High Court Of Kerala
Oberon Trading Corpn. VS. ITO, Ward-1(2), Thiruvananthapuram
Assessment Year : 2004-05
Section : 37(1)
Dr. Manjula Chellur And A.M. Shaffique, JJ.
IT Appeal Nos. 248 And 255 Of 2013
October 7, 2013
Manjula Chellur, CJ. – Heard learned counsel for the appellant. We have also gone through the orders of the Income Tax Appellate Tribunal.
2. Appellant, a partnership firm, involved in the business of pharmaceutical distribution, filed these two appeals. According to appellant firm, long back the firm came to be established. During the course of its business new partners were introduced and all partners, one after the other, retired from the partnership firm in the successive years commencing from the assessment year 2004-2005. Appellant firm claimed depreciation on transfer of so called goodwill paid to the partner, who was retiring in that particular assessment year. Though this came to be allowed, subsequently the assessment came to be reopened under Section 263 of the Income Tax Act. But it got reopend suo motu by the Commissioner of Income Tax under Section 263 of the Act.
3. The only question that needs our attention in the present appeal is whether money paid as transfer of goodwill to a partner, who was retiring, could be claimed as depreciation in that assessment year by the partnership firm? According to learned counsel for the appellant, Tribunal was not justified in disallowing such claim opining that under common law, partnership firm may not be a legal entity, though under the Income Tax Act it is an independent and separate assessable unit. Facts in the present case are to the effect that initially four partners constituted the partnership firm in the business of pharmaceuticals and continued so. Later, three partners entered and the partnership consisted of seven partners. Subsequently, in four consecutive assessment years earlier four partners one by one retired from the partnership firm. According to appellant assessee, in each assessment year whatever amount payable to the retiring partner as a goodwill claimed as depreciation has to be allowed and Tribunal was not justified in opining that there is no question of payment of any goodwill to a retiring partner, as the partnership continues to be a firm carrying on the business without any change in the nature of business by using the earlier name. The learned counsel places reliance in the case of B. Raveendran Pillai v. CIT  332 ITR 531/ 194 Taxman 477 (Ker.). On perusal of the above case, we note that so far as the present case and the case referred to by the learned counsel, the facts are entirely different because the entity that was transferable in that case was a proprietary concern and not a partnership. Similarly, the entity came to be transferred to new proprietary without retaining the same name of the old proprietary concern, i.e., the hospital. Apart from the said fact, one has to see difference in the facts of the present case. We are not concerned with the partnership firm where there is no transfer of interest in the partnership firm entirely to the new partners at a time. It is a case where four partners constituted the partnership firm initially and added three more partners and then continued partnership firm with seven partners and later on in each successful assessment year one after the other the initial four partners came to retire from the business and at the end of the fourth year, only three new partners continued to run the business of pharmaceuticals. The question is whether the previous owner has transferred goodwill to the appellant assessee and the benefit derived from the appellant assessee is retention of continued trust of the customers, who were customers of the previous owners. When one partner retires from the business, there is no severance of status so far as the partnership is concerned, as the retiring partner would take his capital investment and retire from partnership and the others continue to carry on the business. By adopting this method, four partners, who decided to go out of the business, have not transferred the entire business concern to the new partners, but have chosen to continue for some time and at their leisure, they retired from partnership one after the other. Therefore, the assets and liabilities of the firm continued as such without any change including tangible and intangible. Share of the capital came to be paid to the retiring partner and it cannot be treated as cost paid to the retiring partner towards acquisition of any right from him. Partner who retire from the partnership firm takes its initial investment and profit, if any, payable to him. Similarly, if he is accountable for any loss in a particular assessment year, that would also be worked out at the time of retiring from partnership business.
4. In that view of the matter, there is no transfer of any interest and the money paid is only towards the share of the capital invested by that partner along with some profit, if any, and nothing beyond that. Therefore, the question of each year some money paid towards the goodwill would not arise in the facts of the present case, therefore, the Income Tax Appellate Tribunal was justified in disallowing goodwill claimed by the appellant assessee.
Accordingly, the appeal is dismissed.
[Citation : 360 ITR 19]