIOR COLLEGES ON 24.7.2006, THE ASSESSMENT WAS FRAMED U/S 143(3) REA D WITH SECTION 153A FOR THE ASSESSMENT YEAR 2005-06 AND 2006-07 IN WHICH TH E CLAIM OF THE ASSESSEE THAT THE AFORESAID RECEIPT OF ` 60 LAKHS AS PER MOU WAS TOWARDS THE GOODWILL WAS ACCEPTED. 3. ON SCRUTINY, THE CIT OBSERVED THAT THE SAID RECE IPT WAS A NON-COMPETE FEES AND THE SAME WAS TO BE TAXABLE U/S 28(VA)(A) O F THE ACT BUT WHILE COMPLETING THE ASSESSMENT, THE A.O. HAS NOT BROUGHT THE ABOVE AMOUNTS TO TAX FOR THE ASSESSMENT YEAR 2005-06 & 2006-07. 4. THE CIT ACCORDINGLY ISSUED A SHOW CAUSE NOTICE T O THE ASSESSEE PROPOSING REVISION U/S 263 OF THE ACT. IN RESPONSE THERETO, IT WAS STATED BY THE ASSESSEE THAT THE AMOUNT RECEIVED BY THE ASSESS EE AS PER THE MOU WAS TOWARDS THE SHARE IN THE GOODWILL. THEREFORE, IT I S NOT CHARGEABLE TO TAX. IT WAS FURTHER CONTENDED BEFORE THE CIT THAT THERE WAS NO CLAUSE IN THE MOU WHICH CAN SUGGEST THAT A PAYMENT WAS MADE ON ACCOUN T OF NON-COMPETITION FEES. IN THE DEED OF GUARANTEE AND THE MOU, IT WAS SPECIFICALLY MENTIONED THAT AMOUNT OF ` 60 LAKHS WAS TO BE PAID TO THE ASSESSEE TOWARDS A SHARE IN THE GOODWILL OF THE PARTNERSHIP FIRM AND THE AMOUNT WAS RECEIVED FOR PERMANENTLY RELINQUISHING HIS SHARE OF RIGHTS IN TH E SOURCE OF INCOME. SUCH A PERMANENT RELINQUISHMENT WILL RESULT IN THE CAPITAL RECEIPT AND CANNOT BE TREATED AS A REVENUE. IT WAS ALSO STATED BEFORE TH E CIT THAT THE CONTINUING PARTNERS HAVE ALSO FILED A CIVIL SUIT AGAINST THE A SSESSEE FOR PERMANENT INJUNCTION RESTRAINING THE ASSESSEES FROM CARRYING ON ANY ACTIVITIES IN CONTRAVENTION TO THE MOU AND THE SAID CIVIL SUIT WA S DISMISSED BY THE CIVIL COURT. THEREFORE, THERE WAS NO UNDERSTANDING EITHE R IN THE MOU OR ANYWHERE THAT ANY PART OF THIS AMOUNT WAS RECEIVED ON ACCOUN T OF NON-COMPETITION FEES. THE CIT WAS NOT CONVINCED WITH THE EXPLANATI ONS OF THE ASSESSEES AND HE FINALLY SET ASIDE THE ASSESSMENT ORDER WITH A DI RECTION TO THE A.O. TO RE- ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 3 EXAMINE THE ISSUE AFRESH AFTER COLLECTING THE RELEV ANT MATERIAL AND MAKING PROPER VERIFICATION. 5. AGGRIEVED WITH THIS ORDER OF THE CIT, THE ASSESS EE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL WITH THE SUBMISSION THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS E XAMINED THIS ISSUE BY MAKING NECESSARY ENQUIRIES. IN SUPPORT OF THIS CON TENTION, HE HAS INVITED OUR ATTENTION TO THE QUESTIONNAIRE ISSUED BY THE ASSESS ING OFFICER VIDE LETTER DATED 13.10.2008 IN WHICH THE ASSESSEE WAS ASKED TO EXPLA IN THE NATURE OF RECEIPT OF THIS AMOUNT OF ` 60 LAKHS