# 12 S.C.R. 1 VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME TAX

- **Citation:** [2016] 12 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 2016-10-18
- **Case number:** Civil Appeal No. 1234of2012
- **Bench:** A. K. Sikri, N.V. Ramana
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/12-s-c-r-1-vatsala-shenoy-v-joint-commissioner-of-income-tax-31198
- **Pages:** 25

## Headnote

Income Ta:x Act, 1961:
A
B
ss. 2(14), 45 - Capital asset - Profit/gain arising from transfer
C
thereof to be taxed as "Capital gains" -Assessees, erstwhile partners
of a dissolved partnership firm - Winding up proceedings file.d to
sell the assets of the firm and distribute the share thereof - Firm
sold as an ongoing concern to three partners forming Association
of Persons (AOP-3) - Assesseeslerstwhile partners received their D
net share of the value of the assets of the firm - Taxed as capital
gains in the hands of assessees by Assessing Officer - Held: Result
of winding up proceedings, after dissolution of firm, was to sell the
assets of the firm and distripute the share thereof - On facts, it is
clear that asset of the firm that was sold was capital asset within the
meaning of s. 2(14) of the Act - Thus, once it is held to be the
"capital asset'', gain therefrom is to be treated as capital gains within
the meaning of s. 45 - Capital gains uls. 45 is deemed income which
arises at a fixed point of time, viz. on the date of transfer - 'Transfer'
of the assets triggered the provisions of s.45, making the capital
gains subject to payment of tax at the hands of assessees - However,
business income/revenue income of the firm in the Assess111e1it Year
in question to be assessed at the hands of AOP-3 and not
assessees - Companies Act, 1956 - s.583(4J(a) - Tax/Taxation.
E
F
s.2(42)C - Slump &Ile - When not - Held: As per the definition
of 'slump sale', sale in question could be treated as slump sale only
if there was no value assigned to the individual assets and liabilities
G
in such sale - In the present case, not only value was assigned to
individual assets, even liabilities were taken care of - Hence, sale
in question not slump sale.
Partly allowing the appeals by assessees, the Court
,,
H
2
A
B
c
D
E
F
SUPREME COURT REPORTS
[2016] 12 S;C.R.
..,
HELD: 1.1 The firm stood dissolved with effect from
December 06, 1987; the company petition-was filed by two
partners in view of eruption of disputes among the partners; the
business was carried on by the partners with controlling interest
as an interim arrangement; the income was assessed in their
hands as AOP and not in the hands of the firm which had already
been dissolved; assets of the company were put to sale in
accordance with the Partnership Deed of a dissolved firm, though
as an ongoing concern; and outgoing partners (assessees herein)
received their net share of the value of the assets of the firm out
·or the amount received by way of sale of the assets of the firm as
per the Partnership Deed. On the aforesaid facts, it becomes
clear that asset of the firm that was sold was the capital asset
within the meaning of Section 2(14) of the Act. Once it is held to
be the "capital asset", gain therefrom is to be tn;ated as capital
gains within the meaning of Section 45 of the Act. [Paras 24, 27)
[18-E-H; 19-AJ
1.2 Capital gains under Section 45 of the Act is deemed
income which arises at a fixed point of time, viz. on the date of
transfer. When the said legal principle is applied to the facts of
the instant case, it is found that the partnership firm had dissolved
and thereafter winding up proceedings were taken up in the High
Court. The result of those proceedings was to sell the assets of
the firm and distribute the share thereof to the erstwhile partners.
Thus, the 'transfer' of the assets triggered the provisions of
Section 45 of the Act and making the capital gains subject to the
payment of tax. [Paras 27, 28] [20-G-H; 21-A-B)
1.3 The assessees, however, were attempting to wriggle
out from payment of capital gains tax on the ground that it was a
"slump sale" within the meaning of Section 2(42)C of the Act and
there was no mechanism at that time as to how the capital gains
is to be computed in such circumstances, which was provided for
G the first time by Section SOB of the Act with effect from April 01,
2000. As per the definition of 'slump sale' in Section 2(42)C, sale
in questio

## Text

_Characters 0–39,904 of 54,380. This is a partial read: ask again with offset=39904 for what follows._

[2016) 12 S.C.R. 1
VATSALA SHENOY
v.
JOINT COMMISSIONER OF INCOME TAX
I
(ASSESSMENT), MYSORE
(Civil Appeal No. 1234of2012)
OCTOBER 18, 2016
[A. K. SIKRI AND N.V. RAMANA, JJ.]
Income Ta:x Act, 1961:
A
B
ss. 2(14), 45 - Capital asset - Profit/gain arising from transfer
C
thereof to be taxed as "Capital gains" -Assessees, erstwhile partners
of a dissolved partnership firm - Winding up proceedings file.d to
sell the assets of the firm and distribute the share thereof - Firm
sold as an ongoing concern to three partners forming Association
of Persons (AOP-3) - Assesseeslerstwhile partners received their D
net share of the value of the assets of the firm - Taxed as capital
gains in the hands of assessees by Assessing Officer - Held: Result
of winding up proceedings, after dissolution of firm, was to sell the
assets of the firm and distripute the share thereof - On facts, it is
clear that asset of the firm that was sold was capital asset within the
meaning of s. 2(14) of the Act - Thus, once it is held to be the
"capital asset'', gain therefrom is to be treated as capital gains within
the meaning of s. 45 - Capital gains uls. 45 is deemed income which
arises at a fixed point of time, viz. on the date of transfer - 'Transfer'
of the assets triggered the provisions of s.45, making the capital
gains subject to payment of tax at the hands of assessees - However,
business income/revenue income of the firm in the Assess111e1it Year
in question to be assessed at the hands of AOP-3 and not
assessees - Companies Act, 1956 - s.583(4J(a) - Tax/Taxation.
