1991 (12) TMI 103 - AT - Income Tax

Issues Involved
1. Determination of whether the sale was by individual partners or by the firm.
2. Taxability of the transaction under Section 41(2) of the IT Act.
3. Applicability of capital gains tax.
4. Nature of the sale: whether it was a slump sale or a sale of individual assets.
5. Treatment of sale proceeds and outstanding liabilities.
6. Validity of additions and disallowances made by the Income-tax Officer (ITO).

Detailed Analysis

1. Determination of Whether the Sale Was by Individual Partners or by the Firm
The assessee contended that the individual partners sold their shares separately and not jointly in the partnership. The AAC, however, found that the sale of assets was by the firm, not by individual partners. The AAC noted that the sale consideration was accounted for in the books of the firm and adjusted accordingly. The Tribunal upheld this view, stating that the sale deed executed by one partner could not alienate the firm's properties. The sale was completed only when the other partner surrendered his interest, effectively dissolving the firm.

2. Taxability of the Transaction Under Section 41(2) of the IT Act
The ITO had brought to tax a profit of Rs. 78,799 under Section 41(2) of the IT Act, treating the sale proceeds as exceeding the written down value of the assets. The assessee argued that no profit arises under Section 41(2) when the undertaking itself is sold. The Tribunal, however, held that the sale was of individual assets and not the entire business, thereby making the profit taxable under Section 41(2).

3. Applicability of Capital Gains Tax
The assessee reported a net capital gain of Rs. 49,792 after deductions. The ITO, however, determined that there was a capital loss of Rs. 75,360. The Tribunal found that the sale was of individual assets and not the business as a whole. Therefore, the capital gains tax was applicable. The Tribunal rejected the assessee's reliance on the Karnataka High Court's decision in Syndicate Bank Ltd., as the facts of the case were distinguishable.

4. Nature of the Sale: Whether It Was a Slump Sale or a Sale of Individual Assets
The assessee claimed that it was a slump sale, and therefore, the surplus was not taxable. The Tribunal disagreed, noting that the sale deed and surrender deed described the sale of individual assets such as buildings and fittings, not the business as a whole. The Tribunal cited the decision in CIT v. F.X. Periera & Sons (Travancore) (P.) Ltd. to support its conclusion that the sale was of individual assets and not a slump sale.

5. Treatment of Sale Proceeds and Outstanding Liabilities
The Tribunal noted that the sale proceeds were accounted for in the firm's books, and no liabilities were transferred to the vendees. The treatment of sale proceeds in the books of the assessee indicated that it was a sale of assets by the firm on its dissolution. The Tribunal also noted that the firm continued for purposes of winding up after its dissolution, as envisaged under Section 47 of the Partnership Act and Section 189 of the IT Act.

6. Validity of Additions and Disallowances Made by the Income-tax Officer (ITO)
The ITO had added a sum of Rs. 7,000 towards omission of rent and disallowed Rs. 2,000 and Rs. 1,000 for want of proof. The AAC confirmed these additions and disallowances. The Tribunal found no specific ground of appeal on these issues and declined to entertain the plea to consider them.

Conclusion
The Tribunal upheld the AAC's order, concluding that the sale was of individual assets by the firm and not a slump sale. The profit arising from the sale was taxable under Section 41(2) and as capital gains. The appeal was dismissed.

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