Vatsala Shenoy vs. JCIT (Supreme Court)

DATE: October 18, 2016 (Date of pronouncement)
DATE: October 20, 2016 (Date of publication)
AY: -
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S. 50B: Important law explained on what constitutes a "slump sale" and whether capital gains on liquidation of a firm are chargeable to tax

(i) 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 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 16 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 by way of sale of the assets of the firm as per Clause 16 of 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. It is not even disputed. Once it is held to be the “capital asset”, gain herefrom is to be treated as capital gain within the meaning of Section 45 of the Act.

(ii) The assessees, however, are attempting the wriggle out from payment of capital gain tax on the ground that it was a “slump sale” within the meaning of Section 2(42C) of the Act and there was no mechanism at that time as to how the capital gain is to be computed in such circumstances, which was provided for the first time by Section 50B of the Act with effect from April 01, 2000. However, this argument fails in view of the fact that the assets were put to sale after their valuation. There was a specific and separate valuation for land as well as building and also machinery. Such valuation has to be treated as that of a partnership firm which had already stood dissolved.

(iii) As per the aforesaid definition, sale in question could be treated as lump sale only if there was no value assigned to the individual assets and liabilities in such sale. This has obviously not happened. It is stated at the cost of repetition that not only value was assigned to individual assets, even the liabilities were taken care of when the amount of sale was apportioned among the outgoing partners, i.e. the assessees herein.

(iv) Once we hold that the sale in question was not slump sale, obviously Section 50B also does not get attracted as this section contains special provision for computation of capital gains in case of slump sale. As a fortiorari, the judgment in the case of PNB Finance Limited (2008) 13 SCC 94 : 307 ITR 75 also would not apply.

(v) In the aforesaid scenario, when the Official Liquidator has distributed the amount among the nine partners, including the assessees herein, after deducting the liability of each of the partners, the High Court has rightly held that the amount received by them is the value of net asset of the firm which would attract capital gain. Scope of Section 45 of the Act was explained in Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF) (2009) 8 SCC 412 and we would like to reproduce the following discussion from the said judgment:

“16. The following conditions need to be satisfied for taxing a transaction as capital gains viz. the subject-matter must be a capital asset, the transaction must fall in the definition of “transfer”, there must be profit or loss called “capital gains” and that the taxpayer has claimed exemption in whole or in part by complying with legal provisions (like Section 54-F) …”

(vi) When we apply the said legal principle to the facts of the instant case, we find 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 gain subject to the payment of tax under the Act.

(vii) Insofar as argument of the assessees that tax, if at all, should have been demanded from the partnership firm is concerned, we may only state that on the facts of this case that may not be the situation where the firm had dissolved much before the transfer of the assets of the firm and this transfer took place few years after the dissolution, that too under the orders of the High Court with clear stipulation that proceeds thereof shall be distributed among the partners. Insofar as the firm is concerned, after the dissolution on December 06, 1987, it had not filed any return as the same had ceased to exist. Even in the interregnum, it is the AOP which had been filing the return of income earned during the said period. The High Court has touched upon this aspect in greater detail in para 30 of its judgment. Since we agree with the same, we reproduce below the discussion in the said para…

(viii) 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 November 20, 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 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 M/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax (1992) 1 SCC 659 : 193 ITR 321 and Commissioner of Income Tax v. Excel Industries Ltd. (2014) 13 SCC 459 : 358 ITR 295 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 We now advert to the second argument.) It is argued that insofar as income of the firm in the Assessment Year in question is concerned, it could not be taxed at the hands of the assessees.

(ix) We find merit in this submission. 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 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 {See – M/s. Radhasoami Satsang, Saomi Bagh, Agra and Excel Industries Ltd.} From the judgment of the High Court, we find that this aspect has been dealt with very cursorily, without taking into consideration the aforesaid aspects highlighted by us. The upshot of the aforesaid discussion would be to allow the appeals partly only to the extent that 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.

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