A new partner came into our LLP and paid in a large sum, part of which was credited to the existing partners' accounts in their sacrificing ratio. The AO has taxed my share of it as short-term capital gain for an old year. Is that right?
Not for a year before assessment year 2021-22. The Tribunal held that where the existing partners do not retire and merely their profit-sharing ratios are realigned on the admission of a new partner, there is no relinquishment of any share in the firm's assets, no transfer within section 2(47), and therefore no capital gain in the continuing partner's hands. It added that the amendments made by the Finance Act 2021 — the substitution of section 45(4) and the insertion of section 9B — take effect only from assessment year 2021-22 and had no application to the year before it, which was AY 2017-18.
Decided by the ITAT (Shri Aby T. Varkey, Judicial Member and Ms. Padmavathy S, Accountant Member) on 2026-02-16, reported as ITA No. 2986/Chny/2025; Assessment Year 2017-18; Income Tax Appellate Tribunal, 'C' Bench, Chennai; heard 11 February 2026, pronounced 16 February 2026. It bears on section 45, section 45(3), section 45(4), section 9B, section 2(47), section 2(14), section 147, section 250 of the Income Tax Act 1961, in Capital Gains and Reassessment & Reopening matters.
This is the third order from the Chennai Bench on the same LLP and the same event, and it now stands as the settled treatment of pre-2021 'sacrificing ratio' credits in that jurisdiction. But the dating is the whole point. The reasoning rests on there being no charging provision that reaches money credited to a continuing partner on reconstitution — and from assessment year 2021-22 there is one. The substituted section 45(4) charges the firm, not the partner, on money or a capital asset received by a partner in connection with a reconstitution to the extent it exceeds the balance in his capital account, and that balance is computed without the increase attributable to revaluation or to self-generated goodwill. So on the same facts arising in AY 2021-22 or later, the answer to 'is the partner taxed?' remains no, but the answer to 'is anyone taxed?' becomes yes, at the firm level, with the Rule 8AB attribution and Form 5C obligations that go with it. A second point worth carrying: the revenue's own ground framed the AO's charge as one under section 45(3), and the Tribunal's material shows why that cannot work — section 45(3) charges the partner who transfers a capital asset to the firm, not the partner whose share in the firm shrinks.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, an individual, was one of seven partners in M/s CRCL LLP. M/s Elior India Catering LLP was inducted into CRCL as a partner with a 51 per cent stake by contributing Rs 31.75 crore, of which Rs 19.88 crore was credited to the existing partners' current accounts in their respective sacrificing ratios. The order does not state this assessee's own profit-sharing percentage before or after the induction; the 12 per cent reduced to 5.88 per cent, and the credit of Rs 2,38,63,452, belong to another partner, Gokulakrishna, and appear only inside the coordinate-bench order quoted at para 13. He had filed his return for AY 2017-18 declaring total income of Rs 48,24,760. During scrutiny of CRCL the Assessing Officer learned that amounts received from Elior India towards the sacrificing ratio had been credited to the partners' accounts under an amended LLP agreement, and that the assessee had received Rs 2,98,29,315. The AO held the amount to be goodwill, reopened the assessment under section 147, took the view that a right to receive profit in a firm is a capital asset under section 2(14) and that relinquishment of that right is a transfer within section 2(47), and assessed the whole amount as short-term capital gain. The CIT(A) / National Faceless Appeal Centre allowed the assessee's appeal on 26 August 2025, following the coordinate bench decision in the case of another partner of the same LLP, Gokulakrishna v. DCIT, ITA No. 1088/Chny/2025 dated 17 June 2025. The revenue appealed, arguing that this was not a mere realignment of profit-sharing ratio because the assessee had received the amount for sacrificing or relinquishing his share of goodwill.
The revenue's appeal was dismissed and the CIT(A)'s order upheld. The Tribunal found the facts identical to those in the coordinate bench decision in the case of another partner of CRCL, that the revenue had brought no new material to controvert those findings, and that there was no infirmity in the CIT(A)'s order (paras 4 to 6). Adopting the coordinate bench's reasoning, it held that the revaluation of CRCL's assets and the credit of the revalued amount to the partners' accounts did not entail a transfer under section 2(47); that the induction of Elior India and the consequent reduction in the existing partners' share ratio did not entail any relinquishment of their rights in CRCL; that during the subsistence of a firm the partners have no defined share in its assets, so on realignment of the profit-sharing ratio there is no relinquishment of any non-existent share; and that the amendments made by the Finance Act 2021 to section 45(4) and by the insertion of section 9B are prospective, effective from assessment year 2021-22, and had no application to assessment year 2017-18.