E
F
s.2(42)C - Slump &Ile - When not - Held: As per the definition
of 'slump sale', sale in question could be treated as slump sale only
if there was no value assigned to the individual assets and liabilities
G
in such sale - In the present case, not only value was assigned to
individual assets, even liabilities were taken care of - Hence, sale
in question not slump sale.
Partly allowing the appeals by assessees, the Court
,,
H
2
A
B
c
D
E
F
SUPREME COURT REPORTS
[2016] 12 S;C.R.
..,
HELD: 1.1 The firm stood dissolved with effect from
December 06, 1987; the company petition-was filed by two
partners in view of eruption of disputes among the partners; the
business was carried on by the partners with controlling interest
as an interim arrangement; the income was assessed in their
hands as AOP and not in the hands of the firm which had already
been dissolved; assets of the company were put to sale in
accordance with the Partnership Deed of a dissolved firm, though
as an ongoing concern; and outgoing partners (assessees herein)
received their net share of the value of the assets of the firm out
·or the amount received by way of sale of the assets of the firm as
per the Partnership Deed. On the aforesaid facts, it becomes
clear that asset of the firm that was sold was the capital asset
within the meaning of Section 2(14) of the Act. Once it is held to
be the "capital asset", gain therefrom is to be tn;ated as capital
gains within the meaning of Section 45 of the Act. [Paras 24, 27)
[18-E-H; 19-AJ
1.2 Capital gains under Section 45 of the Act is deemed
income which arises at a fixed point of time, viz. on the date of
transfer. When the said legal principle is applied to the facts of
the instant case, it is found that the partnership firm had dissolved
and thereafter winding up proceedings were taken up in the High
Court. The result of those proceedings was to sell the assets of
the firm and distribute the share thereof to the erstwhile partners.
Thus, the 'transfer' of the assets triggered the provisions of
Section 45 of the Act and making the capital gains subject to the
payment of tax. [Paras 27, 28] [20-G-H; 21-A-B)
1.3 The assessees, however, were attempting to wriggle
out from payment of capital gains tax on the ground that it was a
"slump sale" within the meaning of Section 2(42)C of the Act and
there was no mechanism at that time as to how the capital gains
is to be computed in such circumstances, which was provided for
G the first time by Section SOB of the Act with effect from April 01,
2000. As per the definition of 'slump sale' in Section 2(42)C, sale
in question could be treated as slump sale only if there was no
value assigned to the individual assets and liabilities in such sale.
This had obviously not happened. Not only value was assigned to
individual assets, even the liabilities were taken care of when
H
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
3
TAX (ASSESSMENT), MYSORE
the amount of sal.e was apportioned among the outgoing partners, A
i.e. the assessees herein. Once it is held that the sale in question
was not slump sale, obviously Section SOB also does not get
attracted as this section contains special provision for
computation of capital gains in case of slump sale. [Paras 25, 26]
[19-A-B; F-H)
1.4 There is merit in the submission of the assessees that
income of the firm in the Assessment Year in question could not
be taxed at the hands of the assessees. First, and pertinently, it
is an admitted case that 40% of the said income was allowed by
the High Court to be retained by the successful bidder (AOP-3)
precisely for this very purpose. This 40% represented the tax
which was to be paid on the income generated by the ongoing
concern being run by the Association of Persons, as authorised
B
c
by the High Court. Secondly, in the previous years, the
Department had taxed the AOP and this procedure had to
continue in the Assessment Year in question as well. Therefore, D
the business income/revenue income in the Assessment Year in
question is to be assessed at the hands of AOP-3, in terms of the
orders of the High Court, as AOP-3 retained the tax amount from
the consideration which was payable to the assessees herein and
it is AOP-3 which was supposed to file the return in that behalf
and pay tax on the said revenue income. [Paras 32, 33, 34) [24E
B-D, G-H]
PNB Finance Limited v. Commissioner of Income Tax I.
New Delhi (2008) 13 SCC 94 : 2008 (15) SCR 556 -
held inapplicable.
Commissioner of Income Tax, Faridabad v. Ghanshyam
(HUF) (2009) 8 sec 412 : 2009 (10) SCR 1025 -
held applicable.
Mis. Radhasoami Satsang, Saomi Bagh, Agra v.
Commissioner of Income Tax (1992) 1 S€C 659 : 1991
(2) Suppl. SCR 312; Commissioner of Income Tax 1:
Excel Industries Ltd. (2014) 13 SCC 459 : 2013 (10)
SCR 490 - relied on.
