1997 (7) TMI 7 - SC - Income Tax

Sale of business of firm to company as going concern - ITO held that the w.d.v. of plant, machinery and dead stock as per income-tax records was Rs. 3,32,276 and after deducting the same from the amount of Rs. 15,87,296 for which the plant, machinery and dead stock were transferred to the company, the ITO held that tax was payable u/s 41(2) - Tribunal was right in holding that the status of the assessee was a registered firm and not that of an association of persons

Summary

Issues Involved:
1. Taxability of the surplus.
2. Applicability of Section 41(2) or Section 45.
3. Status of the assessee for tax purposes.
4. Entitlement to relief based on circulars.
5. Tax liability of a going concern transfer under Section 45 or Section 41(2).

Detailed Analysis:

1. Taxability of the Surplus:
The Tribunal rejected the assessee's contention that the principle of mutuality applied, based on the decision in Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790. The High Court affirmed this decision, ruling in favor of the Revenue.

2. Applicability of Section 41(2) or Section 45:
The Tribunal held that the surplus was taxable under Section 41(2) of the 1961 Act, as its language was broader than Section 10(2)(vii) of the 1922 Act. The High Court disagreed, holding that the surplus was taxable as capital gains. The Supreme Court, however, found that Section 41(2) was applicable, as the value of the plant, machinery, and dead stock was determined at the time of sale. The Court reversed the High Court's decision, ruling in favor of the Revenue on this issue.

3. Status of the Assessee for Tax Purposes:
The Tribunal held that the assessee should be taxed as a registered firm. The High Court, however, ruled that the assessee should be taxed as a "body of individuals." The Supreme Court affirmed the High Court's decision on this matter.

4. Entitlement to Relief Based on Circulars:
The Tribunal found that the circulars cited by the assessee did not apply. One circular related to nationalized banks, and the other was based on the decision in Mugneeram Bangur's case, which dealt with the provisions of Section 10(2)(vii) of the 1922 Act before its amendment. The Supreme Court agreed with the Tribunal, ruling in favor of the Revenue.

5. Tax Liability of a Going Concern Transfer:
The High Court ruled that the transfer of a going concern was not taxable under Section 41(2) but under Section 45. The Supreme Court disagreed, stating that the surplus was taxable under Section 41(2). However, if the surplus exceeded the difference between the written down value and the actual cost, the excess would be treated as capital gains. The Tribunal was directed to re-examine this issue.

Conclusion:
The Supreme Court partially allowed the appeal, setting aside the High Court's judgment on questions 2, 3, 5, and 6, and affirming the High Court's decision on question 4. The case was remanded to the Tribunal for further consideration on the issue of capital gains. No order as to costs was made.