REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 1234 OF 2012 VATSALA SHENOY .....APPELLANT(S) VERSUS JOINT COMMISSIONER OF INCOME TAX (ASSESSMENT), MYSORE .....RESPONDENT(S) WITH CIVIL APPEAL NO. 1235 OF 2012 CIVIL APPEAL NO. 1236 OF 2012 CIVIL APPEAL NO. 1237 OF 2012 CIVIL APPEAL NO. 1238 OF 2012 CIVIL APPEAL NO. 1239 OF 2012 CIVIL APPEAL NO. 1240 OF 2012 CIVIL APPEAL NO. 1241 OF 2012 CIVIL APPEAL NO. 1242 OF 2012 CIVIL APPEAL NO. 1243 OF 2012 CIVIL APPEAL NO. 1244 OF 2012 CIVIL APPEAL NO. 1245 OF 2012 CIVIL APPEAL NO. OF 2016 (ARISING OUT OF SLP (C) NO. OF 2016 @ SLP (C) NO.....CC 9101 OF 2014) Page 1 2 CIVIL APPEAL NO. OF 2016 (ARISING OUT OF SLP (C) NO. OF 2016 @ SLP (C) NO.....CC 10193 OF 2014) AND CIVIL APPEAL NO. OF 2016 (ARISING OUT OF SLP (C) NO. 14812 OF 2014) JUDGMENT A.K. SIKRI, J. Delay condoned in Special Leave Petition (C) No.....CC 9101 and 10193 of 2014. 2) Leave granted. 3) All these appeals (except Civil Appeal No. 1245 of 2012 and Civil Appeals arising out of SLP (C) No....CC Nos. 9101 and 10193 of 2014 and SLP (C) No. 14812 of 2014, which are filed by Revenue) are preferred by assessees. respondent in these appeals is Joint Commissioner of Income Tax (Assessment), Special Range, Mysore, who would be referred to as 'Revenue' hereinafter. It may also be mentioned that these appeals arise out of common judgment rendered by High Court of Karnataka on December 23, 2010 in appeals filed under Section 260-A of Income Tax Act, 1961 (for short, 'Act') challenging certain aspects of assessments pertaining to Assessment Year 1995-1996. In fact, as would be noticed hereinafter, Page 2 3 all these assessees were partners of partnership firm known as 'M/s. Mangalore Ganesh Beedi Works', which was sold to three other partners, as going concern, but after dissolution of partnership firm. Certain considerations received as result thereof were treated as capital gains on which income tax was charged by Assessing Officer. case of assessees was that it was capital receipt in their hands, not exigible to income tax. exact nature of receipt, treated as capital gain by Assessing Officer, shall be taken note of subsequently at appropriate stage. Suffice it to state that assessees successive appeals to Commissioner of Income Tax (Appeals) and then to Income Tax Appellate Tribunal (ITAT) and thereafter to High Court have failed, thereby sustaining order of Assessing Officer. With this brief background of litigation, we advert to events that have taken place in some detail. 4) One S. Raghuram Prabhu started business of manufacturing beedies in year 1939. His brother-in-law joined him in year 1940 and this sole proprietorship was converted into partnership firm with name 'M/s. Mangalore Ganesha Beedi Works' (hereinafter referred to as '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 same name. Duration of this firm was five years, which period could be extended by six months. Page 3 4 Thereafter, affairs of firm had to be wound up as provided in Clause 16 of Partnership Deed. firm was dissolved on December 06, 1987 by afflux of time after extending life of firm by period of six months, as per terms stipulated in Partnership Deed. However, because of difference of opinion among erstwhile partners, affairs of firm could not be wound up. Therefore, two of partners of firm filed petition before High Court under provisions of Part X of Companies Act, 1956 for winding up of affairs of firm in terms of Section 583(4)(a) thereof. said petition was registered as Company Petition No. 1 of 1988. Significantly, though firm stood dissolved on December 06, 1987, and thereafter Company Petition No. 1 of 1988 for winding up proceedings after dissolution was filed in High Court, business of partnership firm continued because of interim order passed by High Court. This was because of agreement of partners, as stipulated in Partnership Deed itself, providing that on dissolution firm was to be sold as continuing concern to that partner(s) who could give highest price therefor. relevant clauses in partnership firm stipulating aforesaid arrangement are clauses (3) and (16) which read as under: 3. duration of Partnership shall be five years in first instance; but by mutual agreement parties hereto may extend said duration. If during subsistence of this Partnership any of partners desire Page 4 5 to retire from partnership he or she can do so, if all other partners agree to said retirement. However, if all other partners do not agree to said retirement, partner intending to retire shall give six months' notice in writing of his or her intention to retire and on expiration of period of said notice said Partner shall cease to be