QUESTION: My father, who was a partner in a firm died three years ago. He has left myself, my brother and my mother as legal heirs, though there was a promise, that I would be taken as a partner in my father's place. The other partners had retracted from this position and offered a compensation, which was finally settled after five years only during the current financial year. It has been provided in the agreement between ourselves and other partners that the payment is in full discharge of my father's right as a partner and that the tax on the same will be borne by us. Is there any liability for us? If so, whether it is taxable in the year of death or the year of settlement?
ANSWER: What the reader and his co-heirs have received is in settlement of account on the death of a partner.
There may or may not be a dissolution of a firm on such death depending upon the terms of the partnership deed.
But this makes no difference, because it has been consistently held that any amount received on settlement either on dissolution or retirement should not be liable to tax even as decided by the Supreme Court itself in Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) and Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC) . There are also a number of decisions of the High Courts to this effect. Where such amount is received in cash, it would not have been liable to tax, even if the amount had been received during the life time of the father on his retirement or on dissolution of the firm, so such amount could not be liable to tax in the hands of the successors. What has been received is only an amount due to the estate of the deceased, though it had been finalised during the year. The amount is a capital receipt and is, therefore, not taxable.