2000 (7) TMI 207 - AT - Income Tax

Summary

Issues Involved:

1. Whether the business undertaking as a going concern is a capital asset.
2. Whether an auction sale conducted as per High Court directions can be considered a retirement of a partner.
3. Whether a sale preceded by asset valuation can be considered a 'slump sale'.
4. Whether capital gains tax can be levied when the cost of acquisition is ascertainable.
5. Applicability of the Gujarat High Court's explanation of reallocation of state of affairs to partnership business sold in court auction.
6. Locus standi of interveners in an appeal.

Summary:

Issue 1: Whether the business undertaking as a going concern is a capital asset.
The Tribunal concluded that the amounts received by the appellants for allowing the remaining partners to continue the business of M/s. Mangalore Ganesh Beedi Works (MGBW) as a going concern constituted a transfer of their rights in the firm. This transfer, which occurred during the dissolution of the firm, was not exigible to tax as capital gains. The Tribunal relied on the precedent set in the case of Mr. Ramanatha Shenoy, where it was held that such a transfer did not result in capital gains tax liability.

Issue 2: Whether an auction sale conducted as per High Court directions can be considered a retirement of a partner.
The Tribunal examined the auction sale conducted under the directions of the High Court of Karnataka (HCK) and concluded that the sale did not constitute a retirement of a partner. Instead, it was a transfer of the business as a going concern to the highest bidders among the partners. The Tribunal noted that the sale was monitored by the HCK and involved the extinguishment of the rights of the outgoing partners, resulting in a transfer of their interests in the firm to the successful bidders.

Issue 3: Whether a sale preceded by asset valuation can be considered a 'slump sale'.
The Tribunal rejected the argument that the sale was a 'slump sale' because the assets were valued, and the sale price was allocated to individual assets. The Tribunal noted that the valuation of assets, including goodwill, trademarks, and copyrights, was done by Chartered Accountants appointed by the HCK. The Tribunal held that the allocation of the sale price to individual assets was rational and scientific, and the sale was not a 'slump sale'.

Issue 4: Whether capital gains tax can be levied when the cost of acquisition is ascertainable.
The Tribunal held that the cost of acquisition of the assets, including trademarks and goodwill, was ascertainable, and therefore, capital gains tax was leviable. The Tribunal noted that trademarks and copyrights were registered assets with an initial cost, and their market value as of April 1, 1981, could be adopted as the cost of acquisition. The Tribunal directed the Assessing Officer to rework the capital gains based on the market value of the assets.

Issue 5: Applicability of the Gujarat High Court's explanation of reallocation of state of affairs to partnership business sold in court auction.
The Tribunal distinguished the present case from the Gujarat High Court's explanation in CIT v. Mohanbhai Pamabhai, where the reallocation of state of affairs among partners was considered. The Tribunal held that the present case involved a transfer of interests in the firm by the outgoing partners to the successful bidders, resulting in capital gains. The Tribunal noted that the outgoing partners received a price for their interests, which exceeded the cost, leading to capital gains tax liability.

Issue 6: Locus standi of interveners in an appeal.
The Tribunal upheld the locus standi of the interveners, noting that they had similar issues in their own cases, which were not before the Tribunal. The Tribunal justified entertaining the interveners, as their involvement was relevant to the resolution of the issues in the present appeals.

Conclusion:
The Tribunal dismissed the appeals, upholding the levy of capital gains tax on the amounts received by the appellants for transferring their interests in the firm to the successful bidders. The Tribunal also upheld the taxability of the profit for 234 days as revenue income. The additional ground for awarding costs to the appellants was rejected, and the chargeability of interest u/s 234B was decided against the appellants.