Partner and subject to Para 14 infra from that date all his or her liabilities and rights as Partner of firm shall come to end. xx xx xx 16. If Partnership is dissolved, going concern carried on under name of Firm MANGALORE GANESH BEEDI WORKS and all trade marks used in course of said business by said firm and under which business of Partnership is carried on shall vest in and belong to Partner who offers and pays or two or more Partners who jointly offer and pay highest price therefor as single group at sale to be then held as among Partners shall be entitled to bid. other Partners shall execute and complete in favour of purchasing Partner or Partners at his/her or their expense all such deed, instruments and applications and otherwise aid him/her or them for registration his/her name or their names of all said trade marks and do all such deed, acts and transactions as are incidental or necessary to said transferee or assignee Partner or Partners. 5) In view of aforesaid clauses, specific order dated November 05, 1988 was passed by High Court permitting group of partners, seven in number, who had controlling interest, to continue business as interim arrangement till completion of winding up proceedings. Ultimately, orders dated June 14, 1991 were passed in said company petition for winding up affairs of firm by selling its assets as 'ongoing concern'. Though this order was challenged by some of partners by filing special leave petition in this Court, Page 5 6 same was dismissed as withdrawn in year 1994. In this manner, orders dated June 14, 1991 became final, which had permitted sale of firm, as ongoing concern, to such of its partner(s), who makes offer of highest price. Reserve price of 30 crores was also fixed thereby mandating that price cannot be less than 30 crores. successful bidder was also required to accept further liability to pay interest @ 15% per annum towards amount of price payable to partners from December 06, 1987 till date of deposit. In order dated June 14, 1991, it was also directed that successful bidder shall deposit offer price together with interest with Official Liquidator within period of sixty days of date of acceptance of offer. 6) On aforesaid terms, these partners individually or in groups offered their bids. Bid of Association of Persons comprising three partners (hereinafter referred to as 'AOP-3'), at 92 crores, turned out to be highest and same was accepted by High Court vide order dated September 21, 1994. AOP-3 deposited this amount of 92 crores with Official Liquidator on November 17, 1994 and with occurrence of this event, assets of firm were treated as having been sold to AOP-3 on November 20, 1994. Even actual handing over of business of firm along with its assets by Official Liquidator to said AOP-3 took place on January 07, 1995. Page 6 7 7) From aforesaid facts, following events which are relevant for purposes of these appeals, are recapitulated: (i) Date of dissolution of partnership firm is December 06, 1987. (ii) Company Petition No. 1 of 1988 was filed in High Court of Karnataka for winding up of firm. All steps and formalities for winding up, thereafter, are taken pursuant to orders passed by High Court from time to time. (iii) Order dated November 05, 1988 is passed permitting group of partners (seven in number) to continue business as interim arrangement till completion of winding up proceedings. (iv) Winding up order dated June 14, 1991 is passed fixing minimum price of 30 crores for sale of dissolved partnership firm as going concern to such of its partner(s) who makes offer of highest price. (v) date of deposit of bid amount of 92 crores by AOP-3, being highest bid, is on November 17, 1994. 8) With aforesaid background facts, we advert to developments that have taken place on income tax front. 9) Since firm stood dissolved with effect from December 06, 1987, upto December 06, 1987, it is firm which had filed income tax returns Page 7 8 in respect of income which it had earned, for payment of income tax thereupon. However, as mentioned above, though firm was dissolved, but business continued because of orders passed by High Court keeping in view provisions contained in Partnership Deed. income that was earned from date of dissolution till date of winding up and when firm was sold to AOP-3 was assessed at hands of dominant partners controlling business activities (seven in number) as Association of Persons (AOP), meaning thereby, income from business of said firm December 06, 1987 till winding up was assessed as AOP. At same time, these assessees were also filing their individual returns as well. 10) assessees filed return for Assessment Year 1995-1996. It is in