The Tribunal proceeded on the rule of consistency, treating the coordinate bench's decision in another partner's case on the same transaction as governing, and reproduced that order at length (para 4). The reasoning it adopted runs through the Karnataka High Court's decision in CIT v. P.N. Panjawani, where the Court held that a reduction in the shares of existing partners on the admission of new partners is not a transfer of capital assets, because the property belonged to the firm and not to the erstwhile partners, and that there is no provision in the scheme of the Act for levying capital gains on consideration received for a reduction of share in a firm. That in turn rests on Addanki Narayanappa v. Bhaskara Krishtappa, on Malabar Fisheries Co. v. CIT and on Sunil Siddharthbhai v. CIT for the proposition that a partner has no exclusive interest in any partnership asset during the subsistence of the firm. The coordinate bench distinguished CIT v. Mansukh Dyeing and Printing Mills, relied on by the departmental representative, on the ground that there the existing partners had retired on the admission of the new partners whereas here they continued; and it distinguished Sudhakar M. Shetty, B. Raghurama Prabhu Estate, Vatsala Shenoy and Samir Suryakant Sheth on their facts. It relied on ITO v. Smt. Paru D. Dave, ITO v. Fine Developers and Anik Industries Ltd. v. DCIT for the realignment point. It then recorded that the Finance Act 2021 changes came into force on 1 April 2021 and are prospective, so they did not reach AY 2017-18.
the coordinate bench has relied on various judicial precedence and also held that the amendment bringing the amount received on dissolution / reconstitution of firm into tax net is effective only from AY 2021-22
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Handle my notice → Ask a CA on WhatsAppNot for a year before assessment year 2021-22. The Tribunal held that where the existing partners do not retire and merely their profit-sharing ratios are realigned on the admission of a new partner, there is no relinquishment of any share in the firm's assets, no transfer within section 2(47), and therefore no capital gain in the continuing partner's hands. It added that the amendments made by the Finance Act 2021 — the substitution of section 45(4) and the insertion of section 9B — take effect only from assessment year 2021-22 and had no application to the year before it, which was AY 2017-18. This was decided by the ITAT (Shri Aby T. Varkey, Judicial Member and Ms. Padmavathy S, Accountant Member) and bears on section 45, section 45(3), section 45(4), section 9B, section 2(47), section 2(14), section 147, section 250 of the Income Tax Act 1961. It is reported as ITA No. 2986/Chny/2025; Assessment Year 2017-18; Income Tax Appellate Tribunal, 'C' Bench, Chennai; heard 11 February 2026, pronounced 16 February 2026. This is the third order from the Chennai Bench on the same LLP and the same event, and it now stands as the settled treatment of pre-2021 'sacrificing ratio' credits in that jurisdiction. But the dating is the whole point. The reasoning rests on there being no charging provision that reaches money credited to a continuing partner on reconstitution — and from assessment year 2021-22 there is one. The substituted section 45(4) charges the firm, not the partner, on money or a capital asset received by a partner in connection with a reconstitution to the extent it exceeds the balance in his capital account, and that balance is computed without the increase attributable to revaluation or to self-generated goodwill. So on the same facts arising in AY 2021-22 or later, the answer to 'is the partner taxed?' remains no, but the answer to 'is anyone taxed?' becomes yes, at the firm level, with the Rule 8AB attribution and Form 5C obligations that go with it. A second point worth carrying: the revenue's own ground framed the AO's charge as one under section 45(3), and the Tribunal's material shows why that cannot work — section 45(3) charges the partner who transfers a capital asset to the firm, not the partner whose share in the firm shrinks. If it applies to you, the first step is this: Fix the assessment year before anything else. For AY 2020-21 and earlier this order is directly useful; for AY 2021-22 onwards it is not, and the firm's position under the substituted section 45(4) and section 9B has to be worked out instead.
