A partner was paid a large sum when a new partner came in and her profit share fell. The officer has taxed it as goodwill. Is it taxable, and does section 9B or the new section 45(4) apply?
Not on these facts, and not for a year before AY 2021-22. The Tribunal held that where a new partner is admitted and the existing partners simply realign their profit-sharing ratios, the assets remain with the firm, no partner has any defined share in those assets during the subsistence of the partnership, and there is therefore no relinquishment and no transfer within s.2(47) — so nothing is chargeable under s.45 in the partner's hands, and the receipt is not 'goodwill'. It then recorded expressly that s.9B and the substituted s.45(4) came into force on 1 April 2021 and had no application to the year before it, which was AY 2017-18.
Decided by the ITAT (Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member ('B' Bench, Chennai)) on 2025-09-23, reported as ITA No.821/Chny/2025 (ITAT Chennai, 'B' Bench); Assessment Year 2017-18; heard 26 June 2025, pronounced 23 September 2025. It bears on section 45, section 45(4), section 9B, section 2(47), section 147, section 148 of the Income Tax Act 1961, in Capital Gains and Reassessment & Reopening matters.
This is the answer to the reassessment notices now going out to partners of LLPs and firms into which private-equity or strategic investors bought in before 2021, where the officer treats the sum paid to the sacrificing partners as goodwill assessable as income from other sources or as short-term capital gain. Two things make it useful. First, the Tribunal separates the two events that officers run together: the firm's revaluation of its own assets, and the partners' realignment of profit shares on the admission of the new partner. Neither, on these facts, was a transfer. Second, and more important for current advice, the Tribunal states the year boundary in terms — for AY 2021-22 onwards the same commercial arrangement is governed by an entirely different scheme, under which the FIRM, not the partner, is charged, and both s.9B and the substituted s.45(4) can bite. Read this decision as authority for the pre-2021 years only. Note also the limit of the reasoning: the Tribunal distinguished CIT v. Mansukh Dyeing and Printing Mills, where existing partners RETIRED as new ones came in, on the ground that here the erstwhile partners continued alongside the new partner. Where partners actually go out, this decision does not help.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee was a partner in M/s CRCL LLP. She filed her original return for AY 2017-18 on 4 November 2017 declaring Rs 76,00,680, and a revised return on 1 March 2018 declaring Rs 77,68,620. Pursuant to a notice under s.148 she filed a return on 11 March 2021 at the same figure. Elior India Catering LLP was inducted as a partner of CRCL LLP, taking 51 per cent, and the assessee's profit-sharing ratio in CRCL fell from 10 per cent to 4.90 per cent. She received Rs 1,98,86,210, credited to her account, which she said was consideration for that sacrifice of profit share. The Assessing Officer treated the sum as a receipt of 'goodwill' and added it as income from other sources. The assets of CRCL had been revalued by the partners and the revaluation difference credited to the partners' accounts, the revaluation being anterior to the introduction of the new partner. The assessee also pointed out that reassessment proceedings had been taken against other partners of CRCL on the same issue. The CIT(A) held the receipt did not amount to goodwill and deleted the addition, and the Revenue appealed, contending that 'transfer' includes relinquishment or extinguishment of rights and that the reduction in profit share was therefore a transfer, and that the claim had been entertained in breach of clause 3 of rule 46A.
The Revenue's appeal was dismissed and the deletion of the addition of Rs 1,98,86,210 was upheld. Amounts received in the nature of sacrifice of the profit-sharing ratio in a partnership or LLP arrangement do not qualify as goodwill; the assessee had no rights over the assets of the firm and there was no transfer of assets that could attract capital gains under s.45. On the further point, the amendments made by the Finance Act 2021 — the substituted s.45(4) and the inserted s.9B — come into force on 1 April 2021 and are prospective, and had no application to AY 2017-18 (para 19).
