Goodwill exempt on retirement of partner

Hello,

In India, the tax treatment of goodwill received by a retiring partner has changed notably with the Finance Act of 2021. Goodwill is no longer considered a depreciable asset and is subject to capital gains tax when transferred upon retirement. The cost of acquisition of goodwill for the retiring partner is typically nil unless it was purchased, affecting capital gains calculation.

The case of Patel v. CIT [1999] is significant as it dealt with the tax implications of amounts received by a retiring partner. The Supreme Court ruled that payments made to a retiring partner for his share in the assets of the firm, including goodwill, should not be treated as a transfer under section 45 of the Income Tax Act, thus exempting it from capital gains tax under clause (ii) of section 47 of the Act. This ruling might suggest that payments for goodwill under these circumstances could be exempt from tax. However, post-2021 changes might impact the applicability of this precedent, given the explicit reclassification of goodwill as a non-depreciable asset.

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Shubham Goyal

It is a transfer of capital asset by firm to its partners. Firm is liable to pay tax u/s 45(4) under the head capital gain. Capital gain shall be equal to value of money received by the partner plus FMV of the capital asset received by the partner from the firm on date of such receipt minus amount of balance in the capital account of partner at the time of reconstitution of the firm. The amount attributable to the capital asset being transferred shall be reduced from the full value of consideration to compute income under the head capital gain. Firm is required to furnish details in Form No. 5C