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Wednesday, October 19, 2016

'M/s. 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.=High Court deals how the business income/revenue income is to be treated/calculated, but the question of taxability at the hands of the assessees has not bee touched upon at all. 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.

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 1234 OF 2012


|VATSALA SHENOY                             |.....APPELLANT(S)            |
|VERSUS                                     |                             |
|JOINT COMMISSIONER OF INCOME TAX           |                             |
|(ASSESSMENT), MYSORE                       |.....RESPONDENT(S)           |

                                   W I T H
                        CIVIL APPEAL NO. 1235 OF 2012

                        CIVIL APPEAL NO. 1236 OF 2012

                        CIVIL APPEAL NO. 1237 OF 2012

                        CIVIL APPEAL NO. 1238 OF 2012

                        CIVIL APPEAL NO. 1239 OF 2012

                        CIVIL APPEAL NO. 1240 OF 2012

                        CIVIL APPEAL NO. 1241 OF 2012

                        CIVIL APPEAL NO. 1242 OF 2012

                        CIVIL APPEAL NO. 1243 OF 2012

                        CIVIL APPEAL NO. 1244 OF 2012

                        CIVIL APPEAL NO. 1245 OF 2012

                 CIVIL APPEAL NO.                   OF 2016
                (ARISING OUT OF SLP (C) NO.          OF 2016
                      @ SLP (C) NO.....CC 9101 OF 2014)

                 CIVIL APPEAL NO.                   OF 2016
                (ARISING OUT OF SLP (C) NO.          OF 2016
                     @ SLP (C) NO.....CC 10193 OF 2014)

                                    A N D

                 CIVIL APPEAL NO.                   OF 2016
                 (ARISING OUT OF SLP (C) NO. 14812 OF 2014)

                               J U D G M E N T


A.K. SIKRI, J.
                 Delay condoned in  Special  Leave  Petition  (C)  No.....CC
9101 and 10193 of 2014.

Leave granted.

All these appeals (except Civil Appeal No. 1245 of 2012  and  Civil  Appeals
arising out of SLP (C) No....CC Nos. 9101 and 10193 of 2014 and SLP (C)  No.
14812 of 2014, which  are  filed  by  the  Revenue)  are  preferred  by  the
assessees.  The respondent in these appeals is  the  Joint  Commissioner  of
Income 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 by the High Court  of  Karnataka  on
December 23, 2010 in the appeals filed under Section  260-A  of  the  Income
Tax Act,  1961  (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 'M/s. 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 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 background of the litigation, we advert to the  events  that
have taken place in some detail.

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  'M/s.
Mangalore Ganesha Beedi Works' (hereinafter referred to as the 'firm').   It
was reconstituted thereafter from time to time and lastly on June 30,  1982.
 Partnership 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 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  firm  could  not  be  wound  up.
Therefore, two 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 price therefor.   The  relevant  clauses  in  the  partnership  firm
stipulating the aforesaid arrangement are clauses (3) and  (16)  which  read
as under:

“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 Partners who  jointly  offer  and
pay the highest price therefor 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 incidental  or  necessary  to  the  said  transferee  or
assignee Partner or Partners.”

In view of the aforesaid clauses, specific order  dated  November  05,  1988
was passed by the High Court permitting the  group  of  partners,  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 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  that  the
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.

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
September 21, 1994.  AOP-3 deposited this amount  of  ?92  crores  with  the
Official Liquidator on November 17, 1994 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.

From the aforesaid facts,  following  events  which  are  relevant  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  of
Karnataka 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)  Winding up order dated June 14, 1991 is passed  fixing  minimum  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  AOP-3,  being
the highest bid, is on November 17, 1994.

With the aforesaid background facts, we  advert  to  the  developments  that
have taken place on the income tax front.

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 returns  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 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.

The assessees filed the return for the Assessment Year 1995-1996.  It is  in
this Assessment Year the assets of the firm were sold as ongoing concern  to
AOP-3 on September  21,  1994.  The  Assessing  Officer,  while  making  the
assessments, bifurcated this Assessment Year into two periods.   One  period
from April 01, 1994 to November 20, 1994 (as AOP 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  over
to AOP-3 and the assessment was treated as that of AOP-3).  While doing  so,
the Assessing Officer 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, 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  the
business with further splitting between short term  and  long  term  capital
gains.