IN ASSESSMENT YEAR 2005-06 AND 2006-07. THE A.O. HIMSELF HAS ASKED THAT THIS NON-COMPETITION FE ES FALLS U/S 28 OF THE ACT AND SINCE THE SAME WAS NOT ADMITTED AS INCOME, PLEA SE EXPLAIN WHY THIS SHOULD NOT BE BROUGHT TO TAX AS PROFIT IN TERMS OF SECTION 28 OF THE INCOME TAX ACT? THIS QUERY WAS DULY REPLIED BY THE ASSESS EES VIDE HIS LETTER DATED 3.11.2008 IN WHICH IT WAS STATED THAT THIS AMOUNT W AS RECEIVED TOWARDS THE GOODWILL AND NOT AS NON-COMPETITION FEES. BEING CO NVINCED WITH THE EXPLANATIONS OF THE ASSESSEES, THE A.O. HAS ACCEPTE D THE CLAIM. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT IT IS A SETTLED POSITION OF LAW THAT ONCE THE ASSESSING OFFICER IS CONVINCED WITH T HE EXPLANATIONS OF THE ASSESSEES AND THE CLAIM OF THE ASSESSEES IS ACCEPTE D, HE IS NOT REQUIRED TO RECORD HIS REASONS OF ACCEPTANCE IN THE ASSESSMENT ORDER. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO PLACED A RELIANCE UPON FO LLOWING JUDGEMENTS IN SUPPORT OF HIS CONTENTION THAT THE AMOUNT RECEIVED OR RECEIVABLE BY A RETIRING PARTNER IS NOT LIABLE TO BE TAXED IN VIEW OF THE LE GAL POSITION THAT WORD TRANSFER AS DEFINED IN SECTION 2(47) OF THE ACT D OES NOT COVER THE CASE OF PARTNER RETIRING FROM A FIRM AND RECEIPT OF ANY AMO UNT FROM RETIREMENT FROM THE PARTNERSHIP FIRM. 1. DCIT VS. VENKATA RAO (HUF) ITA 217/V/2011 ORDER DATED 12.9.2008 2. CIT VS. R. LINGAMALLU RAGHU KUMAR 247 ITR 801 ( SC) 3. PRASANTH S. JOSHI VS. ITO 324 ITR 154 4. ITO VS. AMITABH SINGH 16 SOT 453 (DELHI) 5. CIT VS. G.K. KABRA 211 ITR 336. ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 4 6. THE LD. D.R. ON THE OTHER HAND BESIDES PLACING A HEAVY RELIANCE UPON THE ORDER OF THE CIT HAS INVITED OUR ATTENTION TO T HE MOU EXECUTED BETWEEN THE RETIRING PARTNERS AND THE CONTINUING PARTNERS. IN CLAUSE 8 OF THE MOU, IT HAS BEEN STATED THAT THE PARTNER NO.1 I.E. RETIRING PARTNERS SHALL NOT DIRECTLY OR INDIRECTLY INVOLVED IN STARTING OR RUNNING ANY JUNI OR COLLEGE UP TO AND UNTIL 1 ST JULY, 2007. MEANING THEREBY, AT THE TIME OF MAKING THE PAYMENT OF THE AFORESAID AMOUNT, THE CONDITION WAS IMPOSED UPON TH E RETIRING PARTNERS THAT THEY SHALL NOT DIRECTLY OR INDIRECTLY INVOLVE IN ST ARTING OR RUNNING ANY JUNIOR COLLEGE UP TO AND UNTIL 1 ST JULY, 2007. THEREFORE, THE AMOUNT RECEIVED BY THE RETIRING PARTNERS IS AS A NON-COMPETITION FEES AND IS CHARGEABLE TO TAX. THE LD. D.R. FURTHER CONTENDED THAT CIVIL SUIT WAS FILE D AGAINST THE ASSESSEES FOR VIOLATION OF THE TERMS AND CONDITIONS OF THE MOU. MOREOVER, THE CIT HAS NOT EXPRESSED HIS OWN VIEW IN THIS REGARD. HE HAS SIMP LY DIRECTED THE A.O. TO RE- EXAMINE THE ISSUE AFRESH AFTER COLLECTING THE RELEV ANT MATERIAL. SINCE THE ASSESSING OFFICER HAS ACCEPTED THE CLAIM OF THE ASS ESSEE WITHOUT VERIFYING THE NATURE OF RECEIPT, THE ASSESSMENT ORDER IS ERRONEOU S AND PREJUDICIAL TO THE INTEREST OF THE REVENUE AND THE CIT HAS RIGHTLY INV OKED HIS JURISDICTION U/S 263 OF THE ACT. 7. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CA REFUL PERUSAL OF THE ORDERS OF THE LOWER AUTHORITIES, WE FIND THAT THE C ONTROVERSY REVOLVES AROUND THE MOU EXECUTED BETWEEN THE RETIRING PARTNERS AND THE SURVIVING PARTNERS. IN CLAUSE 6 OF THIS MOU, IT WAS AGREED AMONG THE PA RTIES THAT THE SURVIVING/CONTINUING PARTNERS WOULD PAY A GOODWILL OF ` 60 LAKHS IN TWO INSTALMENTS I.E. THE FIRST INSTALMENT OF ` 40 LAKHS ON OR BEFORE 15.7.2004 AND THE SECOND INSTALMENT OF ` 20 LAKHS ON OR BEFORE 15.7.2005. 8. THERE IS ONE MORE CLAUSE I.E. CLAUSE NO.8 WHICH SAYS THAT THE PARTY NO.1 I.E. RETIRING PARTNERS HERE TO SHALL NOT DIREC TLY OR INDIRECTLY INVOLVE IN STARTING OR RUNNING ANY JUNIOR COLLEGE UPTO AND UN TIL 1 ST JULY, 2007. BOTH THE CLAUSES I.E. CLAUSE NOS.6&7 ARE INDEPENDENT CLAUSES AND NOWHERE IT HAS BEEN MENTIONED IN EITHER OF THE CLAUSE THAT THE AFORESAI D PAYMENT IS MADE WITH A CONDITION THAT THE ASSESSEE SHALL NOT DIRECTLY OR I NDIRECTLY INVOLVE IN STARTING OR ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 5 RUNNING ANY JUNIOR COLLEGE UPTO AND UNTIL 1 ST JULY, 2007. BOTH THE CLAUSES ARE TO BE INTERPRETED INDEPENDENTLY. THE INTENTION OF THE ASSESSEE IS ALSO CLEAR FROM THE FACTS THAT AFTER THE RECEIPT OF THE AFORES AID AMOUNT, HE SET UP THE EDUCATIONAL INSTITUTIONS. AGAINST THIS ACTIVITY OF THE ASSESSEE, THE CONTINUING PARTNERS FILED A CIVIL SUIT SEEKING PERMANENT INJUN CTIONS RESTRAINING THE ASSESSEE FROM HAVING ANY JUNIOR COLLEGE EITHER RESI DENTIAL OR NON-RESIDENTIAL AND TO IMPART COACHING TO STUDENTS APPEARING FOR VA RIOUS COMPETITIVE EXAMINATIONS, SUCH AS OF THE SURVIVING PARTNERS, IN ANY MANNER, WHATSOEVER INCLUDING USING THE SURVIVING PARTNERS POPULAR NAME GOWTHAM AND ITS LOGO UP TO AND UNTIL 1.7.2007. THIS CIVIL SUIT WAS DISM ISSED BY THE CIVIL COURT. THE COPY OF THE JUDGEMENT OF THE CIVIL COURT IS AVAILAB LE AT PG.NO.16 TO 27 OF THE COMPILATION OF THE ASSESSEE. 