The Tribunal reviewed the submissions and the CIT(A)'s order, found it well reasoned, and held that the case law relied on — including CIT v. P.N. Panjawani, ITO v. Paru D. Dave, ITO v. Fine Developers and Anik Industries Ltd. — supported the view that a sum received for sacrificing a profit-sharing ratio is not goodwill, and that the assessee possessed no rights over the assets of the firm (para 8). It then set out at length, in para 9, the reasoning of the coordinate bench in Gokulakrishna v. DCIT on akin facts, and adopted it. That reasoning distinguished CIT v. Mansukh Dyeing and Printing Mills, relied on by the Departmental Representative, on the footing that there three new partners had been admitted and the existing partners had retired, whereas on the facts before the bench the erstwhile partners continued alongside the new partner; it likewise distinguished Sudhakar M. Shetty, B. Raghurama Prabhu Estate and Vatsala Shenoy as cases where the firm had been wound up and the outgoing partners' receipts were transfers, and Samir Suryakant Sheth as a case of private payments by the incoming partner for reduction in profit share and for a non-competition agreement. On the substance it held that the revaluation of the firm's assets and the credit of the revalued amount to partners' capital accounts in their share ratio entailed no transfer as defined in s.2(47); that on the introduction of a new partner there is only a realignment of the share ratio inter se to the extent of sharing profits or losses; that during the subsistence of a partnership the partners have no defined share in the firm's assets, so on realignment there is no relinquishment of any non-existent share, the assets remaining with the firm; and that such an arrangement is not covered by s.45(4), which covers the case of dissolution of a partnership firm. Only then, at para 19, did it record that the Finance Act 2021 had introduced a charge on receipt of money or a capital asset by a specified person from a specified entity on reconstitution as income of the specified entity, and had inserted s.9B to bring within tax the receipt of a capital asset or stock in trade on dissolution or reconstitution, both with effect from 1 April 2021 and both prospective, and that transfer of a capital asset is common to s.9B and s.45(4).
In fact, transfer of capital asset is common in both section 9B and section 45(4) of the Act. In the present case, the assessment year under consideration is 2017-18 and accordingly, the amendments vide Finance Act, 2021 have no application in the present case.
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Handle my notice → Ask a CA on WhatsAppNot on these facts, and not for a year before AY 2021-22. The Tribunal held that where a new partner is admitted and the existing partners simply realign their profit-sharing ratios, the assets remain with the firm, no partner has any defined share in those assets during the subsistence of the partnership, and there is therefore no relinquishment and no transfer within s.2(47) — so nothing is chargeable under s.45 in the partner's hands, and the receipt is not 'goodwill'. It then recorded expressly that s.9B and the substituted s.45(4) came into force on 1 April 2021 and had no application to the year before it, which was AY 2017-18. This was decided by the ITAT (Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member ('B' Bench, Chennai)) and bears on section 45, section 45(4), section 9B, section 2(47), section 147, section 148 of the Income Tax Act 1961. It is reported as ITA No.821/Chny/2025 (ITAT Chennai, 'B' Bench); Assessment Year 2017-18; heard 26 June 2025, pronounced 23 September 2025. This is the answer to the reassessment notices now going out to partners of LLPs and firms into which private-equity or strategic investors bought in before 2021, where the officer treats the sum paid to the sacrificing partners as goodwill assessable as income from other sources or as short-term capital gain. Two things make it useful. First, the Tribunal separates the two events that officers run together: the firm's revaluation of its own assets, and the partners' realignment of profit shares on the admission of the new partner. Neither, on these facts, was a transfer. Second, and more important for current advice, the Tribunal states the year boundary in terms — for AY 2021-22 onwards the same commercial arrangement is governed by an entirely different scheme, under which the FIRM, not the partner, is charged, and both s.9B and the substituted s.45(4) can bite. Read this decision as authority for the pre-2021 years only. Note also the limit of the reasoning: the Tribunal distinguished CIT v. Mansukh Dyeing and Printing Mills, where existing partners RETIRED as new ones came in, on the ground that here the erstwhile partners continued alongside the new partner. Where partners actually go out, this decision does not help. If it applies to you, the first step is this: Establish first whether the assessment year falls before AY 2021-22; if it does, say so at the outset, because the entire post-2021 scheme drops away and the argument is fought on s.2(47) and s.45 alone.