While the aforesaid treatment was given to the assessment of the  income  of
the firm, insofar 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  ?92  crores  (the
amount of auction 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 Order 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 M/s.   |              |
|MGBW out of Rs. 92 crores                       |              |
|                   |            | |             |              |
|Share of assessee out of Rs. 92| |Rs.          |              |
|crores                         | |12,73,55,600 |              |
|                   |            | |             |              |
|A 1                |            | |             |              |
|Goodwill u/s. 48   |            | |             |              |
|r.w.s. 55(1)       |            | |             |              |
|76.6% of           |Rs.9,75,54,3| |             |              |
|Rs.12,73,55,600    |90          | |             |              |
|(See Table 3)      |            | |             |              |
|less Cost of       |nil         | |             |              |
|acquisition        |            | |Rs.          |              |
|(See Table 3)      |            | |9,75,54,390  |              |
|Net Taxable        |            | |             |              |
|Goodwill           |            | |             |              |
|                   |            | |             |              |
|A 2                |            | |             |              |
|Sale of Land       |            | |             |              |
|(See Table 3)      |            | |             |              |
|Market value @ 19% |Rs.12,73,55,| |             |              |
|of                 |600         | |             |              |
|less Cost of       |Rs.2,41,97,5| |             |              |
|acquisition        |64          | |             |              |
|(see Table 3)      |            | |             |              |
|13.843% of         |            | |             |              |
|Rs.1,53,45,025     |            | |             |              |
|                   |            | |             |              |
|Indexed Cost       |21,24,212 x | |             |              |
|                   |259         | |             |              |
|                   |100         | |             |              |
|                   |55,01,710   | |Rs.1,86,95,85|              |
|                   |            | |4            |              |
|                   |            | |             |              |
|TOTAL LONG TERM CAPITAL GAINS (A1+A2)           |Rs.           |
|                                                |11,62,50,244  |
|                   |            | |             |              |
|III    Short-term Capital gain on|             |              |
|transfer of                      |             |              |
|movable (depreciable asset) u/s. |             |              |
|50                               |             |              |
|                   |            | |             |              |
|4.4% of            |            | |Rs. 56,03,646|              |
|Rs.12,73,55,600    |            | |             |              |
|                   |            | |             |              |
|Less Value / w.d.v. in the       |             |              |
|beginning of                     |             |              |
|accounting year – 31.03.1994     |Rs.2,09,224  |              |
|13.843% of Rs.15,11,404          |             |              |
|                   |            | |             |              |
|SHORT TERM CAPITAL GAINS         |             |Rs. 53,94,422 |
|                   |            | |             |              |
|IV  Share of Notional/Proportionate Profit –    |Rs.           |
|revenue receipt                                 |1,32,55,640   |
|                   |            | |             |              |
|TOTAL INCOME (I + II + III + IV) |             |Rs.           |
|                                 |             |13,78,40,987  |
|TOTAL INCOME EXCLUDING LONGTERM CAPITAL-GAINS   |Rs.           |
|                                                |2,15,90,743”  |


As can be gathered from the above, the total  proceeds  of  ?92  crores  are
first apportioned among the  assessees  in  the  ratio  in  which  they  had
received the said amount.  Thereafter, this  amount  is  divided  into  long
term capital gains and short term capital  gains.  Two  components  of  long
term capital gains are taken into consideration, namely  goodwill  and  sale
of land.  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  in
the Assessment Order itself mentioning the market  value  of  these  assets.
This Table II reads as under:

|S.No.|Asset                 |%age   |Sales/Market|Amount in    |
|     |                      |       |Value       |assessee's   |
|     |                      |       |            |case         |
|1.   |Land as per H.S.      |19.00  |17,47,90,000|2,41,97,564  |
|     |Seshagiri – Registered|       |            |             |
|     |Valuer                |       |            |             |
|2.   |Buildings as per H.S. |4.10   |3,80,00,000 |56,06,646    |
|     |Seshagiri – Registered|       |            |             |
|     |Valuer                |       |            |             |
|3.   |Plant & Machinery     |0.30   |25,00,000   |             |
|     |estimated on the basis|       |            |             |
|     |of Swamy & Rao's      |       |            |             |
|     |Report                |       |            |             |
|4.   |Goodwill – being      |76.60  |70,47,10,000|9,75,54,390  |
|     |balancing figure      |       |            |             |
|     |remaining out of total|       |            |             |
|     |figure of 92,00,00,000|       |            |             |
|     |also being almost same|       |            |             |
|     |figure if super profit|       |            |             |
|     |method is adopted     |       |            |             |
|     |Total                 |100.00 |92,00,00,000|12,73,55,600 |