this Assessment Year assets of firm were sold as ongoing concern to AOP-3 on September 21, 1994. Assessing Officer, while making assessments, bifurcated this Assessment Year into two periods. One period from April 01, 1994 to November 20, 1994 (as AOP of partners who had continued business in that capacity in previous years). Second period from November 20, 1994 till March 31, 1995 (as business was handed over to AOP-3 and assessment was treated as that of AOP-3). While doing so, Assessing Officer observed that entire capital gains on sale as going concern of Page 8 9 business of firm as well as proportionate profits for period April 01, 1994 to November 20, 1994, when controlling AOP was carrying on business as computed in accordance with order of High Court in Company Petition No. 1 of 1988, on notional basis sum of 9,57,57,007 should be taxed in hands of firm. However, according to Assessing Officer, to protect interests of Revenue, same amounts were included in assessment of AOP for first period. income and tax computations were made separately for two periods in order of assessment. Assessing Officer apportioned consideration among various assets comprised within business with further splitting between short term and long term capital gains. 11) While aforesaid treatment was given to assessment of income of firm, insofar as assessees as individuals are concerned, on same date Assessing Officer made assessment in their cases also by including therein proportionate share from out of 92 crores (the amount of auction bid) as capital gain at their hands and bifurcated same into long term and short term gain. manner in which it is done can be discerned from one such Assessment Order where capital gain is computed in following manner: INCOME AS RETURNED Rs.29,40,680 Page 9 10 II. Computation of capital gains on account of transfer of interest in partnership firm M/s. MGBW out of Rs. 92 crores Share of assessee out of Rs. 92 crores Rs. 12,73,55,600 A1 Goodwill u/s. 48 r.w.s. 55(1) 76.6% of Rs.12,73,55,600 Rs.9,75,54,390 (See Table 3) less Cost of acquisition nil (See Table 3) Net Taxable Goodwill Rs. 9,75,54,390 A2 Sale of Land (See Table 3) Market value @ 19% of Rs.12,73,55,600 less Cost of acquisition Rs.2,41,97,564 (see Table 3) 13.843% of Rs.1,53,45,025 Indexed Cost 21,24,212 x 259 100 55,01,710 Rs.1,86,95,854 TOTAL LONG TERM CAPITAL GAINS (A1+A2) Rs. 11,62,50,244 III Short-term Capital gain on transfer of movable (depreciable asset) u/s. 50 4.4% of Rs.12,73,55,600 Rs. 56,03,646 Less Value / w.d.v. in beginning of accounting year 31.03.1994 13.843% of Rs.15,11,404 Rs.2,09,224 SHORT TERM CAPITAL GAINS Rs. 53,94,422 IV Share of Notional/Proportionate Profit revenue receipt Rs. 1,32,55,640 TOTAL INCOME (I + II + III + IV) Rs. 13,78,40,987 TOTAL INCOME EXCLUDING LONGTERM CAPITAL-GAINS Rs. 2,15,90,743 12) As can be gathered from above, total proceeds of 92 crores are Page 10 11 first apportioned among assessees in ratio in which they had received 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 purposes of calculation/ computation, figures were taken from Table II incorporated in Assessment Order itself mentioning market value of these assets. This Table II reads as under: Sales/Market Amount in S.No. Asset %age Value assessee's case 1. Land as per H.S. Seshagiri 19.00 17,47,90,000 2,41,97,564 Registered Valuer 2. Buildings as per H.S. Seshagiri 4.10 3,80,00,000 56,06,646 Registered Valuer 3. Plant & Machinery estimated on basis of Swamy & Rao's 0.30 25,00,000 Report 4. Goodwill being balancing figure remaining out of total figure of 92,00,00,000 also 76.60 70,47,10,000 9,75,54,390 being almost same figure if super profit method is adopted Total 100.00 92,00,00,000 12,73,55,600 13) It becomes apparent that approach adopted by Assessing Officer was to take into consideration market value of assets of firm, viz. land, building and plant & machinery, which had already been evaluated by Registered Valuers as reflected in Table above. market value of these three assets was 21,52,90,000. Since total sale Page 11 12 consideration at which firm was sold was 92 crores, balance amount of 70,47,10,000 was treated as representing goodwill of firm which was taxed as long term gain. This mode of arriving at short term and long term capital gain and taxing it accordingly by Assessing Officer has received stamp of approval by Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal, as well as High Court. 