Gokulakrishna v. DCIT

Case snapshot

Sections / provisions: 45(4); 9B

Questions before the Court / Tribunal

• Partner profit-sharing realignment after 2021 amendment: The reported decision concerns money received by an existing partner for reduction/realignment of profit-sharing ratio after admission of a new partner and whether that event constitutes a taxable transfer/distribution under the amended partnership provisions.

Material facts and background

a new partner, profit sharing ratio changed and the goodwill was calculated and distributed amongst the existing partners including the assessee and the assessee received an amount of Rs. 2,38,63,452/- in his current account held in M/s.CRCL LLP. The assessee vide his response dt.07.09.2021 has stated that on the basis of mutual agreement between the partners it was decided that M/s. Elior India Catering LLP would have 51% stake in M/s. CRCL LLP. That there was no valuation report to support the basis for contribution of Rs.31,76,03,000/- against taking over 51% share in the firm, M/s. CRCL LLP. Hence no basis for arriving at the amount of Rs.31,76,03,000/- to be paid by M/s. Elior India Catering LLP. That the assessee's profit sharing ratio has changed from 12% to 5.88% on induction of new partner, M/s. Elinor India Catering LLP and thus the assessee relinquished 6.12% of the profit sharing ratio as well as the share in the goodwill of the firm. The contention of the assessee that the profit sharing ratio has remained in the same proportion to the capital infused into the firm is nothing but camouflaging his reduction in the profit sharing ratio and the share in the goodwill of...

Further, perusal of the Investment Agreement dt.17.11.2016 as well as the Amended and Restated Agreement of LLP dt.02.02.2017, it can be seen that it is a composite agreement where the partners are foregoing their rights as a partner in the firm and the liabilities of non-compete undertaking as per clause 19 of the Investment Agreement dt.17.11.2016 and as per para 7 to 11 given in Schedule F- "Duties of Partners" in the Amended and Restated Agreement of LLP dt.02.02.2017 were tied to each of the partner. The payment credited to the assessee is against forgoing of the interest by the assessee. As per sec 2(14) "capital asset" means property of any kind held by the assessee whether or not connected with his business or profession. Further, property has vide connotation and it signifies every possible interest which a person can acquire, hold and enjoy. Therefore, business can be considered as property. Thus, the right to receive profit in a partnership firm is a capital asset under section 2(14) of the Act and relinquishment of the right to receive profit is a transfer within the definition of section 2(47) of the Act. That reduction clearly indicated that there was diminishment in...

In view of the above observations, the Assessing Officer was of the

opinion that the right to receive profit in a partnership firm is a capital asset under section 2(14) of the Act and relinquishment of the right to receive profit is a transfer within the definition of section 2(47) of the Act. Accordingly, the Assessing Officer treated the amount of ₹.2,38,63,452/received from Elior India as income from short term capital gains and

added to the total income of the assessee. On appeal, the CIT(A) confirmed the order of the Assessing Officer. 9.

On being aggrieved, the assessee is in appeal before the Tribunal.

The ld. Counsel for the assessee Shri R. Sivaraman, Advocate has

Appellant / assessee submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Revenue / respondent submissions

Per contra, the ld. DR Ms. R. Anita, Addl. CIT has submitted that the

contention of the ld. Counsel for the assessee that there was no legal requirement to obtain a valuation report in case of transaction between related parties is correct, then how it can be ascertained what are the assets of the firm and how the said assets have been valued whether on a slump sale basis or on individual asset wise values have been arrived at. To support her contention, the ld. DR relied on the judgement of the Hon’ble Supreme Court in the case of JCIT v. Vatsala Sheny [2016] 74 taxmann.com 143 (SC), wherein, it was upheld the principle that extinguishment/transfer of interest in partnership firm’s assets for a consideration that results in transfer of capital asset liable to tax. The ld. DR has further submitted that the case on hand is not a distribution of

share held before reconstitution became the share of the incoming partners. As the property was not owned by this erstwhile partners, it cannot be said they transferred 50% in favour of incoming partners and any amount represents the consideration received for such transfer and as such it is liable for payment of capital gains under Section 45 (1) of the Act. It is because they did not transfer the capital assets. Insofar as arguments with regard to the reconstitution, their share got reduced and the amount which was withdrawn and partnership represents inducted partners along with erstwhile partners. As rightly pointed by the appellate authorities in the scheme of the Income Tax Act, there is no provision for levying capital gains on such consideration received for reduction of the share in the partnership firm. The provisions of Section 45(3) or 45(4) is not applicable to the facts of the case. Insofar as the contention that this is a colourable device adopted by the firm as well as the assessees to avoid payment of tax is concerned, it has no substance because tax planning is legitimate. However, it has to be done within the frame work of law. 17. The partnership firm came into...

