Decided on December 17,1982



M. Fatima Beebi, Judicial Member - (1.) THIS appeal by the assessee directed against the order of the AAC dated 17-11-1980 arises for the assessment year 1974-75. The grounds of appeal relate to the computation of capital gains and relief under Section 80E of the Income tax Act, 1961 ('the Act').
(2.) The assessee is a partner of Varma & Varma, a registered firm of chartered accountants. During the accounting period relevant for the assessment year 1974-75 the firm was reconstituted and the share of the assessee in the profits was reduced from 17 per cent to 15.25 per cent. The ITO, in completing the assessment on 31-3-1978, subjected to charge an amount of Rs. 3,242 computed as capital gains on surrender of 1.75 per cent share in the firm by the assessee for consideration. The assessee preferred appeal against such addition before the A AC contending that after the assessee joined as partner in 1956 there had been an improvement in the profession of the firm; the cost of improvement for each percentage of the shares after its acquisition cannot be evaluated and, therefore, no capital gains can be computed or subjected to charge. The assessee relied on the decision of the Kerala High Court in CIT v. E.C. Jacob [1973] 89 ITR 88 (FB).
(3.) THE AAC stated detailed facts in paragraph (?) of his order which are extracted below : ...During the accounting year concerned, there was a re-constitution of the firm of Chartered Accountants Varma & Varma in which the appellant is the senior partner ; some new partners have also been admitted and there has been re-allocation of shares. Share of increase in the value of goodwill in the firm has been computed on the basis of the value of the goodwill at the beginning of this year and at the time of last re-allocation of shares. Thus the total capital gains on account of the increase in value of the goodwill was computed and the increase in goodwill has been credited to the already existing partners who had surrendered certain percentage out of their share of profit. THE appellant had surrendered 1.75 per cent of his share of profits and the increase in the value of the goodwill proportionate to the appellant's share amounting to Rs. 14,882 has been credited in his favour. During the earlier years, the appellant had made payments towards the goodwill on his admission as a partner as well as in respect of increase in his share effected in the subsequent years. THE proportionate cost attributed to his 1.75 per cent share surrendered has been worked out at Rs. 3,398. THE difference of Rs. 11,484 has been treated by the Income-tax Officer as capital gains in respect of the consideration of Rs. 14,882 received by him for surrender of 1.75 per cent of the profits from his share of profits. This has been treated as capital gain by the Income-tax Officer. This action of the Income-tax Officer is questioned in the appeal before me.... THE AAC distinguished the decision in E.C. Jacob's case (supra) and rejected the assessee's contention stating that this is a case where the assessee has incurred cost of acquisition for his share of goodwill and where a portion of his share of goodwill is transferred for consideration, the difference is liable to tax as capital gains. THE AAC also held the view that there is no tangible investment for improvement of the profession and there is no cost of improvement to be adjusted. In this view he dismissed the appeal.;

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