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A S PECIFIC QUERY WAS RAISED BY THE ASSESSING OFFICER VIDE ITS LETTER DAT ED 13.10.2008 ASKING THE ASSESSEE TO EXPLAIN WHY THIS AMOUNT RECEIVED SHOULD NOT BE BROUGHT TO TAX AS PROFIT IN TERMS OF SECTION 28 OF THE INCOME-TAX ACT 1961. THE SPECIFIC QUERY RAISED TO THE ASSESSEE IS EXTRACTED HEREUNDER FOR T HE SAKE OF REFERENCE: NON-COMPETE FEE RECEIVED: ` 20,00,000/- DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSME NT YEAR 2006-07, YOU HAVE RECEIVED A SUM OF ` 20,00,000/- ON 15.7.2005, TOWARDS THE 2 ND INSTALMENT OF NON-COMPETE FEE IN TERMS OF A MEMORAN DUM DATED 1.4.2002 ENTERED INTO BETWEEN THE RETIRING AND EXISTING PART NERS OF GOWTHAM RESIDENTIAL JUNIOR COLLEGE. THIS IS EXCLUSIVELY RE CEIVED BY YOU DURING THE FINANCIAL YEAR RELEVANT FOR ASST. YEAR 2006-07. TH OUGH IT IS SHOWN IN THE RECEIPTS SIDE OF CASH FLOW STATEMENT, THE ABOVE REC EIPT IS NOT ADMITTED AS INCOME. IN THIS REGARD, YOUR ATTENTION IS DRAWN TO SECTION 28 OF THE I.T. ACT WHICH GOVERNS THE RECEIPT OF THE NATURE OF THE PAYM ENT RECEIVED WHICH IS EXCLUSIVELY RECEIVED BY YOU FOR NOT CARRYING OUT AN Y BUSINESS OF RUNNING ANY INSTITUTION UPTO 2007. AS THIS NON-COMPETE FEE FAL LS UNDER SECTION 28 OF ACT AND AS THE SAME WAS NOT ADMITTED AS INCOME, PLEASE EXPLAIN WHY THIS SHOULD NOT BE BROUGHT TO TAX AS PROFIT IN TERMS OF SECTION 28 OF INCOME-TAX ACT, 1961. 10. THE REPLY WAS FILED BY THE ASSESSEE VIDE ITS LE TTER DATED 3.11.2008. THE QUESTIONNAIRE AND RECEIPTS ARE AVAILABLE AT PG. NO.30 TO 44 OF THE COMPILATION OF THE ASSESSEE. IN REPLY DATED 3.11.2 008, IT WAS SPECIFICALLY STATED BY THE ASSESSEE THAT WHATSOEVER AMOUNT WAS R ECEIVED BY THE ASSESSEE ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 6 IT WAS A COST OF GOODWILL RELINQUISHED BY THE ASSES SEE IN FAVOUR OF THE SURVIVING PARTNERS AND IT IS NOT A FEES FOR NON-COM PETITION. THE SPECIFIC REPLY GIVEN BY THE ASSESSEE IS ALSO EXTRACTED HEREUNDER F OR THE SAKE OF REFERENCE: NON COMPETE FEE . NO NON COMPETE FEE RECEIVED BY ME. I HAVE ENTITLE D FOR GOODWILL OF ` 60,00,000/- AS PER CLAUSE VI OF THE MEMORANDUM DATE D 1.4.2002 REFERRED BY YOUR GOODSELVES IN YOUR LETTER DATED 13.10.2008. C LAUSE VI OF THE MOU IS HEREWITH REPRODUCED. THAT ON THE COMPLETE RETIREMENT PARTY NO.(1) HERE TO, THE PARTY NO.(2) HERETO, HAS AGREED TO PAY A GOODWILL OF ` 60,00,000/- (RUPEES SIXTY LAKHS ONLY) IN TWO INSTALMENTS I.E. THE FIRST INSTALMENT OF ` 40,00,000/- ON OR BEFORE 15 TH JULY, 2004 AND THE SECOND INSTALMENT OF ` 20,00,000/- ON OR BEFORE 15 TH JULY, 2005. FROM THE ABOVE IT IS CLEAR THAT FIRM PAID ME GOODW ILL ONLY AND THE NOT FEES FOR NON COMPETITION. AS I AM THE PARTNER RETI RING I AM ENTITLED FOR THE SHARE IN THE ASSETS OF THE FIRM INCLUDING GOODWILL. MY SHARE OF GOODWILL WAS ASSESSED AT ` 60 LAKHS AND OUT OF WHICH ` 20 LAKHS WAS PAID. THIS CONSTITUTES CAPITAL RECEIPT IN