The assessee was a partner in M/s CRCL LLP. She filed her original return for AY 2017-18 on 4 November 2017 declaring Rs 76,00,680, and a revised return on 1 March 2018 declaring Rs 77,68,620. Pursuant to a notice under s.148 she filed a return on 11 March 2021 at the same figure. Elior India Catering LLP was inducted as a partner of CRCL LLP, taking 51 per cent, and the assessee's profit-sharing ratio in CRCL fell from 10 per cent to 4.90 per cent. She received Rs 1,98,86,210, credited to her account, which she said was consideration for that sacrifice of profit share. The Assessing Officer treated the sum as a receipt of 'goodwill' and added it as income from other sources. The assets of CRCL had been revalued by the partners and the revaluation difference credited to the partners' accounts, the revaluation being anterior to the introduction of the new partner. The assessee also pointed out that reassessment proceedings had been taken against other partners of CRCL on the same issue. The CIT(A) held the receipt did not amount to goodwill and deleted the addition, and the Revenue appealed, contending that 'transfer' includes relinquishment or extinguishment of rights and that the reduction in profit share was therefore a transfer, and that the claim had been entertained in breach of clause 3 of rule 46A. The matter was decided on 2025-09-23 by the ITAT (Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member ('B' Bench, Chennai)). On those facts the ITAT held as follows. The Revenue's appeal was dismissed and the deletion of the addition of Rs 1,98,86,210 was upheld. Amounts received in the nature of sacrifice of the profit-sharing ratio in a partnership or LLP arrangement do not qualify as goodwill; the assessee had no rights over the assets of the firm and there was no transfer of assets that could attract capital gains under s.45. On the further point, the amendments made by the Finance Act 2021 — the substituted s.45(4) and the inserted s.9B — come into force on 1 April 2021 and are prospective, and had no application to AY 2017-18 (para 19).
The Tribunal reviewed the submissions and the CIT(A)'s order, found it well reasoned, and held that the case law relied on — including CIT v. P.N. Panjawani, ITO v. Paru D. Dave, ITO v. Fine Developers and Anik Industries Ltd. — supported the view that a sum received for sacrificing a profit-sharing ratio is not goodwill, and that the assessee possessed no rights over the assets of the firm (para 8). It then set out at length, in para 9, the reasoning of the coordinate bench in Gokulakrishna v. DCIT on akin facts, and adopted it. That reasoning distinguished CIT v. Mansukh Dyeing and Printing Mills, relied on by the Departmental Representative, on the footing that there three new partners had been admitted and the existing partners had retired, whereas on the facts before the bench the erstwhile partners continued alongside the new partner; it likewise distinguished Sudhakar M. Shetty, B. Raghurama Prabhu Estate and Vatsala Shenoy as cases where the firm had been wound up and the outgoing partners' receipts were transfers, and Samir Suryakant Sheth as a case of private payments by the incoming partner for reduction in profit share and for a non-competition agreement. On the substance it held that the revaluation of the firm's assets and the credit of the revalued amount to partners' capital accounts in their share ratio entailed no transfer as defined in s.2(47); that on the introduction of a new partner there is only a realignment of the share ratio inter se to the extent of sharing profits or losses; that during the subsistence of a partnership the partners have no defined share in the firm's assets, so on realignment there is no relinquishment of any non-existent share, the assets remaining with the firm; and that such an arrangement is not covered by s.45(4), which covers the case of dissolution of a partnership firm. Only then, at para 19, did it record that the Finance Act 2021 had introduced a charge on receipt of money or a capital asset by a specified person from a specified entity on reconstitution as income of the specified entity, and had inserted s.9B to bring within tax the receipt of a capital asset or stock in trade on dissolution or reconstitution, both with effect from 1 April 2021 and both prospective, and that transfer of a capital asset is common to s.9B and s.45(4). In the words reproduced by the source cited on this page: "In fact, transfer of capital asset is common in both section 9B and section 45(4) of the Act. In the present case, the assessment year under consideration is 2017-18 and accordingly, the amendments vide Finance Act, 2021 have no application in the present case." The decision followed or applied Gokulakrishna v. DCIT, ITA No.1088/Chny/2025 (ITAT Chennai, 17 June 2025) — reasoning adopted and set out verbatim; CIT v. P.N. Panjawani (2013) 21 taxmann.com 458 (Karnataka) — relied on; ITO v. Smt. Paru D. Dave (2008) 110 ITD 410 (Mumbai) — relied on; ITO v. Fine Developers, ITA No. 4630(Mum)/2011, 55 SOT 122 (Mumbai) — relied on; Anik Industries Ltd. v. DCIT [2020] 116 taxmann.com 385 (Mumbai) — relied on; CIT v. Mansukh Dyeing and Printing Mills, 449 ITR 439 (SC) — distinguished; Sudhakar M. Shetty v. ACIT, 130 ITD 197 (Mumbai) — distinguished; B. Raghurama Prabhu Estate v. JCIT, 335 ITR 394 (Karnataka) — distinguished; Vatsala Shenoy v. JCIT, AIR 2016 SC 5299 — distinguished; Samir Suryakant Sheth v. ACIT, ITA Nos. 2919 & 3092/Ahd/2002 — distinguished.
