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TMI Blog2016 (10) TMI 704X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reafter to the High Court have failed, thereby sustaining the order of the Assessing Officer. With this brief background of the litigation, we advert to the events that have taken place in some detail. 4) One S. Raghuram Prabhu started the business of manufacturing beedies in the year 1939. His brother-in-law joined him in the year 1940 and this sole proprietorship was converted into a partnership firm with the name 'M/s. Mangalore Ganesha Beedi Works' (hereinafter referred to as the 'firm'). It was reconstituted thereafter from time to time and lastly on June 30, 1982. Partnership deed dated June 30, 1982 was entered between thirteen persons with the same name. Duration of this firm was five years, which period could be extended by six months. Thereafter, the affairs of the firm had to be wound up as provided in Clause 16 of the Partnership Deed. The firm was dissolved on December 06, 1987 by afflux of time after extending the life of the firm by a period of six months, as per the terms stipulated in the Partnership Deed. However, because of the difference of opinion among the erstwhile partners, the affairs of the firm could not be wound up. Therefore, two of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his/her name or their names of all the said trademarks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee Partner or Partners. 5) In view of the aforesaid clauses, specific order dated November 05, 1988 was passed by the High Court permitting the group of partners, seven in number, who had controlling interest, to continue the business as an interim arrangement till the completion of winding up proceedings. Ultimately, the orders dated June 14, 1991 were passed in the said company petition for winding up the affairs of the firm by selling its assets as an 'ongoing concern'. Though this order was challenged by some of the partners by filing special leave petition in this Court, the same was dismissed as withdrawn in the year 1994. In this manner, orders dated June 14, 1991 became final, which had permitted the sale of the firm, as an ongoing concern, to such of its partner(s), who makes an offer of highest price. Reserve price of ₹30 crores was also fixed thereby mandating that the price cannot be less than ₹30 crores. The successful bidder was also required to accept further liability to pay interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , though the firm was dissolved, but the business continued because of the orders passed by the High Court keeping in view the provisions contained in the Partnership Deed. The income that was earned from the date of dissolution till the date of winding up and when the firm was sold to AOP-3 was assessed at the hands of dominant partners controlling the business activities (seven in number) as Association of Persons (AOP), meaning thereby, the income from the business of the said firm December 06, 1987 till winding up was assessed as an AOP. At the same time, these assessees were also filing their individual returns as well. 10) The assessees filed the return for the Assessment Year 1995-1996. It is in this Assessment Year the assets of the firm were sold as ongoing concern to AOP-3 on September 21, 1994. The Assessing Officer, while making the assessments, bifurcated this Assessment Year into two periods. One period from April 01, 1994 to November 20, 1994 (as AOP of the partners who had continued the business in that capacity in previous years). Second period from November 20, 1994 till March 31, 1995 (as the business was handed over to AOP-3 and the assessment was treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporated in the Assessment Order itself mentioning the market value of these assets. This Table II reads as under: S. No. Asset %age Sales/Market Value Amount in assessee's case 1. Land as per H.S. Seshagiri Registered Valuer 19.00 17,47,90,000 2,41,97,564 2. Buildings as per H.S. Seshagiri Registered Valuer 4.10 3,80,00,000 56,06,646 3. Plant Machinery estimated on the basis of Swamy Rao's Report 0.30 25,00,000 4. Goodwill being balancing figure remaining out of total figure of 92,00,00,000 also being almost same figure if super profit method is adopted 76.60 70,47,10,000 9,75,54,390 Total 100.00 92,00,00,000 12,73,55,600 13) It becomes ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the first time (vide Finance Act, 1999) by inserting Section 50B to the Act with effect from April 01, 2000, laying down the mechanism for computation of capital gains in case of slump sale. For, such slump sales prior to April 01, 2000 were, therefore, not taxable, was the submission of the learned counsel. It was argued that precisely this very issue had been clinchingly determined by this Court in PNB Finance Limited v. Commissioner of Income Tax I, New Delhi (2008) 13 SCC 94 : 307 ITR 75 in the following manner: 16. In the case of Artex Manufacturing Co. this Court found that a value was appointed, that value submitted his valuation report in which itemized valuation was carried out and on that basis the consideration was fixed at ₹ 11,50,400. Therefore, the sale consideration had been arrived at after taking into account the value of plant, machinery and dead stock as computed by the value and, consequently, it was held that the surplus arising on the sale was taxable under section 41(2) of the Act and not as capital gains. In the circumstances, the judgment of this court in the case of Artex Manufacturing Co. was not applicable to the present case. Further, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y tangible items but also intangible items like, goodwill, man power, tenancy rights and value of banking licence. However, the cost of such items (intangibles) is not determinable. In the case of CIT v. B.C. Srinivasa Setty reported in [1981] 128 ITR 294, this court held that section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the asset must be one which falls within the contemplation of section 45. It is further held that, the charging section and the computation provisions together constitute an integrated code and when in a case the computation provisions cannot apply, such a case would not fall within section 45. In the present case, the banking undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On the facts, we find that item-wise earmarking was not possible. On the facts, we find that the compensation (sale consideration) of ₹ 10.20 crores was not allocable (sic) item- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Beedi Works (2012) 345 ITR 421 (Delhi High Court) (iii) Areva T D India Ltd. v. The Deputy Commissioner of Income Tax (iv) Commissioner of Income Tax Anr. v. Associated Electronics Electricals Industries (Bangalore) (P) Ltd. (2016) 130 DTR 0222 (Kar) (b) Without prejudice to the aforesaid contentions, his other submission was that if at all the capital gain tax was payable, liability to pay the same was that of the partnership firm and not the individual partners by virtue of Section 45(4), which reads as under: 45. Capital gains . (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head Capital gains , and shall be deemed to be the income of the previous year in which the transfer took place. xx xx xx (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This event happened as per the terms stipulated in the partnership deed itself. The necessity for filing the petition under the Companies Act arose because of differences between the erstwhile partners that had erupted, pertaining to the affairs of the firm. No doubt, in the said petition interim order dated November 05, 1988 was passed by the High Court permitting the group of persons (seven in number), having controlling interest in the firm, to continue the business. However, this was done as an interim arrangement till the completion of winding up proceedings. Pertinently, insofar as the firm is concerned, it did not carry on business thereafter as an existing firm. On the contrary, few ex-partners with controlling interest were allowed to continue the business activity in the interregnum as a stopgap arrangement. Another important fact which needs a mention is that, insofar as the firm is concerned, it did not file income tax returns after the date of dissolution. Obviously so, as it stood dissolved and was no more in existence. Precisely for this reason, the income that was generated from the business, after the dissolution, was assessed by the income tax authorities in the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the Partnership Deed. On the aforesaid facts, it becomes clear that asset of the firm that was sold was the capital asset within the meaning of Section 2(14) of the Act. It is not even disputed. Once it is held to be the capital asset , gain therefrom is to be treated as capital gain within the meaning of Section 45 of the Act. 25) The assessees, however, are attempting the wriggle out from payment of capital gain tax on the ground that it was a slump sale within the meaning of Section 2(42C) of the Act and there was no mechanism at that time as to how the capital gain is to be computed in such circumstances, which was provided for the first time by Section 50B of the Act with effect from April 01, 2000. However, this argument fails in view of the fact that the assets were put to sale after their valuation. There was a specific and separate valuation for land as well as building and also machinery. Such valuation has to be treated as that of a partnership firm which had already stood dissolved. 26) Section 2(42)C defines 'slump sale' and reads as under: slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s very wide meaning. What is taxable under Section 45(1) of the 1961 Act is profits and gains arising from a transfer of a capital asset and the charge of income tax on the capital gains is a charge on the income of the previous year in which the transfer took place. 18. Capital gain(s) is an artificial income. It is created by the 1961 Act. Profit(s) arising from transfer of capital asset is made chargeable to income tax under Section 45(1) of the 1961 Act. From the scheme of Section 45, it is clear that capital gains is not an income which accrues from day-to-day during a specific period but it arises at a fixed point of time, namely, on the date of the transfer. In short, Section 45 defines capital gains , it makes them chargeable to tax and it allots the appropriate year for such charge. It also enacts a deeming provision. Section 48 lays down the mode of computation of capital gains and deductions therefrom. In para 45 of the judgment, the Court also stated that capital gains under Section 45 of the Act are not income accruing from day to day. It is deemed income which arises at a fixed point of time, viz. on the date of transfer. 28) When we apply the said legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue to exist despite the dissolution and not for any other purpose. The material on record in the instant case would clearly show that after dissolution of the firm on 06.12.1987, the firm has never filed any return and in view of the order of this court permitting the partners to carry on the business in the interest of employees, return was filed by AOP-13 consisting of erstwhile 13/12 partners for accounting profits and seeking depreciation in the assets of the firm and continued to do business in view of the order of this court that there was no agreement among the partners to continue the business during the pendency of the winding up proceedings. Further having regard to Clause 16 of the Partnership Deed of the dissolved firm, it is clear that the partners intended that the assets of the firm should not be sold to an outsider. It is well settled that every act of the partner would be binding on the firm and also the partners interse and Clause 16 of the Partnership Deed which has been culled out supra clearly shows that if Partnership is dissolved, the going concern carried on under the name of the Firm MANGALORE GANESH BEEDI WORKS and all the trademarks used in course of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endant (sic - dated) 14.06.1991 in the Company Petition) and therefore it is clear that the order passed by the Assessing Authority confirmed in the first appeal and by the Income Tax Appellate Tribunal (Special Bench) holding that 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. The said finding is justified and accordingly we answer the substantial question of law in favour of the Revenue and against the assessee. 30) In view of our aforesaid discussion, 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. 31) We now advert to the second argument. 32) It is argued that insofar as income of the firm in the Assessment Year in question is concerned, it could not be taxed at the hands of the assessees. We find merit in this submission. 33) First, and pertinently, it is an admitted case that 40% of the said income was allowed by the High Court to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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