MY HANDS. IN THIS CONNECTION I WISH TO BRING TO YOUR KIND NOTICE THE DECISION OF HONORABLE A.P. HIGH COURT IN THE CASE OF CIT VS. L. RAGHU KUMAR REPORTED IN 141 ITR 674. THIS DECISION WAS APPROVED BY THE HONORABLE SUPREME COURT IN THE CASE OF CIT VS. R. L INGMALLU RAGHUKUMAR REPORTED IN 247 ITR 801. COPIES OF THE DECISION CI TED ABOVE ARE HEREWITH ENCLOSED FOR YOUR RECORD AND KIND PERUSAL. THEREFO RE THERE IS NO QUESTION OF APPLICABILITY OF SECTION 28 OF THE I.T. ACT. 11. FROM A CAREFUL PERUSAL OF THE MATERIAL AVAILABL E ON RECORD, WE FIND THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSING OFFICER HAS EXAMINED THE ISSUE IN THE LIGHT OF EXPLANATIONS OF THE ASSESSEE AND THE RELEVANT DOCUMENT. HAVING CONVINCED WITH THE EXPLA NATIONS OF THE ASSESSEE THE ASSESSING OFFICER HAS ACCEPTED THE CLAIM OF THE ASSESSEES THAT THE AMOUNT RECEIVED WAS TOWARDS THE GOODWILL AND NOT A NON-COM PETITION FEES. IT IS ALSO A SETTLED POSITION OF LAW THAT ONCE THE ASSESSING O FFICER IS SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND ACCEPTED HIS CLAIM, THE A.O. IS NOT REQUIRED TO RECORD ANY REASONS FOR HIS ACCEPTANCE IN THE ASS ESSMENT ORDER AND HIS ORDER CANNOT BE REVISED U/S 263 OF THE ACT FOR THE SIMPLE REASON THAT A.O. HAS NOT DISCUSSED THE ISSUE AT ALL IN THE ASSESSMEN T ORDER. WHAT IS REQUIRED TO BE SEEN IS THAT WHETHER THE ASSESSING OFFICER HA S JUDICIOUSLY APPLIED HIS MIND AND HE HAS TAKEN A POSSIBLE VIEW. THE ORDER O F THE A.O. CAN ONLY BE REVISED, DESPITE HIS APPLICATION OF MIND, IF IT IS ESTABLISHED THAT THE VIEW TAKEN ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 7 BY THE ASSESSING OFFICER IS PERVERSE AND CONTRARY T O THE LEGAL POSITIONS. BUT THAT IS NOT THE CASE HERE. IT IS A QUESTION OF APP RECIATION OF FACTS AND THE DOCUMENTS AVAILABLE ON RECORD ALSO SPEAKS THAT THE AMOUNT RECEIVED BY THE ASSESSEES IS TOWARDS THE GOODWILL AND NOT A NON-COM PETITION FEES. THEREFORE, THE VIEW TAKEN BY THE ASSESSING OFFICER CANNOT BE C ALLED TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 12. WE HAVE ALSO EXAMINED THE CLAIM OF THE ASSESSEE ON MERIT AND WE FIND THAT IN THE MOU IN CLAUSE NO.6, IT HAS BEEN SPECIFI ED THAT THE SURVIVING PARTNERS WOULD PAY A GOODWILL OF ` 60 LAKHS IN TWO INSTALMENTS. THE FIRST INSTALMENT OF ` 40 LAKHS TO BE PAID ON OR BEFORE 15.7.2004 AND SEC OND INSTALMENT OF ` 20 LAKHS ON OR BEFORE 15.7.2005. NOWHERE IN THIS CLAUSE, IT HAS BEEN MENTIONED THAT THIS PAYMENT IS MADE TOWARD S THE NON-COMPETITION FEES. THERE IS ONLY A SEPARATE CLAUSE I.E. CLAUSE NO.8 WHICH SAYS THAT THE RETIRING PARTNERS SHALL NOT