Facts:
- Damayanti Ramachandran HUF[1] (‘the Assessee’), was a partner in two firms: Ms. Texmo Industries and Ms. Texmo Precision Castings. In AY 2014-15, family arrangements led to a significant reduction in the Assessee’s profit-sharing ratios in both partnership firms.
- Both firms underwent revaluation of assets; goodwill of INR 712.26 crores was determined for Texmo Industries. The revaluation amount was credited to current accounts of partners, including the Assessee.
- The Assessee’s share of goodwill was disputed for taxability under section 28(iv) of the Income Tax Act, which taxes benefits or perquisites arising from business or profession. The Assessing Officer (AO) treated the credited goodwill as income taxable under section 28(iv), leading to reassessment orders and additions to taxable income.
- The Assessee contended that the credited goodwill was not taxable income but part of family arrangements and reconstitution of partnership, exempt under relevant income tax provisions.
- The Commissioner of Income-tax Appeals (CITA) ruled in favor of the Assessee, holding the provisions of section 28(iv) not applicable as no benefit or perquisite arose in the course of business that could be taxed.
- The revenue challenged the CITA order, raising grounds including the applicability of section 28(iv), procedural compliance in reassessment, and interpretation of family arrangements as business arrangements.
Arguments:
- Revenue contended that the credited goodwill represented a benefit or perquisite convertible to money, thus taxable under section 28(iv). The reconstitution was a business arrangement, not a family settlement, and income escaped assessment.
- Assessee responded stating that the credited goodwill amount in the current account was not a perquisite or benefit arising in the course of business, but a result of family arrangement and reconstitution of partnership rights. Judicial precedents held that monetary amounts received on retirement or revaluation are not taxable under section 28(iv).
- Assessee further contended procedural lapses by AO in reassessment, such as failure to provide valid reasons for reopening under section 148 and disposing objections by a speaking order before reassessment.
Findings:
- The tribunal found that the family arrangement led to reconstitution of partnership rights among family members, and the credited goodwill was a capital adjustment, not taxable income.
- It was held that section 28(iv) applies only to non-monetary benefits arising in business, not to monetary amounts like credited goodwill or cash withdrawals pursuant to family arrangements.
- The tribunal relied on key case laws such as
- Mahindra and Mahindra[2] whereby emphasize was made on the language of the section 28(iv) of the Income Tax Act 1961, which excludes monetary benefits.
- Smt. Chetanaben B. Sheth[3], Manish M. Chheda[4], and Ramona Pinto[5] were cited supporting the non-taxability of revaluation amounts credited to partners.
- The tribunal found that the AO failed to comply with the Supreme Court directions in GKN Driveshafts India Ltd[6] regarding the reassessment procedure. The AO did not provide proper reasons or dispose of objections via speaking orders before reassessment.
- It was held that non-compliance of procedural safeguards renders the reassessment order void-ab-initio.
- The tribunal rejected revenue’s claim of substantive tax liability and procedural validity of reassessment and upheld the CITA order in favor of the assessee.
Conclusion:
The tribunal comprehensively analyzed facts, submissions, case law, and procedural requirements to hold the credited goodwill as non-taxable and quash the reassessment proceedings for non-compliance of mandated procedures in reopening assessment. It held that the,
- The benefits arising from the revaluation and credited goodwill on partnership reconstitution pursuant to family arrangements are not taxable income under section 28(iv) of the Income Tax Act.
- Monetary amounts credited to partners’ current accounts as part of family reconstitution are not taxable as benefits or perquisites.
- Procedurally, the reassessment initiated by the department was quashed for non-compliance with Supreme Court mandates on reopening of assessments (GKN Driveshafts India Ltd.).
The orders of Assessing Officer were set aside, and the appeals filed by revenue were dismissed, confirming the non-taxability of goodwill credited on partnership revaluation and family arrangement.
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[1] Damayanti Ramachandran (HUF) v. ITO [TS-1053-ITAT-2025(CHNY)] dated 07 August, 2025
[2] Mahindra and Mahindra vs. Commissioner (404 ITR 1 SC)
[3] CIT v. Smt. Chetanaben B. Sheth (203 ITR 24 GHC)
[4] DCIT v. Manish M. Chheda (ITAT Mumbai)
[5] Ramona Pinto v. DCIT (464 ITR 305 Bombay)
[6] GKN Driveshafts India Ltd. (259 ITR 19 SC)