14) Mr. Ajay Vohra, learned senior counsel appearing for assessees, submitted, with great emphasis, that aforesaid approach is incorrect, invalid and impermissible in law. Two broad arguments, on basis of which he attacked rationale of aforesaid assessments, are following: (i) After referring to averments made in winding up petition that was filed in Karnataka High Court, order of winding up and final order of confirmation of sale, Mr. Vohra pointed out that firm was admittedly sold as going concern. Predicated on this fact, his submission was that there could not have been any capital gain on sale of ongoing concern. For this purpose, he drew sustenance from definition of 'capital asset' as contained in Section 2(14)(a) of Act as well as Section 45 of Act. Section 2(14)(a) is to following effect: 2(14) capital asset means (a) property of any kind held by assessee, whether or Page 12 13 not connected with his business or profession; xx xx xx 15) He submitted that expression 'property of any kind' was of widest amplitude, as held in Commissioner of Income Tax, Bombay City I v. Tata Services Ltd.1 Therefore, assets of partnership were to be treated as capital assets. 16) He, thus, argued that undertaking that was transferred as going concern was capital asset. However, at that time, there was no provision as to how asset of firm when wold is to be computed as capital gain. learned counsel pointed out that such provision was introduced for first time (vide Finance Act, 1999) by inserting Section 50B to Act with effect from April 01, 2000, laying down 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 submission of 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 2 in following manner: 16. In case of Artex Manufacturing Co. this Court found that valuer was appointed, that valuer submitted his valuation report in which itemized valuation was carried out and on that basis consideration was fixed at 1 (1980) 122 ITR 594 (Bombay) 2 (2008) 13 SCC 94 : 307 ITR 75 Page 13 14 Rs.11,50,400. Therefore, sale consideration had been arrived at after taking into account value of plant, machinery and dead stock as computed by valuer and, consequently, it was held that surplus arising on sale was taxable under section 41(2) of Act and not as capital gains. In circumstances, judgment of this court in case of Artex Manufacturing Co. was not applicable to present case. Further, this court in case of CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 has held that whether (sic) business of assessee stood transferred as going concern for slump sale price, in absence of evidence on record as to how slump price stood arrived at, section 41(2) had no application. It is interesting to note that judgment in case of Electric Control Gear Mfg. Co. is given by same Bench which decided case of Artex Manufacturing Co. In fact, both judgments are reported on after other in 227 ITR at pages 260 and 278 respectively. In present case, as can be seen from impugned judgment of Delhi High Court, judgment of this court in Electric Control Gear Mfg. Co. is missed out. That judgment has not been considered by High Court. As stated above, this court has clarified its judgment in Artex Manufacturing Co. in its judgment in case of Electric Control Gear Mfg. Co. Therefore, section 41(2) has no application to facts of present case. 17. As regards applicability of section 45 is concerned, three tests are required to be applied. In this case, section 45 applies. There is no dispute on that point. first test is that charging section and computation provisions are inextricably linked. charging section and computation provisions together constituted integrated code. Therefore, where computation provisions cannot apply, it is evident that such case was not intended to fall within charging section, which, in present case, is section 45. That section contemplates that any surplus accruing on transfer of capital assets is chargeable to tax in previous year in which transfer took place. In this case, transfer took place on July 18, 1969. second test which needs to be applied is test of allocation/attribution. This test is spelt out in judgment of this Court in Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR 299. This test applies to slump transaction. object behind this test is to find out whether slump price was capable of being attributable to individual assets, which is also known as item-wise earmarking. third test is that there is conceptual Page 14 15 difference between undertaking and its components. Plant, machinery and dead stock are individual items of undertaking. 