Co111111issioner of Income Tax, Bombay City I v. Tata
Services Ltd. (1980) 122 ITR 594 (Bombay); Mangalore
F
G
H
4
A
B
c
D
E
F
SUPREME COURT REPORTS
[2016] 12 S.C.R.
,Ganesh Beedi Works v. Commissioner of Income Tax,
Mysore & Anr. (2016) 2 SCC 556; CIT v. B.C. Srinivasa
Setty (1981) 2 SCC 460:1981 (2) SCR 938; Areva T &
D India Ltd. v. The Deputy Commissioner of Income
Tax (2012) 345 ITR 421; Commissioner of Income Tax
& Anr. v. Associated Electronic!;, & Electricals Industries
(Bangalore) (P} Ltd. (2016) 130 DTR 0222 (Kar) -
referred to.
Case Law Reference
, ,
(1980) 122 ITR 594 (Bombay) referred to
Fara 15
2008 (15) SCR 556
held inapplicable Para 16
(2016) 2 sec 556
referred to
Para 17
1981 (2) SCR 938
referred to
Para18
(2012) 345 ITR 421
referred to
Para 18
(2016) 130 DTR 0222 (Kar)
referred to
Para 18
2009 (10) SCR 1025
held applicable
Para 27
2013 (10) SCR 490
relied on
Para 33
1991 (2) Suppl. SCR 312
relied on
Para 33
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1234
of2012.
From the Judgment and Order dated 23.12.2010 of the High Court
ofKarnataka at Bangalore in ITA No. 147 of2000.
WITH
C.A. Nos.1235, 1236, 1237, 1238, 1239, 1240, 1241, 1242, 1243,
l244and 1245 of2012.
C.A. Nos. 10190, 10191and10192 of2016.
G
Ajay Vohra, Sr. Adv., Mohit Chaudhary, Ms. Puja Sharma, Kuna!
Sachdeva, Ms. Damini Chawla, Balwinder S., Iman Ali, Yashraj Singh
Deora, Ashok Kulkarni, Ms. Priyadar Shinee Singh, Ms. Asmita Singh,
Mis. Mitter & Mitter Co., Advs. for the Appellant.
K. Radhakrishnan, Sr. Adv., Rupesh Kumar, Arijit Prasad, T. M.
H
Singh, Pratik Raoka, Mrs. Anil Katiyar, Advs. for the Respondent.
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
5
TAX (ASSESSMENT), MYSORE
The Judgment of the Court was delivered by
A:K. SIKRI, J. 1. Delay condoned in Special Leave Petition
(C)No ..... CC 9101and10193 of2014.
2. Leave granted.
A
3. All these appeals (except Civil Appeal No. 1245 of2012 and
B
Civil Appeals arising out of SLP (C) No .... CC Nos. 9101 and I 0193 of
2014 and SLP (C) No. 14812 of2014, which are filed by the Revenue)
are preferred by the assessees. The respondent in these appeals is the
Joint Commissioner oflncome Tax (Assessment), Special Range, Mysore,
who would be referred to as the 'Revenue' hereinafter. It may also be
mentioned that these appeals arise out of a common judgment rendered
C
by the High Court of Karnataka on December 23, 20 I 0 in the appeals
filed under Section 260-A of the Income Tax Act, 19(:! I (for short, the
'Act') challenging certain aspects of assessments pertaining to the
Assessment Year 1995-1996. In fact, as would be noticed hereinafter,
all these assessees were partners of a partnership firm known as 'Mis.
D
Mangalore Ganesh Beedi Works', which was sold to three other partners,
as a going concern, but after the dissolution of the partnership firm.
Certain considerations received as a result thereof were treated as capital
gains on which income tax was charged by the Assessing Officer: The
case of the assessees was that it was a capital receipt in their hands, not
exigible to income tax. The exact nature of the receipt, treated as capital
gain by the Assessing Officer, shall be taken note of subsequently at the
appropriate stage. Suffice it to state that the assessees successive appeals
E
to Commissioner of Income Tax (Appeals) and .then to the Income Tax
Appellate Tribunal (ITAT) and thereafter to the High Court have failed,
thereby sustaining the order of the Assessing Officer. With this brief F
background of the litigation, we advert to the events that have taken
place in some detail.
4. One S. Raghuram Prabhu started the business of manufacturing
beedies in the year 1939. His brother-in-law joined him in the year 1940
and this sole proprietorship was converted into a partnership firm with
the name 'Mis. Mangalore Ganesha Beedi Works '(hereinafter referred
G
to as the 'firm'). It was reconstituted thereafter from time to time and
lastly o,n June 30, 1982. t'>artnership deed dated June 30, 1982 was
entered between thirteen persons with the same name. Duration of this
firm was five years, which period could be extended by six months.
Thereafter, the affairs of the firm had to be wound up as provided in
H
.
.
6
SUPREME COURT REPORTS
f2016112 S.C.K
A
Clause 16 of the Partnership Deed. The firm was dissolved on December
06, 1987 by afflux of time after extending the life of the firm by a period
of six months, as per the terms stipulated in the Partnership Deed.