The assessee, an individual, was one of seven partners in M/s CRCL LLP. M/s Elior India Catering LLP was inducted into CRCL as a partner with a 51 per cent stake by contributing Rs 31.75 crore, of which Rs 19.88 crore was credited to the existing partners' current accounts in their respective sacrificing ratios. The order does not state this assessee's own profit-sharing percentage before or after the induction; the 12 per cent reduced to 5.88 per cent, and the credit of Rs 2,38,63,452, belong to another partner, Gokulakrishna, and appear only inside the coordinate-bench order quoted at para 13. He had filed his return for AY 2017-18 declaring total income of Rs 48,24,760. During scrutiny of CRCL the Assessing Officer learned that amounts received from Elior India towards the sacrificing ratio had been credited to the partners' accounts under an amended LLP agreement, and that the assessee had received Rs 2,98,29,315. The AO held the amount to be goodwill, reopened the assessment under section 147, took the view that a right to receive profit in a firm is a capital asset under section 2(14) and that relinquishment of that right is a transfer within section 2(47), and assessed the whole amount as short-term capital gain. The CIT(A) / National Faceless Appeal Centre allowed the assessee's appeal on 26 August 2025, following the coordinate bench decision in the case of another partner of the same LLP, Gokulakrishna v. DCIT, ITA No. 1088/Chny/2025 dated 17 June 2025. The revenue appealed, arguing that this was not a mere realignment of profit-sharing ratio because the assessee had received the amount for sacrificing or relinquishing his share of goodwill. The matter was decided on 2026-02-16 by the ITAT (Shri Aby T. Varkey, Judicial Member and Ms. Padmavathy S, Accountant Member). On those facts the ITAT held as follows. The revenue's appeal was dismissed and the CIT(A)'s order upheld. The Tribunal found the facts identical to those in the coordinate bench decision in the case of another partner of CRCL, that the revenue had brought no new material to controvert those findings, and that there was no infirmity in the CIT(A)'s order (paras 4 to 6). Adopting the coordinate bench's reasoning, it held that the revaluation of CRCL's assets and the credit of the revalued amount to the partners' accounts did not entail a transfer under section 2(47); that the induction of Elior India and the consequent reduction in the existing partners' share ratio did not entail any relinquishment of their rights in CRCL; that during the subsistence of a firm the partners have no defined share in its assets, so on realignment of the profit-sharing ratio there is no relinquishment of any non-existent share; and that the amendments made by the Finance Act 2021 to section 45(4) and by the insertion of section 9B are prospective, effective from assessment year 2021-22, and had no application to assessment year 2017-18.
The Tribunal proceeded on the rule of consistency, treating the coordinate bench's decision in another partner's case on the same transaction as governing, and reproduced that order at length (para 4). The reasoning it adopted runs through the Karnataka High Court's decision in CIT v. P.N. Panjawani, where the Court held that a reduction in the shares of existing partners on the admission of new partners is not a transfer of capital assets, because the property belonged to the firm and not to the erstwhile partners, and that there is no provision in the scheme of the Act for levying capital gains on consideration received for a reduction of share in a firm. That in turn rests on Addanki Narayanappa v. Bhaskara Krishtappa, on Malabar Fisheries Co. v. CIT and on Sunil Siddharthbhai v. CIT for the proposition that a partner has no exclusive interest in any partnership asset during the subsistence of the firm. The coordinate bench distinguished CIT v. Mansukh Dyeing and Printing Mills, relied on by the departmental representative, on the ground that there the existing partners had retired on the admission of the new partners whereas here they continued; and it distinguished Sudhakar M. Shetty, B. Raghurama Prabhu Estate, Vatsala Shenoy and Samir Suryakant Sheth on their facts. It relied on ITO v. Smt. Paru D. Dave, ITO v. Fine Developers and Anik Industries Ltd. v. DCIT for the realignment point. It then recorded that the Finance Act 2021 changes came into force on 1 April 2021 and are prospective, so they did not reach AY 2017-18. In the words reproduced by the source cited on this page: "the coordinate bench has relied on various judicial precedence and also held that the amendment bringing the amount received on dissolution / reconstitution of firm into tax net is effective only from AY 2021-22" The decision followed or applied Gokulakrishna v. DCIT, ITA No. 1088/Chny/2025 dated 17 June 2025 (ITAT Chennai) — followed, being a coordinate bench decision on the same transaction in another partner's case; CIT v. P.N. Panjawani (Karnataka High Court) — followed through the coordinate bench order; ITO v. Smt. Paru D. Dave, 110 ITD 410 (Mumbai) — relied on; CIT v. Mansukh Dyeing and Printing Mills, 449 ITR 439 (SC) — distinguished, the existing partners there having retired.