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, cost of such items (intangibles) is not determinable. In case of CIT v. B.C. Srinivasa Setty reported in [1981] 128 ITR 294, this court held that section 45 charges profits or gains arising from transfer of capital asset to income-tax. In other words, it charges surplus which arises on transfer of capital asset in terms of appreciation of capital value of that asset. In said judgment, this Court held that asset must be one which falls within contemplation of section 45. It is further held that, charging section and computation provisions together constitute integrated code and when in case computation provisions cannot apply, such case would not fall within section 45. In present case, banking undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On facts, we find that item-wise earmarking was not possible. On facts, we find that compensation (sale consideration) of Rs.10.20 crores was not allocable (sic) item-wise as was case in Artex Manufacturing Co. 17) Mr. Vohra pointed out that in instant case itself, insofar as AOP-3 is concerned (who were successful bidders and purchased assets of firm), they were treated as purchasers of ongoing concern by this Court in case of their assessment in Mangalore Ganesh Beedi Works v. Commissioner of Income Tax, Mysore & Anr.3 In nutshell, his argument was that since it was sale of ongoing concern, it had to be treated as slump sale within meaning of Section 2(42C) of Act and, therefore, it was not permissible for Assessing Officer to assign amount of 92 crores into different 3 (2016) 2 SCC 556 : (2015) 378 ITR 640 Page 15 16 heads of land, building and machinery and treating balance amount as goodwill. It was capital asset as ongoing concern which was sold at 92 crores and in absence of provisions relating to mode of computation and deductions at relevant time, which were inserted subsequently only with effect from April 01, 2000, as per PNB Finance Limited, consideration was to be treated as capital receipt and no capital gain was payable thereon. 18) Two incidental submissions were also made on this aspect, which are: (a) Even if provisions of capital gain were applicable and amount was to be taxed as capital gain, valuation of goodwill, as done by Assessing Officer, was contrary to law. It was submitted that manner in which goodwill was valued showed that cost of acquisition was treated as 'Nil'. However, it could not be so having regard to provisions of Section 48. He contrasted same with Section 55(2) which was inserted with effect from April 01, 2002 and deals with 'cost of acquisition' for purposes of Sections 48 and 49 stipulating that insofar as capital asset in relation to goodwill of business is concerned, cost of acquisition would be cost at which it was purchased from previous owner. According to him, this yardstick could not have been applied prior to April 01, 2002 in absence of any statutory scheme and instant case needed to be covered by law laid down by Page 16 17 courts in this behalf in various judgments. learned counsel referred to following judgments in support: (i) CIT v. B.C. Srinivasa Setty4 (ii) Mangalore Ganesh Beedi Works (iii) Areva T & D India Ltd. v. Deputy Commissioner of Income Tax5 (iv) Commissioner of Income Tax & Anr. v. Associated Electronics & Electricals Industries (Bangalore) (P) Ltd. 6 (b) Without prejudice to aforesaid contentions, his other submission was that if at all capital gain tax was payable, liability to pay same was that of partnership firm and not individual partners by virtue of Section 45(4), which reads as under: 45. Capital gains. (1) Any profits or gains arising from transfer of capital asset effected in 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 head Capital gains , and shall be deemed to be income of previous year in which transfer took place. xx xx xx (4) profits or gains arising from transfer of capital asset by way of distribution of capital assets on dissolution of firm or other association of persons or body of individuals (not being company or co-operative society) or otherwise, shall be chargeable to tax as income of firm, association or body, of previous year in which said transfer takes place and, for purposes of section 48, fair market value of asset 4 (1981) 2 SCC 460 : 128 ITR 294 5 (2012) 345 ITR 421 (Delhi High Court) 6 (2016) 130 DTR 0222 (Kar) Page 17 18 on date of such transfer shall be deemed to be full value of consideration received or accruing as result of transfer. 19) Second submission of learned senior counsel for assessees pertained to payment of tax on income which business earned from April 01, 1994 till November 20, 1994. learned counsel argued that as per orders of High Court in winding up petition, 40% of this income was retained by AOP-3 as tax component because of reason that for business income of earlier years, after dissolution, same was taxed as AOP. Therefore, individual partners could not be taxed on said business income in year in question, as held in M/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax7 and Commissioner of Income Tax v. Excel Industries Ltd.8 His related submission was that in any case this amount was not received by assessees as it was retained by AOP-3 and, therefore, tax was not payable by assessees. 