However, because of the difference of opinion among the erstwhile
partners, the affairs of the finn could not be wound up. Therefore, two
B
c
of the partners of the firm filed a petition before the High Court under
the provisions of Part X of the Companies Act, 1956 for winding up of
the affairs of the firm in terms of Section 583(4)(a) thereof. The said
petition was registered as Company Petition No. 1 of 1988. Significantly,
though the firm stood dissolved on December 06, 1987, and thereafter
Company Petition No. 1 of 1988 for the winding up proceedings after
dissolution was filed in the High Court, the business of the partnership
firm continued because of the interim order passed by the High Court.
This was because of the agreement of the partners, as stipulated in the
Partnership Deed itself, providing that on dissolution the firm was to be
sold as a continuing concern to that partner(s) who could give the highest
D
price therefor. The relev,ant clauses in the partnership firm stipulating
the aforesaid arrangement are clauses (3) and (16) which read as under:
E
F
G
H
"3. The duration of the Partnership shall be five yearS> in
the first instance; but by mutual agreement the parties hereto
may extend the said duration. If during the subsistence of
this Partnership any of the partners desire to retire from
the partnership he or she can do so, if all the other partners
agree to the said retirement. However, if all the other
partners do not agree to the said retirement, the partner
intending to retire shall give six months' notice in writing of
his or her intention to retire and on expiration of the.period
of the said notice the said Partner shall,cease to be a Partner
and subject to Para 14 infra from that date all his or her
liabilities and rights as a Partner of the firm shall come to
an end.
xx
xx
xx
16. If the Partnership is dissolved, the.going concern carried
on under the name of the Firm MANGALORE GANESH
BEEDI WORKS and all the trade marks used in course of
the said business by the said firm and under which the
business of the Partnership is carried on shall vest in and
belong to the Partner who offers and pays or two or more
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
7
TAX (ASSESSMENT), MYSORE [A. K. SIKRI, J.]
Partners who jointly offer and pay the highest price therefor
A
as a single group at a sale to be then held as among the
Partners shall be entitled to bid. The other Partners shall
execute and complete in-favour of the purchasing Partner
or Partners at his/her or their expense all such deed,
instruments and applications and otherwise aid him/her or
them for the registration his/her name or their names of all
the said trade marks and do all such deed, acts and
transactions as are inc lental or necessary· to the said
transferee or assignee Partner or Partners."
B
5. In view of the aforesaid clauses, specific order dated November
05, 1988 was passed by the High cto1,1rt permitting the group of partners,
C
seven in number, who had controlling interest, to continue the business
as an interim arrangement till the completion of winding up proceedings.
Ultimately, the orders dated June 14, 1991 were passed in the said
company petition for winding up the affairs .of the firm by selling its
assets as an 'ongoing concern'. Though this order was challenged by o
some of the partners by filing special leave petition in this Court, the
same was dismissed as withdrawn in the year 1994. In this manner,
orders dated June 14, 1991 became final, which had permitted the sale
of the firm, as an ongoing concern, to such of its partner(s), who makes
an offer of highest price. Reserve price of~30 crores was also fixed
thereby mandating that the price cannot be less than ~30 crores. The
successful bidder was also required to accept further liability to pay
interest @ 15% per annum towards the amount of price payable to
partners from December 06, 1987 till the date of deposit. In the order
dated June 14, 1991, it was also directed thatthe successful bidder shall
deposit the offer price together with interest with the Official Liquidator
within a period of sixty days of the date of acceptance of the offer.
E
F
6. On the aforesaid terms, these partners individually or in groups
offered their bids. Bid of Association of Persons comprising three partners
(hereinafter referred to as 'AOP-3 '),at ~92 crores, turned out to be the
highest and the same was accepted by the High Court vide order dated
G
September 21, 1994. AOP-3 deposited this amount of ~92 crores with
the Official Liquidator on November 17, J 994 and with the occurrence
of this event, assets of the firm were treated as having been sold to
AOP"3 on November 20, 1994. Even actual handing over of the business
of the firm along with its assets by the Official Liquidator to the said
AOP-3 took place on January 07, 1995.
H
8
SUPREME COURT REPORTS
[2016] 12 S.C.R.
A
7. From the aforesaid facts, following events which are relevant
B
c
D
E
F
for the purposes of these appeals, are recapitulated:
(i) Date of dissolution of the partnership firm is December 06,
1987.
(ii) Company Petition No. 1 of 1988 was filed in the High Court
ofKarnataka for winding up of the firm. All steps and formalities for
winding up, thereafter, are taken pursuant to the orders passed by the
High Court from time to time.
(iii) Order dated November 05, 1988 is passed permitting the
group of partners (seven in number) to continue the business as an interim
arrangement till the completion of winding up proceedings.
(iv) WindinguporderdatedJune 14, 1991 ispassedfiJ!.ingminimum
price of~30 crores for the sale of the dissolved partnership firm as a
going concern to such of its partner(s) who makes the offer of highest
price.
(v) The date of deposit of the bid amount of~92 crores by AOP3, being the highest bid, is on November 17, 1994.
8. With the aforesaid background facts, we advert to the
developments that have taken place on the income tax front.