It was decided by the ITAT on 2026-02-16 and is reported as ITA No. 2986/Chny/2025; Assessment Year 2017-18; Income Tax Appellate Tribunal, 'C' Bench, Chennai; heard 11 February 2026, pronounced 16 February 2026. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 45, section 45(3), section 45(4), section 9B, section 2(47), section 2(14), section 147, section 250, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The revenue's appeal was dismissed and the CIT(A)'s order upheld. The Tribunal found the facts identical to those in the coordinate bench decision in the case of another partner of CRCL, that the revenue had brought no new material to controvert those findings, and that there was no infirmity in the CIT(A)'s order (paras 4 to 6). Adopting the coordinate bench's reasoning, it held that the revaluation of CRCL's assets and the credit of the revalued amount to the partners' accounts did not entail a transfer under section 2(47); that the induction of Elior India and the consequent reduction in the existing partners' share ratio did not entail any relinquishment of their rights in CRCL; that during the subsistence of a firm the partners have no defined share in its assets, so on realignment of the profit-sharing ratio there is no relinquishment of any non-existent share; and that the amendments made by the Finance Act 2021 to section 45(4) and by the insertion of section 9B are prospective, effective from assessment year 2021-22, and had no application to assessment year 2017-18. It arises in Capital Gains and Reassessment & Reopening matters, on section 45, section 45(3), section 45(4), section 9B, section 2(47), section 2(14), section 147, section 250 of the Income Tax Act 1961, and was decided by Shri Aby T. Varkey, Judicial Member and Ms. Padmavathy S, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Establish on the record that the existing partners did not retire and continued as partners after the admission — that is the fact the reasoning turns on, and it is what distinguishes CIT v. Mansukh Dyeing and Printing Mills, where the incoming partners' admission was accompanied by the retirement of existing partners. Where the AO has charged the continuing partner under section 45(3), take the point that section 45(3) applies to a person who transfers a capital asset to the firm by way of capital contribution or otherwise, which is the incoming partner, not the partner whose profit share is reduced. Trace where the money physically went — into the firm from the incoming partner, or from the firm to the existing partner — because from AY 2021-22 that is what decides whether the substituted section 45(4) is engaged. Check whether the reassessment under section 147 was itself validly initiated; the order records that the assessment was reopened but does not decide any jurisdictional ground.
Superseded by amendment. The decision is correct for assessment year 2017-18 and the Tribunal itself says so. It is listed as superseded because a practitioner meeting these facts in assessment year 2021-22 or later must not rely on the result: the substituted section 45(4) charges the firm on money or a capital asset received by a partner in connection with a reconstitution to the extent it exceeds the balance in his capital account computed without any revaluation or self-generated-goodwill uplift, and section 9B separately deems a transfer by the firm where a partner receives a capital asset or stock in trade. What survives unaffected is the holding that section 45(3) cannot be applied to a partner whose profit share is merely reduced — section 45(3) was not amended in 2021 and continues to charge the person who transfers a capital asset to the firm. Whether the revenue has taken this order or the coordinate bench order in Gokulakrishna further in appeal was not checked. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two cautions on citing this order. First, the revenue's grounds describe the AO as having deemed the receipt a transfer under section 2(47) and taxed it under section 45(3) as short-term capital gain, while the body of the order records the AO as having treated the right to receive profit as a capital asset under section 2(14) and its relinquishment as a transfer under section 2(47) chargeable as short-term capital gain. The order does not resolve that difference. Second, the paragraph numbering is layered: this order's own paragraphs run 1 to 6; paragraphs 13 to 20 quoted inside it belong to the coordinate bench order in Gokulakrishna v. DCIT, ITA No. 1088/Chny/2025 dated 17 June 2025; and paragraphs 5 to 23 quoted inside that belong to the Karnataka High Court in CIT v. P.N. Panjawani. Any paragraph cited from this order should be identified by which of the three it belongs to. The figures also differ between the layers: the addition in this assessee's case was Rs 2,98,29,315, while the Rs 2,38,63,452 figure appearing in the quoted passage is the addition in Gokulakrishna's own case. indiankanoon's ?type=print returned a summary rather than the order; the text was obtained through the /docfragment/ channel. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The revenue's appeal was dismissed and the CIT(A)'s order upheld. The Tribunal found the facts identical to those in the coordinate bench decision in the case of another partner of CRCL, that the revenue had brought no new material to controvert those findings, and that there was no infirmity in the CIT(A)'s order (paras 4 to 6). Adopting the coordinate bench's reasoning, it held that the revaluation of CRCL's assets and the credit of the revalued amount to the partners' accounts did not entail a transfer under section 2(47); that the induction of Elior India and the consequent reduction in the existing partners' share ratio did not entail any relinquishment of their rights in CRCL; that during the subsistence of a firm the partners have no defined share in its assets, so on realignment of the profit-sharing ratio there is no relinquishment of any non-existent share; and that the amendments made by the Finance Act 2021 to section 45(4) and by the insertion of section 9B are prospective, effective from assessment year 2021-22, and had no application to assessment year 2017-18.
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