20) Coming to first submission of assessees, it can be seen that it is founded on premise that assets of firm were sold to AOP-3 as going concern with further premise that it was slump sale. It is pointed out that firm was doing business even after winding up petition was filed and as going concern, it was put to sale. 7 (1992) 1 SCC 659 : 193 ITR 321 8 (2014) 13 SCC 459 : 358 ITR 295 Page 18 19 21) Mr. Radhakrishnan, learned senior counsel appearing for Revenue, has refuted aforesaid premise of argument by submitting that though it was sold as going concern, nevertheless, assets were that of dissolved firm as firm had come to end on December 06, 1987 by afflux of time. In order to establish this fact, learned counsel took us through record, including winding up petition which was filed in High Court as well as orders passed therein, which are relied upon by assessees themselves. 22) After going through records, we find that Revenue has been able to substantiate aforesaid submission. We have already noticed that firm was dissolved on December 06, 1987 by afflux of time. This event happened as per terms stipulated in partnership deed itself. necessity for filing petition under Companies Act arose because of differences between erstwhile partners that had erupted, pertaining to affairs of firm. No doubt, in said petition interim order dated November 05, 1988 was passed by High Court permitting group of persons (seven in number), having controlling interest in firm, to continue business. However, this was done as interim arrangement till completion of winding up proceedings. Pertinently, insofar as firm is concerned, it did not carry on business thereafter as existing firm. On contrary, few ex-partners with controlling interest were allowed to continue Page 19 20 business activity in interregnum as stopgap arrangement. Another important fact which needs mention is that, insofar as firm is concerned, it did not file income tax returns after date of dissolution. Obviously so, as it stood dissolved and was no more in existence. Precisely for this reason, income that was generated from business, after dissolution, was assessed by income tax authorities in hands of such erstwhile partners as AOP. It is this AOP which was filing returns and getting same assessed in that capacity and paying income tax thereupon. Further, in orders passed by High Court from time to time in said petition, insofar as firm is concerned, it has always been described as 'the dissolved partnership firm'. Thus, assets which were sold ultimately on November 20, 1994 were of dissolved partnership firm, though as going concern. Once we straighten factual position in manner stated above, whole legal edifice of assessees case crumbles down. 23) At this stage, we would like to clarify one more factual aspect. During pendency of winding up petition before High Court, High Court had passed various orders which included order for valuation of assets of firm. This valuation was done to enable Court to fix reserve price for purpose of inter se bidding between erstwhile partners and/or association of erstwhile partners. Page 20 21 Chartered Accountants had done valuation and submitted reports on basis of which base price was fixed at 30 crores taking into account value of various assets. These assets valued at 30 crores are sold for 92 crores. Thereafter, AOP-3, successful bidder, deposited amount of bid in respect of share of nine other partners and settlement was also prepared recording value of assets of firm after deducting liability of said nine partners. net value of assets so arrived at and distributed among nine partners. 24) What follows from aforesaid facts is that firm stood dissolved with effect from December 06, 1987; company petition had to be filed by two partners in view of eruption of disputes among partners; business was carried on by partners with controlling interest as interim arrangement; income was assessed in their hands as AOP and not in hands of firm which had already been dissolved; assets of company were put to sale in accordance with Clause 16 of Partnership Deed of dissolved firm, though as going concern; and outgoing partners (assessees herein) received their net share of value of assets of firm out of amount received by way of sale of assets of firm as per Clause 16 of Partnership Deed. On aforesaid facts, it becomes