9. Since the firm stood dissolved with effect from December 06,
1987, upto December 06, 1987, it is the firm which had filed the income
tax retums in respect of the income which it had earned, for payment of
income tax thereupon. However, as. mentioned above, though the firm
was dissolved, but the business continued because of the orders passed
by the High Court keeping in view the provisions contained in the
Partnership Deed. The income that was earned from the date of
dissolution till the date of winding up and when the firm was sold to
AOP-3 was assessed at the hands of dominant partners controlling the
business activities (seven in number) as "Association of Persons" (AOP),
meaning thereby, the income from the business of the said firm
G December 06, 1987 till winding up was assessed as an AOP. At the
same time, these assessees were also filing their individual returns as
well.
10. The assessees filed the return for the Assessment Year 19951996. It is in this Assessment Year the assets of the firm were sold as
H
ongoing concern to A.OP-3 on September 21, 1994. The Assessing
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
9
TAX (ASSESSMENT), MYSORE [A. K. SIKRI, J.}
Officer, while making the assessments, bifurcated this Assessment Year
A
into two periods. One period from April 01, 1994 to November 20, 1994
(asAOP of the partners who had continued the business in that capacity
in previous years). Second period from November 20, 1994 till March
31, 1995 (as the business was handed overtoAOP-3 and the assessment
was treated as that of AOP~J). While doing so, the Assessing, Officer .8
observed that the entire capital gains on the sale as a going concern of
the business of the firm as well as the proportionate profits for the period
April 01, 1994 to November 20, 1994, when the controlling AOP was
carrying on business as computed in accordance with the order of the
High Court in Company Petition No. 1 of 1988, on a notional basis a sum
of ~9,57,57,007 should be taxed in the hands of the firm. However,
C
according to the Assessing Officer, to protect interests of the Revenue,
the same amounts were included in the assessment of the AOP for the
first period. The income and tax. computations were made separately
for the two periods in the order of assessment. The Assessing Officer
apportioned the consideration among the various assets comprised within
D
the business with further splitting between short term and long term
capital gains.
11. While the aforesaid treatment was given to the assessment of
the income of the firm, insofal" as the assessees as individuals are
concerned, on the same date the Assessing Officer made assessment in
their cases also by including therein the proportionate share from out of E
~92 crores (the amount ofauction bid) as capital gain at their hands and
bifurcated the same into long term and short term gain. The manner in
which it is done can be discerned from' one such Assessment Ord~
where the capital gain is computed in the following manner:
"INCOME AS RETURNED
Rs.29,40,680
II. Computation of capital gains on account of transfer .Of
interest in partnership firm Mis. MGBW out of Rs. 92 c~ores
Share of assessee out of Rs. 92 crores
Al
Goodwill u/s. 48 r.w.s.
55(1)
76.6% ofRs.12,73,55,600
(See Table 3)
Rs. 12,73,55,600
Rs.9, 75,54,390
F
G
H
10
A
B
c
D
E
F
G
H
SUPREME COURT REPORTS
[2016112 S.C.R.
less Cost of acquisition
nil
(See Table 3)
Net Taxable Goodwill
Rs. 9,75,54,390
A2
Sale of Land
(See Table 3)
Marketvalue @ 19% of
Rs.12, 73,55,600
less Cost of acquisition
, Rs.2,41,97,564
(see Table 3)
13.843%of
Rs.1,53,45,025,
Indexed Cost
21,24,22lx259
100
55,01,710
Rs.1,86,95,854
TOTAL LONG TERM CAPITAL GAINS (Al +A2) Rs. 11,62,50,244
III Short-term Capital gain on transfer of movable (depreciable
asset) u/s. 50
4.4% ofRs.12,73,55,600
Less Value I w.d.v. in the beginning
of accounting year - 31.03 .1994
13.843% ofRs.15,11,404
SHORT TERM CAPITAL GAINS
Rs. 56,03,646
Rs.2,09,224
Rs. 53,94,422
IV Share ofNotional/Proportionate Profit""'
revenue receipt
Rs. 1,32,55,640
TOTAL INCOME (I+ II+ III+ IV)
Rs. 13,78,40,987
TOTAL INCOME EXCLUDING LONGTERM Rs. 2, 15,90, 743"
CAPITAL-GAINS
- 12. As can be gathered from the above, the total proceeds of~92
crores are first apportioned among the assessees in the ratio in which
VATSALA SHENOY v. JOINT COMMJSSIONER OF INCOME
11
TAX (ASSESSMENT), MYSORE [A. K. SlKRI, J.]
they had received the said amount. Thereafter, this amount is div.ided
A
into long term capital gains and short tenn capital gains. Two components
oflong term capital gains are taken into consideration, namely goodwill
and sale ofland. Likewise, short term capital gain is arrived at in respect ·
of transfer of movables which were depreciable assets. For the purposes
of calculation/ computation, figures were taken from Table II incorporated
B
in the Assessment Order itself mentioning the market value of these
assets. This, Table II reads as under:
Sales/Market
Amount in
S.No. Asset
%age
Value
assessee's
case
c
I.
Land as per H.S.
Seshagiri - Registered
19.00
17,47,90;000
2,41,97,564
valuer
2.
Buildings as per H.S.
Seshagiri - Registered
4. I 0
3,80,00,000
56,06,646
Valuer
D
3.
