2016 (10) TMI 704 - SC - Income Tax

Partnership firm - Nature of the Certain considerations received after the dissolution of the firm - Slump sale or not - capital gain - Goodwill - it was contended that at the time of dissolution of firm, capital gain was not taxable, hence not capital gain can be taxed on subsequent receipts - the assets which were sold ultimately on November 20, 1994 were of a dissolved partnership firm, though as a going concern. Held 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. 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. - Decision of High Court 2010 (12) TMI 754 - Karnataka High Court in favor of revenue confirmed. Valuation of goodwill - 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. Thus 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. 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.

Issues Involved:
1. Delay condonation and leave granting.
2. Nature and treatment of the consideration received from the sale of the partnership firm.
3. Taxability of capital gains and revenue income.
4. Valuation of goodwill and other assets.
5. Applicability of Section 45 and Section 50B of the Income Tax Act.
6. Tax liability of the dissolved partnership firm versus individual partners.
7. Assessment of business income for the period April 1, 1994, to November 20, 1994.

Detailed Analysis:

1. Delay Condonation and Leave Granting:
The Supreme Court condoned the delay in filing the Special Leave Petitions and granted leave for the appeals to be heard.

2. Nature and Treatment of the Consideration Received from the Sale of the Partnership Firm:
The appeals centered on the assessment of capital gains arising from the sale of the partnership firm 'M/s. Mangalore Ganesh Beedi Works' as a going concern. The firm was dissolved on December 6, 1987, and sold to three partners (AOP-3) for ?92 crores. The Assessing Officer treated the consideration as capital gains, which was upheld by the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal (ITAT), and the High Court.

3. Taxability of Capital Gains and Revenue Income:
The Assessing Officer bifurcated the assessment year into two periods: April 1, 1994, to November 20, 1994, and November 20, 1994, to March 31, 1995. The capital gains from the sale were taxed in the hands of the individual partners, proportionate to their share from the ?92 crores. The revenue income for the period from April 1, 1994, to November 20, 1994, was assessed as income of the AOP.

4. Valuation of Goodwill and Other Assets:
The Assessing Officer apportioned the sale consideration among various assets, including land, buildings, and machinery, and treated the balance as goodwill. The market value of these assets was determined by registered valuers, and the balance amount of ?70,47,10,000 was treated as goodwill, taxed as long-term capital gain.

5. Applicability of Section 45 and Section 50B of the Income Tax Act:
The assessees argued that the sale was a slump sale and should not attract capital gains tax as per the law prior to the introduction of Section 50B. However, the court held that the sale was not a slump sale since individual values were assigned to the assets. Consequently, Section 50B did not apply, and the sale was treated under Section 45, making the capital gains taxable.

6. Tax Liability of the Dissolved Partnership Firm Versus Individual Partners:
The court held that the dissolved partnership firm did not file returns post-dissolution, and the income was assessed in the hands of the AOP. The assets sold were of a dissolved firm, and the proceeds were distributed among the partners, making the capital gains taxable in the hands of the individual partners.

7. Assessment of Business Income for the Period April 1, 1994, to November 20, 1994:
The court found merit in the assessees' argument that the business income for this period should be taxed in the hands of AOP-3, as 40% of the income was retained by AOP-3 for tax purposes. This income was not to be taxed in the hands of the individual partners.

Conclusion:
The Supreme Court allowed the appeals partly, holding that the business income for the period April 1, 1994, to November 20, 1994, should be assessed in the hands of AOP-3. The capital gains tax on the sale of the partnership firm was upheld to be paid by the individual partners. The appeals by the Revenue were rendered otiose and disposed of accordingly. There was no order as to costs.

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