DIRECTLY OR INDIRECTLY INVOLVE IN THE STARTING OR RUNNING IN JUNIOR COLLEGE. THIS CLAUSE NO.8 DOES N OT HAVE ANY RELEVANCE WITH CLAUSE NO.6. MOREOVER, AFTER THE RECEIPT OF THE AF ORESAID AMOUNT, THE ASSESSEE HAS SET UP ITS EDUCATIONAL INSTITUTIONS AN D ENTERED INTO THE SAME ACTIVITIES IN WHICH THE SURVIVING PARTNERS ARE INVO LVED, AGAINST WHICH A CIVIL SUIT WAS FILED FOR PERMANENT INJUNCTION RESTRAINING THE ASSESSEE FROM INVOLVING IN SAME ACTIVITIES. THIS CIVIL SUIT WAS DISMISSED BY A CIVIL COURT ON THE GROUND THAT THERE CANNOT BE A PROHIBITION AGAIN ST A PUBLIC POLICY. MEANING THEREBY, THOUGH THERE WAS AN INDEPENDENT CL AUSE IN THE MOU, BUT THE ASSESSEE HAD NO INTENTION NOT TO INVOLVE IN THE STARTING OR RUNNING IN EDUCATIONAL INSTITUTIONS. THEREFORE, THE AMOUNT RE CEIVED BY THE ASSESSEE IS ON ACCOUNT OF RELINQUISHMENT OF HIS SHARE IN GOODWI LL ACQUIRED BY THE EDUCATIONAL INSTITUTIONS OVER A PERIOD OF TIME IN F AVOUR OF SURVIVING PARTNERS AND AS SUCH THE SAME IS NOT CHARGEABLE TO TAX. 13. IN THE CASE OF DCIT VS. VENKATA RAO (SUPRA), TH E TRIBUNAL HAS HELD RELYING UPON THE JUDGEMENT OF THE JURISDICTIONAL HI GH COURT IN THE CASE OF CIT VS. L. RAGHUKUMAR 141 ITR 674 (AP) AND CIT VS. P.H. PATEL 171 ITR 128 (AP) THAT THE AMOUNT RECEIVED OR RECEIVABLE BY A RE TIRING PARTNER IS NOT LIABLE ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 8 TO BE TAXED IN VIEW OF THE LEGAL POSITION THAT THE WORD TRANSFER AS DEFINED IN SECTION 2(47) OF THE ACT, DOES NOT COVER THE CASE O F PARTNER RETIRING FROM THE FIRM AND RECEIPT OF ANY AMOUNT FROM RETIREMENT FROM PARTNERSHIP FIRM. 14. IN THE CASE OF CIT VS. L. LINGMALLU RAGHUKUMAR 247 ITR 801, THEIR LORDSHIP OF THE APEX COURT HAVE HELD THAT ON RETIRE MENT OF ASSESSEE PARTNER FROM THE FIRM THERE WAS NO ELEMENT OF TRANSFER OF I NTEREST IN PARTNERSHIP ASSET BY THE RETIRING PARTNER TO THE CONTINUING PARTNERS AND AMOUNT RECEIVED BY HIM WAS NOT ASSESSABLE TO CAPITAL GAINS. 15. IN THE CASE OF ITO VS. AMITABH SINGH 16 SOT 453 , THE TRIBUNAL HAS HELD THAT THE AMOUNT CREDITED TO THE CAPITAL ACCOUN T OF THE ASSESSEE PARTNER ON ACCOUNT OF GOODWILL AND RECEIVED BY HIM ON HIS R ETIREMENT FROM THE FIRM IS NOT TAXABLE AS CAPITAL GAINS AS THE GOODWILL WAS AC QUIRED BY THE FIRM OVER A PERIOD OF TIME AND ALL ALONG IT CONTINUED TO BELONG TO THE FIRM AND THERE WAS NO TRANSFER OF ANY GOODWILL BY THE ASSESSEE TO THE FIRM. THE RELEVANT OBSERVATION OF THE TRIBUNAL ARE EXTRACTED HEREUNDER : THE FIRM ACQUIRED GOODWILL OVER A PERIOD OF TIME, W HICH WAS BROUGHT INTO THE BOOKS AND DISTRIBUTED AMONGST EXISTING PAR TNERS BEFORE THE