Plant & Machinery
estimated on the basis
0.30
25,00,000
of Swamy& Rao's
Report
4.
Goodwill - being
E
balancing figure
remaining out of total
-
figure of 92,00,00,000
76.60
70,47,10,000
9,75,54,390
also being almost same
figure if super-profit
method is adopted
F
Total
I 00.00
92,00,00,000 12, 7 3,55 ,600
13. It becomes apparent that the approach adopted by the
Assessing Officer was to take into consideration market value of the
assets of the firm, viz. land,.building and plant & machinery, which had
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already been evaluated by the Registered Valuers as reflected. in the
Table above. The market value of these three assets was ~21 ;52,90,000.
Since total sale consideration at which the firm was sold was ~92 crores,
balance amount of~70,4 7, I 0,000 was treated as representing goodwill
of the firm which was taxed as longterm gain. This mode of arriving at
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short term and long term capital gain and taxing it accordingly by the
Ass~ssing Officer has received the stamp of approval by the
Commissioner oflncome Tax (Appeals) and the Income Tax Appellate
Tribunal, as well as the High Court.
14. Mr. Ajay Vohra, learned senior counsel appearing for the
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assessees, submitted, with great emphasis, that the aforesaid approach
is incorrect, invalid and impermissible in law. Two broad arguments, on
the basis of which he attacked the rationale of the aforesaid assessments,
are the following:
(i) After referring to the averments made in the winding up petition
c that was filed in the Karnataka High Court, order of winding up and the
final order of confirmation of sale, Mr. Vohra pointed out that the firm
was admittedly sold as a going concern. Predicated on this fact, his
submission was that there could not have been any capital gain on the
sale of ongoing concern. For this purpose, he drew sustenance from the
definition of 'capital asset' as contained in Section 2( 14)(a) of the Act
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as well as Section 45 of the Act. Section 2(14)(a) is to the following
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"2(14) "capital asset" means -
(a) property of any kind held by an assessee, whether or
not connected with his business or profession;
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15. He submitted that the expression 'property of any kind'was
of widest amplitude, as held in Commissi011er of ll~come Tax, BOi11bay .
City Iv. Tata Services Ltd. 1 Therefore, assets of the partnership were
to be treated as capital assets.
16. He, thus, argued that undertaking that was transferred as a
going concern was a capital asset. However, at that time, ,there was no
provision as to how the asset of the firm when sold is to be computed as '
a capital gain .. The learned counsel pointed out that such a provision
was introduced for the first time (vide Finance Act, 1999) by inserting
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Section SOB to the Act with effect from April 01, 2000, laying down the
mechanism for computation of capital gains in case of slump sale. For,
such slump sales prior to April 01, 2000 were, therefore, not taxable,
was the submission of the learned counsel. It was argued that precisely
this very issue had been clinchingly determined by this Court in PNB
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1 (1980) 122 ITR 594 (Bombay)
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
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TAX (ASSESSMENT), MYSORE [A. K. SIKRI, J.]
Finance Limited v. Co111111issio11er of Income Tax I, New Del/ti : in
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the following manner:
"16. In the case of Artex Manufacturing Co. this Court
found that a valuer was appointed, th~t valuer submitted
his valuation report in which itemized valuation was carried
out and on that basis the consideratiOn was fixed at
Rs.11,50,400. Therefore, the sale consideration had been
arrived at after taking into account the value of plant,
machinery and dead stock as computed by the valuer and,
consequently, it was held that the surplus arising on the sale
was taxable under section 41 (2) of the Act and not as capital
gains. In the circumstances, the judgment of this court in
the case of Artex Manufacturing Co. was not, applicable
t-0 the present case. Further, this court in the case of C/Tv.
Electric Control Gear Mfg. Co. [1997] 227 ITR 278 has
held that whether (sic) the business of the assessee stood
transferred as a going concern for slump sale price, in the
absence of evidence on record as to how the slump price
,stood arrived at, section 41(2) had no application. It is
interesting to note th11t the judgment in the ca~e of Electric
Control Gear Mfg. Co. is given by the same Bench which
decided the case of Artex MamtfacJ11ring Co.
In fact,
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both the judgments are reported on after other in 227 ITR
at pages 260 and 278 respectively. In the present case, as
can be seen from the impugned judgment of the Delhi High
Court, the judgment of this court in Electric Control Gear
Mfg. Co. is missed out. That judgment has not been
considered by tf1e High Court. As stated above, this court
has clarified its judgment in Artex Mamtfacturing Co. in
its judgment in the case of Electric Control Gear Mfg.
Co. Therefore, section 41 (2) has no application to the facts
of the present case.
17. As regards applicability of section 45 is concerned,
three test~ are required to be applied. In this case, section
45 applies. There is no dispute on that point. The first test
is that the charging section and the computation provisions
are inextricably linked. The charging section and the
computation provisions together constituted an integrated
' (2008J 13 sec 94 : 307 ITR 75
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code. Therefore, where the computation provisions cannot
apply, it is evident that such a case was not intended to fall
within the charging section, which, in the present case, is
section 45. That section contemplates that any surplus
accruing on transfer of capital assets is chargeable to tax
in the previous year in which transfer took place. In this
case, transfer took place on July 18, 1969. The second test
which needs to be applied is the test of allocation/attribution.