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 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 ?70,47,10,000  was
treated as representing goodwill of the firm which was taxed  as  long  term
gain.  This mode of arriving at short term and long term  capital  gain  and
taxing it accordingly by the Assessing Officer has  received  the  stamp  of
approval by the Commissioner of Income Tax  (Appeals)  and  the  Income  Tax
Appellate Tribunal, as well as the High Court.

Mr.  Ajay  Vohra,  learned  senior  counsel  appearing  for  the  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  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  as  well  as
Section 45 of the Act.  Section 2(14)(a) is to the following effect:
“2(14)   “capital asset” means –

(a) property of any kind held by an assessee, whether or not connected  with
his business or profession;

                         xx          xx         xx”

He submitted that the expression  'property  of  any  kind'  was  of  widest
amplitude, as held in Commissioner of Income Tax,  Bombay  City  I  v.  Tata
Services Ltd.[1]  Therefore, assets of the partnership were  to  be  treated
as capital assets.

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 wold 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 Section 50B 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 Finance Limited v.  Commissioner
of Income Tax I, New Delhi[2] in the following manner:
“16.  In the case of Artex Manufacturing Co. this Court found that a  valuer
was appointed, that 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  to  the  present  case.
Further, this court in the case of CIT v. 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 that  the  judgment  in
the case of Electric Control Gear Mfg. Co. is given by the same Bench  which
decided the case of Artex Manufacturing Co.  In  fact,  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 the  High  Court.   As
stated above, this court has clarified its judgment in  Artex  Manufacturing
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  tests  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   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  judgment
of this Court in Mugneeram Bangur and Co. (Land Department)  [1965]  57  ITR
299.  This test applies to a slump  transaction.   The  object  behind  this
test  is  to  find  out  whether  the  slump  price  was  capable  of  being
attributable  to  individual  assets,  which  is  also  known  as  item-wise
earmarking.  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  [1981]  128  ITR  294,  this  court  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  charging  section  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  (sale
consideration) of Rs.10.20 crores was not allocable (sic) item-wise  as  was
the case in Artex Manufacturing Co.”

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  Mangalore  Ganesh  Beedi  Works  v.
Commissioner of Income Tax, Mysore & Anr.[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
and in the absence  of  provisions  relating  to  mode  of  computation  and
deductions at the relevant time, which were inserted subsequently only  with
effect from April 01, 2000, as per PNB Finance  Limited,  the  consideration
was to be treated as  capital  receipt  and  no  capital  gain  was  payable
thereon.

Two incidental submissions were also made on this aspect, which are:

(a)  Even if the provisions of capital gain were applicable and  the  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  of  acquisition  was
treated as 'Nil'.  However,  it  could  not  be  so  having  regard  to  the
provisions of Section 48.  He contrasted the same with Section  55(2)  which
was inserted with effect from  April  01,  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  purchased
from the previous owner.  According to him, this yardstick  could  not  have
been applied prior to April 01, 2002 in the absence of any statutory  scheme
and the instant case needed to be covered  by  the  law  laid  down  by  the
courts in this behalf in various judgments.  The  learned  counsel  referred
to the following judgments in support:
(i)   CIT v. B.C. Srinivasa Setty[4]
(ii)  Mangalore Ganesh Beedi Works
(iii) Areva T & D India Ltd. v. The Deputy Commissioner of Income Tax[5]
(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  partners  by
virtue of Section 45(4), which reads as under:
“45.  Capital gains. – (1)  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, 54B, 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.

                          xx          xx         xx

(4)  The profits or gains arising from the transfer of a  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.”


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[7]  and
Commissioner  of  Income  Tax  v.  Excel  Industries  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.

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.

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.

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 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 time to  time  in  the  said  petition,
insofar as the firm is concerned, it  has  always  been  described  as  'the
dissolved partnership firm'.  Thus, 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.

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  of  bid  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.

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 therefrom is to be treated as capital gain within  the  meaning
of Section 45 of the Act.

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.

Section 2(42)C defines 'slump sale' and reads as under:
“ “slump sale” means the transfer of one or more undertakings  as  a  result
of the sale for a lump sum consideration without values  being  assigned  to
the individual assets and liabilities in such sales.

Explanation 1. – For the purposes of this clause, “undertaking”  shall  have
the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2. – For the removal of doubts, it is hereby declared  that  the
determination of the value of an asset or liability for the sole purpose  of
payment of stamp duty, registration fees or  other  similar  taxes  or  fees
shall not be regarded as  assignment  of  values  to  individual  assets  or
liabilities.”

            As per the aforesaid  definition,  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 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.  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 also  would
not apply.

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)[9]
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).

17.  Section 45(1) of the 1961 Act speaks about capital  gains  arising  out
of  “transfer”  of  a  capital  asset.  The  definition  of  the  expression
“transfer” is contained in Section 2(47) of the 1961 Act. It has  very  wide
meaning. What is taxable under Section 45(1) of the  1961  Act  is  “profits
and gains arising from a transfer of a capital  asset”  and  the  charge  of
income tax on the capital gains is a charge on the income  of  the  previous
year in which the transfer took place.

18.  Capital gain(s) is an artificial income. It  is  created  by  the  1961
Act. Profit(s) arising from transfer of capital asset is made chargeable  to
income tax under Section 45(1) of the 1961 Act. From the scheme  of  Section
45, it is clear that capital gains is not an income which accrues from  day-
to-day during a specific period but it arises at  a  fixed  point  of  time,
namely, on the date of the transfer. In short, Section 45  defines  “capital
gains”, it makes them chargeable to tax and it allots the  appropriate  year
for such charge. It also enacts a deeming provision. Section  48  lays  down
the mode of computation of capital gains and deductions therefrom.”

            In para 45 of the judgment, the Court also stated  that  capital
gains under Section 45 of the Act are not income accruing from day  to  day.
It is deemed income which arises at a fixed point of time, viz. on the  date
of transfer.

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.


