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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 ..... artners of a partnership firm known as 'M/s. Mangalore Ganesh Beedi Works', which was sold to three other partners, as a going concern, but after the dissolution of the partnership firm. Certain considerations received as a result thereof were treated as capital gains on which income tax was charged by the Assessing Officer. The case of the assessees was that it was a capital receipt in their hands, not exigible to income tax. The exact nature of the receipt, treated as capital gain by the Assessing Officer, shall be taken note of subsequently at the appropriate stage. Suffice it to state that the assessees successive appeals to Commissioner of Income Tax (Appeals) and then to the Income Tax Appellate Tribunal (ITAT) and thereafter 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 Wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to an end. xx xx xx 16. If the 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 said business by the said firm and under which the business of the Partnership is carried on shall vest in and belong to the Partner who offers and pays or two or more Partners who jointly offer and pay the highest price therefor as a single group at a sale to be then held as among the Partners shall be entitled to bid. The other Partners shall execute and complete in favour of the purchasing Partner or Partners at his/her or their expense all such deed, instruments and applications and otherwise aid him/her or them for the registration 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding up order dated June 14, 1991 is passed fixing minimum price ofRs.30 crores for the sale of the dissolved partnership firm as a going concern to such of its partner(s) who makes the offer of highest price. (v) The date of deposit of the bid amount of 92 crores by AOP-3, being thers. highest bid, is on November 17, 1994. 8) With the aforesaid background facts, we advert to the developments that have taken place on the income tax front. 9) Since the firm stood dissolved with effect from December 06, 1987, upto December 06, 1987, it is the firm which had filed the income tax returns in respect of the income which it had earned, for payment of income tax thereupon. However, as mentioned above, 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 12) As can be gathered from the above, the total proceeds of 92 crores arers. first apportioned among the assessees in the ratio in which they had received the said amount. Thereafter, this amount is divided into long term capital gains and short term capital gains. Two components of long term capital gains are taken into consideration, namely goodwill and sale of land. Likewise, short term capital gain is arrived at in respect of transfer of movables which were depreciable assets. For the purposes of calculation/ computation, figures were taken from Table II 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as to how the asset of the firm when wold is to be computed as a capital gain. The learned counsel pointed out that such a provision was introduced for 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 Rs. 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 ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaking and its components. Plant, machinery and dead stock are individual items of an undertaking. A business undertaking can consist of not only 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following judgments in support: (i) CIT v. B.C. Srinivasa Setty (1981) 2 SCC 460 : 128 ITR 294 (ii) Mangalore Ganesh 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 associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion. We have already noticed that the firm was dissolved on December 06, 1987 by afflux of time. 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 gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the amount received by way of sale of the assets of the firm as per Clause 16 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression "transfer" is contained in Section 2(47) of the 1961 Act. It has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettling the accounts of the partners, etc., the firm will continue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and constituted a new firm in the same name (vide order defendant (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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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