The ld. DR could not controvert the above judgement of the Hon’ble

We have also considered the contention of the ld. DR that pursuant

Court / Tribunal analysis and reasoning

Sudhakar M Shetty v. ACIT [2011] 130 ITD 197 (Mumbai) Samir Suryakant Seth v. ACIT in ITA Nos. 2919 & 3092/Ahd/2002 dt. 25.01.2012. B. Raghurama Prabhu Estate v. JCIT [2012] 20 taxmann.com 390 (Karnataka). We have heard both the sides, perused the material available on

common interest. Therefore, he was of the view that the ownership of the properties vest in all the partners of the firm and no partner of a firm has got any independent interest in respect of the assets of the firm. But at the same time, the firm as such has no will of its own although, it is an assessable entity under the provisions of the Act. Therefore, he was of the view that when the existing three partners having a share of 1/3rd each in the assets of the firm have relinquished their 50% share i.e., from 1/3rd to 16.67% in favour of the four new partners on account of which each of the three partners were able to a sum of in a capital gain accrued even though the firm continued after its reconstitution. Further, he held that the capital gains arising in the hands of the partners of the erstwhile firm computed on the basis of reduction in their respective shares consequent to the admission of the new partners has to be brought to tax by holding that the reconstitution of the firm had the effect or relinquishment of the part of the rights of the old partners. He further relied on the judgment in McDowell & Co. Ltd. v. CTO [1985] 22 Taxman 11 (SC) wherein it was held that tax...

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 - For the purpose of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA;]" 8. Section 14 of the Indian Partnership Act, 1932 deals with the property of the firm, which reads as under:“14. The property of the firm - Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.” 9. The Apex Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 dealing with the concept of partnership held as under:“The Whole concept of partnership is to embark...

law the Firm as such has no separate rights of its own in the Partnership Assets and when one talks of firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of sec.2(47) of the IT Act, 1961 There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution. In order to attract S.34(3)(b) it is necessary that the sale or transfer of asset must be by the assessee to a person. Dissolution of a firm must, in point of time, be anterior to the actual...

Operative decision and relief

48/Chny/2025, was also heard along with the main appeal. Since we have adjudicated the main appeal by setting aside the CIT(A)’s order and deleting the addition made by the Assessing Officer, the stay application filed by the assessee become infructuous and accordingly, the same stands dismissed. 22.

application is dismissed. Order pronounced in the open court on 17th June, 2025 at Chennai.

Authorities and precedents appearing in the judgment

• CIT v. Kunnamkulam Mill Board 257 ITR 544 (Kerala)
• CIT v. P.N. Panjawani 356 ITR 676 (Kar.)
• ITO v. Smt. Paru D. Dave
• ITO v. Fine Developers
• Radhu Palace v. Addl. CIT 148 ITD 424 (Delhi)
• Supreme Court in the case of JCIT v. Vatsala Sheny
• Sudhakar M Shetty v. ACIT
• Samir Suryakant Seth v. ACIT in ITA Nos. 2919 & 3092/Ahd/2002 dt
• B. Raghurama Prabhu Estate v. JCIT
• CIT v. P.N. Panjawani (supra)
• McDowell & Co. Ltd. v. CTO
• The Apex Court in the case of Addanki Narayanappa v. Bhaskara

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Partner profit-sharing realignment after 2021 amendment. The operative result is classified as Dismissed. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Partner profit-sharing realignment after 2021 amendment. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Use the judgment as a fact-specific precedent: match the statutory version, assessment period, procedural stage and evidentiary record before relying on the result.
• Check whether a later High Court/Supreme Court order has affirmed, reversed, distinguished or rendered the decision academic.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

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