It was decided by the ITAT on 2025-09-23 and is reported as ITA No.821/Chny/2025 (ITAT Chennai, 'B' Bench); Assessment Year 2017-18; heard 26 June 2025, pronounced 23 September 2025. 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(4), section 9B, section 2(47), section 147, section 148, 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 deletion of the addition of Rs 1,98,86,210 was upheld. Amounts received in the nature of sacrifice of the profit-sharing ratio in a partnership or LLP arrangement do not qualify as goodwill; the assessee had no rights over the assets of the firm and there was no transfer of assets that could attract capital gains under s.45. On the further point, the amendments made by the Finance Act 2021 — the substituted s.45(4) and the inserted s.9B — come into force on 1 April 2021 and are prospective, and had no application to AY 2017-18 (para 19). It arises in Capital Gains and Reassessment & Reopening matters, on section 45, section 45(4), section 9B, section 2(47), section 147, section 148 of the Income Tax Act 1961, and was decided by Shri Manu Kumar Giri, Judicial Member and Shri S.R. Raghunatha, Accountant Member ('B' Bench, Chennai). 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. Show on the deed and the accounts that the existing partners CONTINUED after the change and did not retire — that is the fact on which this decision turns and on which Mansukh Dyeing was distinguished. Separate the revaluation of the firm's assets from the realignment of profit shares in your written submission; the Tribunal treated the revaluation as anterior to the induction of the new partner and held that the credit of the revalued amount to partners' capital accounts was not a transfer under s.2(47). Meet the 'goodwill' characterisation head on: the money was consideration for the sacrifice of a share in future profits, not for any capital asset, and the partner had no defined share in the firm's assets to give up. For AY 2021-22 and later, do not run this argument at all; compute s.9B and the substituted s.45(4) in the FIRM's hands instead, independently of one another. Where the notice is under s.147 or s.148, take the reassessment grounds separately — this order allowed the assessee on the merits and did not decide any jurisdictional point.
Validity check could not be completed. Validity check could not be completed: I did not search for any appeal against this order or for later Tribunal or High Court treatment of it. What I can record is that it sits in a group of orders on the same CRCL LLP arrangement — it adopts Gokulakrishna v. DCIT (ITA No.1088/Chny/2025, 17 June 2025), and a further order in the same group, ACIT v. Manikandan (ITA No.2986/Chny/2025, ITAT Chennai, pronounced 16 February 2026, before Shri Aby T. Varkey, Judicial Member and Ms. Padmavathy S., Accountant Member), reaches the same result for another partner. I read the raw header of the Manikandan order but not its full text. The reasoning here is confined to years before AY 2021-22; for AY 2021-22 onwards the order itself says the Finance Act 2021 scheme applies and this decision does not govern. 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.
The order as printed is internally muddled and a reader should be warned. (1) The appeal is the Revenue's — the cause title names the Dy. Commissioner as appellant — but paragraph 3 opens 'Brief facts are that the assessee has filed an appeal before the Income Tax Appellate Tribunal (ITAT) challenging the addition made by the Assessing Officer', and paragraph 8 speaks of the assessee arguing 'on further appeal before us'. (2) The list of representatives is inverted against the cause title: 'Appellant by: Shri A. Raghava Simhan, C.A.' and 'Respondent by: Ms. Gouthami Manivasam, JCIT'. (3) Paragraph 9 sets out, without quotation marks and under its own paragraph numbers 16 to 20, a verbatim extract from the coordinate bench order in Gokulakrishna v. DCIT (ITA No.1088/Chny/2025, 17 June 2025); the figure of Rs 2,38,63,452 in that extract belongs to Gokulakrishna, not to this case. The amount actually in issue here is Rs 1,98,86,210, as paragraph 10 confirms. The paragraphs quoted in 'reasoning' and 'held' below are drawn partly from that extract, and I have said where. (4) The date '11.03..2021' for the return filed under s.148 is printed with a double stop. I fetched the order twice with ?type=print; paragraph 19 came back word for word identical on both passes and the key_quote is taken from it. 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 deletion of the addition of Rs 1,98,86,210 was upheld. Amounts received in the nature of sacrifice of the profit-sharing ratio in a partnership or LLP arrangement do not qualify as goodwill; the assessee had no rights over the assets of the firm and there was no transfer of assets that could attract capital gains under s.45. On the further point, the amendments made by the Finance Act 2021 — the substituted s.45(4) and the inserted s.9B — come into force on 1 April 2021 and are prospective, and had no application to AY 2017-18 (para 19).
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