NEW PARTNERS WERE TAKEN IN AND SOME EXISTING PARTNERS R ETIRED. THE ASSET OF THE FIRM ALREADY EXISTED AND IT WAS QUANTIFIED AND CRED ITED TO THE ACCOUNTS OF EXISTING PARTNERS. WHEN THE ASSESSEE RETIRED FROM THE FIRM, HE DID NOT TRANSFER ANY GOODWILL TO THE FIRM AS HE DID NOT HAV E ANY INDIVIDUAL GOODWILL. THE GOODWILL BELONGED TO THE FIRM AND CONTINUED TO REMAIN WITH THE FIRM. AS CLARIFIED BY THE COUNSEL, NOTHING WAS CHARGED FROM THE INCOMING PARTNERS BY WAY OF GOODWILL AND, THUS, THERE IS NO QUESTION OF EVEN INDIRECT REALIZATION OF THE VALUE OF GOODWILL BY THE ASSESSEE FROM THE INCO MING PARTNERS THROUGH THE FIRM. THE FACT IS THAT A PROVISION CORRESPONDING T O SUB-S. (3) REGARDING LEVY OF CAPITAL GAIN TAX WHEN A PARTNER BRINGS IN A CAPITAL ASSET TO THE FIRM DOES NOT EXIST ON THE STATUTE BOOK IN CASE OF RETIREMENT OF THE PARTNER AND, THUS, GENERAL PROVISIONS OF LAW, NAMELY, THAT WHAT HE TAK ES IS HIS SHARE IN THE ASSETS OF THE FIRM CONTINUES TO APPLY WITH THE EXCE PTION THAT UNDER SUB-S.(4), WHEN A CAPITAL ASSET IS DISTRIBUTED TO THE PARTNER ON DISSOLUTION OF THE FIRM OR ON HIS RETIREMENT AT LESS THAN THE FAIR MARKET VALU E, THEN, THE FIRM BECOMES LIABLE TO PAY CAPITAL GAINS TAX. SUCH IS NOT THE CASE HERE, AS THIS IS THE CAS E OF A PARTNER. THEREFORE, NOTHING WAS TAXABLE IN TH E HANDS OF THE ASSESSEE. 16 . IN THE LIGHT OF ABOVE PROPOSITION OF LAW, IF THE FA CTS OF THE CASE ARE EXAMINED, WE WOULD FIND EVEN ON MERIT, THE AMOUNT R ECEIVED BY THE ASSESSEE IS ON ACCOUNT OF RELINQUISHMENT OF HIS SHARE IN GOO DWILL ACQUIRED BY THE ITA NOS.184 & 185 OF 2011 K. KOTESWARA RAO, HYDERAB AD ` 9 EDUCATIONAL INSTITUTION OVER A PERIOD OF TIME. THE REFORE, THE AMOUNT RECEIVED BY THE ASSESSEES TOWARDS GOODWILL IS NOT CHARGEABLE TO TAX. MOREOVER, THERE IS NO SPECIFIC ASSERTION IN THE MOU OR ANYWHERE ELS E THAT THIS AMOUNT WAS GIVEN TOWARDS THE NON-COMPETITION FEES. THEREFORE, WE ARE OF THE VIEW THAT ASSESSING OFFICER HAS TAKEN A ONE OF THE PLAUSIBLE VIEW FOR WHICH THE ASSESSMENT ORDER CANNOT BE REVISED BY THE CIT AFTER TREATING IT TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. WE THEREFORE, SET ASIDE THE ORDER OF THE CIT. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 23.8.2011 SD/- SD/- (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM, DATED 23 RD AUGUST, 2011 COPY TO 1 M. CHANDRAMOULESWARA RAO, CHARTERED ACCOUNTANT, 3 - 6 - 309, C - 3, SKYLARK APARTMENTS, BASHEERBAGH, HYDERABAD 2 ACIT, CENTRAL CIRCLE, VIJAYAWADA 3 THE CI T (CENTRAL), HYDERABAD 4 THE CIT (A) , HYDERABAD 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM