If an undertaking is sold as a running business with all assets and liabilities for a slump price, no part of the consideration can be attributed to depreciable assets and assessed as a short-term capital gain u/s 50(2). If the undertaking is held for more than three years, it constitutes a “long-term capital asset” and the gains are assessable as a long-term capital gain
CIT vs. Equinox Solution Pvt. Ltd (Supreme Court)
April 18, 2017 (Date of pronouncement)
AY 1991-92
The assessee claimed that as it had sold their entire running business in one go with its assets and liabilities at a slump price, the provisions of Section 50 (2) of the Act could not be applied to such sale. It was claimed that it was not a case of sale of any individual or one block asset which may attract the provisions of Section 50 (2) of the Act. It was also claimed that that since the undertaking itself is a capital asset owned by the assessee nearly for six years and being in the nature of long term capital asset and the same having been sold in one go as a running concerned, it cannot be termed a “short terms capital gain” so as to attract the provisions of Section 50 (2) of the Act as was held by the Assessing Officer. This plea was upheld by the e CIT (Appeals), Tribunal and the High Court. On appeal by the department to the Supreme Court HELD dismissing the appeal:
(i) In our considered opinion, the case of the respondent (assessee) does not fall within the four corners of Section 50 (2) of the Act. Section 50 (2) applies to a case where any block of assets are transferred by the assessee but where the entire running business with assets and liabilities is sold by the assessee in one go, such sale, in our view, cannot be considered as “short-term capital assets”. In other words, the provisions of Section 50 (2) of the Act would apply to a case where the assessee transfers one or more block of assets, which he was using in running of his business. Such is not the case here because in this case, the assessee sold the entire business as a running concern.
(ii) As rightly noticed by the CIT (appeal) that the entire running business with all assets and liabilities having been sold in one go by the respondent-assessee, it was a slump sale of a “long-term capital asset”. It was, therefore, required to be taxed accordingly.
(iii) Our view finds support with the law laid down by this Court in Commissioner of Income Tax, Gujarat vs. Artex Manufacturing Co. [1997(6) SCC 437 CIT].
(iv) In Premier Automobiles Ltd. vs. Income Tax Officer & Anr., 264 ITR 193 (Bombay) also, the Division Bench of the Bombay High Court examined this question in detail on somewhat similar facts and has taken the same view. The Learned Judge S.H Kapadia – (as His Lordship then was as Judge of the Bombay High Court and later became CJI) speaking for the Bench aptly explained the legal position to which we concur as it correctly summarized the legal position applicable to such facts.
(v) Learned Counsel for the appellant (Revenue) was not able to cite any decision taking a contrary view nor was he able to point out any error in the decisions cited at the Bar by the assessee’s counsel referred supra.
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