Tax on creation of goodwill

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Querist : Anonymous

Querist : Anonymous (Querist)

09 August 2011 We are partnership firm having 3 partners. One partner is retiring having 5 lacs credit balance in his account. What will be the tax incidence on firm or on partners if we crate goodwill of Rs 10 lacs and pay Rs 15 lacs to outgoing partner

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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10 August 2011 For partner it will be deemed as a Capital Sum Received and not taxable as Capital gains or otherwise.

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For firm also there will be no tax liablity. Better it is to be debited to the Capital Accounts of the continuing partners.

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It can not be said here that the firm has purchased goodwill from the retiring partner so that it will be allowed as cost of acquisition of goodwill at a later date in future when it becomes a subject matter of transfer. Basically the firm can not pay to itself for its own goodwill.
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Being an important planning issue , views of experts will certainly benefit us. So let us wait for their comments also.

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