This test is spelt out in the j_udgment of this Court in
Mugneeram Bangur and Co. (Land Department) [1965]
57 ITR 299. This test applies to a slump transaction. The
object behind !his test is to find out whether the slump price
was capable of being attributable to individual assets, which
is also known as item-wise eannarking. The third test is
that there is a conceptual difference between an undertaking
and its components. Plant, machinery and dead stock are
individual items of.an undertaking. A business undertaking
can consist of not only tangible items but also intangible
· items like, goodwill, man power, tenancy rights and value
of banking licence. However, the cost of such items
(intangibles) is not determinable. In the. case of CIT v.
B. C. Srinivasa Setty reported in [l 981] 128 ITR 294, this
cout1 held that section 45 charges the profits or gains arising
from the transfer of a capital asset to income-tax. In other
words, it charges surplus which arises on the transfer of a
capital asset in terms of appreciation of capital value of
that asset. In the said judgment, this Court held that the
"asset" must be one which falls within the contemplation
of section 45. It is further held that, the chargingsection
and the computation provisions together constitute an
integrated code and when in a case the computation
provisions cannot apply, such a case would not fall within
section 45. In the present case, the banking undertaking,
inter alia, included intangible assets like, goodwill, tenancy
rights, man power and value of banking licence. On the
facts, we find that item-wise earmarking was not possible.
On the facts, we find that the compensation (sak
consideration) of Rs.10.20 crores was not allocable (sic)
item-wise as was the case in Artex Mam!facturinf{ Co."
VAJ'SALA SHENOY v. JOINT COMMISSIONER OF INCOME
TAX (ASSESSMENT), MYSORE [A. K~ SIKRI, J.]
17. Mr. Vohra pointed out that in the instant case itself, insofar as
AOP-3 is concerned (who were the successful bidders and purchased the
assets of the firm), they were treated as purchasers of an ongoing concern
by this Court in the case of their assessment in Mmtglllore Gllnesh Bee<li
Works v. Commissioner of Income Tax, Mysore &Am: 3
In nutshell, his argument was that since it was a sale of an ongoing
concern, it had to be treated as a slump sale within the meaning of Section
2( 42C) of the Act and, therefore, it was not permissible for the Assessing
Officer to assign the amount of ~92 crores into different heads of land,
building and machinery and treating balance amount as goodwill. It was a
capital asset as an ongoing-concern which was sold at~ 92. crores ancflh
th_<e..absence of provisions relating to mode of computation and d~ductions
at the relevant time, which were inserted subsequently only with effect
from April 0 I, 2000, as per PNB Fi"'mce Limited, the consideration was
to be treated as capital receipt and no capital gain was payable thereon.
18. Two incidental submissions were also made on this aspect, which
are:
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(a) Even ifthe provisions of capital gain were applicable and the
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amount was to be taxed as the capital gain, valuation of goodwill, as.done
by the Assessing Officer, was contrary to-law. It was submitted that the.
manner in which the goodwill was valued showed that cost ofacquisition
was treated as 'Nil'. However, it could not be so having regard to the
provisions of Section 48. He c2ntrasted the same with Section 55(2)
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which was inserted with effect from April 0 I, 2002 and deals with 'cost of
acquisition' for the purposes of Sections 48 and 49 stipulating that insofar
as capital asset in relation to goodwill of a business is concerned, cost of
acquisition would be the cost at which it was p'urchased from the previous
owner. According to him, this yardstick could not have been applied prior
to April 01, 2002 in the absen9e of any statutory scheme and the instant
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case needed to be covered by the law laid down by the courts in this behalf
in various judgments. The learned couns~I referred to the following
judgments in support:
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(i) C/Tv. B.C. SriniV(ISll Setty
(ii) M<mgalore Ganesh Bee<li Works
(iii) Areva T & D Inc/ill Ltd. v. The Deputy Commissioner of G
Income T~
'(2016) 2 sec 556: (2015) 378 ITR 640
'(1981) 2 sec 460: 128 ITR 294
'(2012) 345 !TR 421 (Delhi High Court)
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(iv) Commissioner of Income Tax & Anr. v. Associated
Electronics & Electricals Industries (Bangalore) (P) Ltd. 6
(b) Without prejudice to the aforesaid contentions, his other
submission was that if at all the capital gain tax was payable, liability to
pay the same was that of the partnership firm and not the individual
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partners by virtue of Section 45( 4 ), which reads as under:
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"45. Capital gains. - (I) Any profits or gains arising ·
from the transfer of a capital asset effected in the previous
year shall, save as otherwise provided in sections 54, 548,
54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable
to income-tax under the head "Capital gains", and shall be
deemed to be the income of the previous year in which the
transfer took place.
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. (4) The profits or gains arising from the transfer ofa capital
asset by way,of distribution of capital assets on the dissolution
of a firm or other association of persons or body of
individuals (not being a company or a co-operative society)
or otherwise, shall be chargeable to tax as the income of
the firm, association or body, of the previous year in which
the said transfer takes place and, for the purposes of section
48, the fair market value of the asset on the date of such
transfer shall be deemed to be the full value of the
consideration received or accruing as a result of the
transfer."