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:
“30.  In view of the provisions of Section  45  it  is  clear  that  in  the
present case, the effect of the sale conducted by this court among  partners
and under Clause  16  of  the  said  Partnership  Deed,  is  that  once  the
partnership is dissolved, the partners would  become  entitled  to  specific
share in the assets of the firm which is proportionate  to  their  share  in
sharing the profits of the firm and they are placed in the same position  as
the tenants in common and for the purpose of dissolution and u/s 47  of  the
Indian Partnership Act, 1932, it is clear that even  after  the  dissolution
of the firm, the authority of each partner to bind the firm  and  the  other
mutual rights and obligations of the partners continue  notwithstanding  the
dissolution so far as may be necessary to wind up the  affair  of  the  firm
and to complete transactions  begun  but  unfinished  at  the  time  of  the
dissolution.  Therefore, for realisation  of  the  assets,  discharging  the
liability of the firm and settling the accounts of the partners,  etc.,  the
firm will continue to exist despite the dissolution and not  for  any  other
purpose.  The material on record in the  instant  case  would  clearly  show
that after dissolution of the firm on 06.12.1987, the firm has  never  filed
any return and in view of the order of this court  permitting  the  partners
to carry on the business in the interest of employees, return was  filed  by
AOP-13 consisting of erstwhile 13/12 partners  for  accounting  profits  and
seeking depreciation in the assets of the firm and continued to do  business
in view of the order of this court that there was  no  agreement  among  the
partners to continue the business during the  pendency  of  the  winding  up
proceedings.  Further having regard to Clause 16 of the Partnership Deed  of
the dissolved firm, it is clear that the partners intended that  the  assets
of the firm should not be sold to an outsider.   It  is  well  settled  that
every act of the partner would be binding on the firm and also the  partners
interse and Clause 16 of the Partnership Deed  which  has  been  culled  out
supra clearly shows that if 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  Partners  who
jointly offer and pay the highest price therefor 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  incidental  or  necessary  to  the  said
transferee or assignee Partner or Partners.  The final order passed by  this
court to wind up the affairs  of  the  firm  would  clearly  show  that  the
property of the firm is purchased by  the  association  of  3  partners  who
submitted their highest  bid  and  that  other  partners  had  to  given  an
undertaking that they may not interfere with the carrying on business  which
is vested in the name of MGBW and all the trademarks used in the  course  of
said business and  therefore  it  is  clear  that  the  appellants  who  are
erstwhile partners were not successful bidders for continuation of  business
in the individual capacity of the  MGBW  and  in  view  of  Clause  16,  all
tangible and intangible assets vested with Association of 3  partners  whose
highest bid of Rs.92 crores was accepted and admittedly  after  the  passing
of the order of this court on 20.11.1994,  all  the  appellants  herein  and
other out-going partners have given requisite undertaking as per  the  order
of this court and the MGBW as a going concern under the name and style  MGBW
and all trademarks used in the course of said business by the said firm  and
all tangible and intangible assets of the firm vested  with  the  purchasers
erstwhile 3 partners who paid  the  highest  bid  and  the  appellants  have
received consideration of the conveyance and their respective share  in  the
sale of net assets of the firm after  their  undertaking  that  they  cannot
interfere with the business of MGBW which  is  vested  with  all  assets  in
favour of 3 partners have received the value of their net  asset  which  has
been distributed by the Official Liquidator and AOP  3  who  have  purchased
the business of the old firm, succeeded to it and constituted a new firm  in
the same name (vide order defendant (sic - dated) 14.06.1991 in the  Company
Petition) and therefore it is clear that the order passed by  the  Assessing
Authority confirmed in the first appeal and  by  the  Income  Tax  Appellate
Tribunal (Special Bench) holding that the appellants as  erstwhile  partners
are liable to pay capital gain on the amount received by  them  towards  the
value of their share in the net assets of the firm are  liable  for  payment
of capital gains u/s 45 of the Act.   The  said  finding  is  justified  and
accordingly we answer the substantial question  of  law  in  favour  of  the
Revenue and against the assessee.”


In view of  our  aforesaid  discussion,  the  arguments  that  valuation  of
goodwill was wrongly done may also not survive.  In any case, we  find  that
no such plea was taken by the assessees in the  High  Court  or  before  the
Tribunal or lower authorities.

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.
 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 entire discussion  on  this  issue
is contained in para 31, which reads as under:
“31.  The concurrent finding on  question  of  fact  that  value  of  profit
received during interregnum period for  a  period  of  234  days  is  to  be
treated as revenue income having regard to the reasons  assigned  that  said
profit is calculated on the basis  of  notional  profit  calculated  on  two
years average profit and from this average 40% was to be  deducted  and  the
net amount was to be paid, the finding is unassailable...”

            The aforesaid  discussion  of  the  High  Court  deals  how  the
business  income/revenue  income  is  to  be  treated/calculated,  but   the
question of taxability at the hands of the assessees  has  not  bee  touched
upon at all.

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.


Insofar as the appeals preferred by the Revenue are  concerned,  they  arise
out of the  protected  assessment  which  was  made  at  the  hands  of  the
partnership firm.  As we have upheld the order of the Assessing  Officer  in
respect of payment of capital  gain  tax  by  the  assessees  herein,  these
appeals are rendered otiose and are disposed of as such.
            There shall be no order as to costs.



                             .............................................J.
                                                                (A.K. SIKRI)



                             .............................................J.
                                                               (N.V. RAMANA)

NEW DELHI;
OCTOBER 18, 2016.
-----------------------
[1]
      (1980) 122 ITR 594 (Bombay)
[2]   (2008) 13 SCC 94 : 307 ITR 75
[3]   (2016) 2 SCC 556 : (2015) 378 ITR 640
[4]   (1981) 2 SCC 460 : 128 ITR 294
[5]   (2012) 345 ITR 421 (Delhi High Court)
[6]   (2016) 130 DTR 0222 (Kar)
[7]   (1992) 1 SCC 659 : 193 ITR 321
[8]   (2014) 13 SCC 459 : 358 ITR 295
[9]   (2009) 8 SCC 412

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