Capital gain tax is levied on returns from all equity investment as well as real estate investments.
As per the details of the case a partnership firm was formed in 1992. As per the partnership model, partners are required to bring in capital and based on the ratio they split the profits available.
While the taxpayer and another individual were to bring in a certain sum of money as capital contribution into the firm, the other four individuals brought a parcel of land as their capital contribution towards the firm, a Deloitte tax research note read.
When the partner (taxpayer) retired from the firm he received certain amount as his part in the firm. The tax department argued that since the partnership also included land as an asset, capital gains tax has to be levied.
ITAT Mumbai ruled in favour of the partner. ITAT based its opinion on earlier Supreme Court judgments which were similar to the case around capital gains on partnership amount.
“Taxability of partners’ share received on retirement from partnership firm, has been a subject matter of litigation. This ruling reiterates the principle that amount received by partner on retirement from partnership firm, as his share in the assets of the partnership firm, is not taxable as capital gains, as the same is not covered within the definition of transfer under section 2(47) of the Income Tax Act,” the Deloitte note read.
Most of the law firms and professional services firms have a partnership model. That is a senior lawyer or an executive enters into a partnership contract with the firm. The partner brings in part of the capital and is entitled to a percentage of profits the partnership makes. On retirement or when the partner quits the firm, he is handed over the capital money he had initially brought in.