19. Second submission of the learned senior counsel for the
assessees pertained to the payment of tax on the income which the
business earned from April 01, 1994 till November20, 1994. The learned
counsel argued that as per the orders of the High Court in the winding
up petition, 40% of this income was retained by AOP-3 as a tax
component because of the reason that for business income of the earlier
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years, after the dissolution, the same was taxed as an AOP. Therefore,
the individual partners could not be taxed on the said business income in
the year in question, as held in Mis. R<ulltasoami Satsa'ng; Saomi Baglt,
Agra v. Commissioner of Income Tax' and CQmmissioner of Income
6 (2016) 130 DTR 0222 (Kar)
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'(1992) 1sec659: 193 ITR 321
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
TAX (ASSESSMENT), MYSORE [A. K. SIKRI, J.]
Tax v. Excel l11dustries Ltd. 8 His related submission was that in any
case this amount was not received by the assessees as it was retained
by AOP-3 and, therefore, tax was not payable by the assessees.
20. Coming to the first submission of the assessees, it can be seen
that it is founded on the premise that the assets of the firm were sold to
AOP-3 as a going concern with further premise that it was a slump sale.
It is pointed out that the firm was doing business even after the winding
up petition was filed and as a going concern, it was put to sale.
21. Mr. Radhakrishnan, learned senior counsel appearing for the ·
Revenue, has refuted the aforesaid premise of the argument by submitting
that though it was sold as a going concern, nevertheless, the assets were
that of a dissolved firm as the firm had come to an end on December 06,
1987 by afflux of time. In order to establish this fact, learned counsel
took us through the record, including the winding up petition which was
filed in the High Court as well as the orders passed therein, which are
relied upon by the assessees themselves.
22. After going through the records, we find that the Revenue has
been able to substantiate the aforesaid submission. We have already
noticed that the firm was dissolved on December 06, 1987 by afflux of
time. This event happened as per the terms stipulated in the partnership
deed itself. The necessity for filing the petition under the Companies
Act arose because of differences between the erstwhile partners that
had erupted, pertaining to the affairs of the firm. No doubt, in the said
petition interim order dated November 05, 1988 was passed by the High
Court permitting the group of persons (seven in number), having
controlling interest in the firm, to continue the business. However, this
was done as an interim arrangement till the completion of winding up
proceedings. Pertinently, insofar as the firm is concerned, it did not
carry on business thereafter as an existing firm. On the contrary, few
ex-partners with controlling interest were allowed to continue the business
activity in the interregnum as a stopgap arrangement. Another important
fact which needs a mention is that, insofar as the firm is concerned, it
did not file income tax returns after the date of dissolution. Obviously
so, as it stood dissolved and was no more in existence. Precisely for this
reason, the income that was generated from the business, after the
dissolution, was assessed by the income tax authorities in the hands of
such erstwhile partners as an AOP. It is this AOP which was filing the
• (2014) t3 sec 459: 358 ITR 295
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returns and getting the same assessed in that capacity and paying the
income tax thereupon. Further, in the orders passed by the High Court
from tim.e to time in the said petition, insofar as the firm is concerned, it
has always been described as 'the dissolved partnership/inn'. Thps,
the assets which were sold ultimately on November 20, 1994 were of a
dissolved partnership firm, though as a going concern.
Once we straighten the factual position in the manner stated above,
the whole legal edifice of the assessees case crumbles down.
23. At this stage, we would like to clarify one more factual aspect.
During the pendency of the winding up petition before the High Court,
the High Court had passed various orders which included an order for
valuation of the assets of the firm. This valuation was done to enable
the Court to fix the reserve price for the purpose of inter se bidding
between the erstwhile partners and/or association of erstwhile partners.
The Chartered Accountants had done the valuation and submitted reports
on the basis of which base price was fixed at ~30 crores taking into
account the value of various assets. These assets valued at ~30 crores
are sold for ~92 crores. Thereafter, AOP-3, the successful ·bidder,
deposited the amount ofbid in respect of the share of nine other partners
and a settlement was also prepared recording the value of the assets of
the firm after deducting the liability of the said nine partners. The net
value of the assets so arrived at and distributed among the nine partners.
24. What follows from the aforesaid facts is that the firm stood
dissolved with .effect from December 06, 1987; the company petition
had to be filed by two partners in view of eruption of disputes among the
partners; the business was carried on by the partners with controlling
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interest as an interim arrangement; the income was assessed in their
hands as AOP and not in the hands of the firm which had already been
dissolved; assets of the company were put to sale in accordance with
Clause I 6 of the Partnership Deed of a dissolved firm, though as a going
concern; and outgoing partners (assessees herein) received their net
share of the value of the assets of the firm out of the amount received
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by way of sale of the assets of the firm as per Clause 16 of the Partnership
Deed.
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On the aforesaid facts, it becomes clear that asset of the firm that
was sold was the capital asset within the meaning of Section 2( 14) of
the Act. It is not even disputed. Once it is held to be the "capital asset'',
VATSALA SHENOY v. JOINT COMMISSIONER OF INCOME
19
TAX (ASSESSMENT), MYSORE [A. K.