clear that asset of firm that was sold was capital asset within meaning of Section 2(14) of Act. It is not even disputed. Once it is held to be capital asset , gain Page 21 22 therefrom is to be treated as capital gain within meaning of Section 45 of Act. 25) assessees, however, are attempting wriggle out from payment of capital gain tax on ground that it was slump sale within meaning of Section 2(42C) of Act and there was no mechanism at that time as to how capital gain is to be computed in such circumstances, which was provided for first time by Section 50B of Act with effect from April 01, 2000. However, this argument fails in view of fact that assets were put to sale after their valuation. There was specific and separate valuation for land as well as building and also machinery. Such valuation has to be treated as that of partnership firm which had already stood dissolved. 26) Section 2(42)C defines 'slump sale' and reads as under: slump sale means transfer of one or more undertakings as result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales. Explanation 1. For purposes of this clause, undertaking shall have meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2. For removal of doubts, it is hereby declared that determination of value of asset or liability for sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. As per aforesaid definition, sale in question could be treated as Page 22 23 slump sale only if there was no value assigned to individual assets and liabilities in such sale. This has obviously not happened. It is stated at cost of repetition that not only value was assigned to individual assets, even liabilities were taken care of when amount of sale was apportioned among outgoing partners, i.e. assessees herein. Once we hold that sale in question was not slump sale, obviously Section 50B also does not get attracted as this section contains special provision for computation of capital gains in case of slump sale. As fortiorari, judgment in case of PNB Finance Limited also would not apply. 27) In aforesaid scenario, when Official Liquidator has distributed amount among nine partners, including assessees herein, after deducting liability of each of partners, High Court has rightly held that amount received by them is value of net asset of firm which would attract capital gain. Scope of Section 45 of Act was explained in Commissioner of Income Tax, Faridabad v. Ghanshyam (HUF)9 and we would like to reproduce following discussion from said judgment: 16. following conditions need to be satisfied for taxing transaction as capital gains viz. subject-matter must be capital asset, transaction must fall in definition of transfer , there must be profit or loss called capital gains and that taxpayer has claimed exemption in whole or in part by complying with legal provisions (like Section 54-F). 9 (2009) 8 SCC 412 Page 23 24 17. Section 45(1) of 1961 Act speaks about capital gains arising out of transfer of capital asset. definition of expression transfer is contained in Section 2(47) of 1961 Act. It has very wide meaning. What is taxable under Section 45(1) of 1961 Act is profits and gains arising from transfer of capital asset and charge of income tax on capital gains is charge on income of previous year in which transfer took place. 18. Capital gain(s) is artificial income. It is created by 1961 Act. Profit(s) arising from transfer of capital asset is made chargeable to income tax under Section 45(1) of 1961 Act. From scheme of Section 45, it is clear that capital gains is not income which accrues from day-to-day during specific period but it arises at fixed point of time, namely, on date of transfer. In short, Section 45 defines capital gains , it makes them chargeable to tax and it allots appropriate year for such charge. It also enacts deeming provision. Section 48 lays down mode of computation of capital gains and deductions therefrom. In para 45 of judgment, Court also stated that capital gains under Section 45 of Act are not income accruing from day to day. It is deemed income which arises at fixed point of time, viz. on date of transfer. 28) When we apply said legal principle to facts of instant case, we find that partnership firm had dissolved and thereafter winding up proceedings were taken up in High Court. result of those proceedings was to sell assets of firm and distribute share thereof to erstwhile partners. Thus, 'transfer' of assets triggered provisions of Section 45 of Act and making capital gain subject to payment of tax under Act. Page 24 25 29) Insofar as argument of assessees that tax, if at all, should have been demanded from partnership firm is concerned, we may only state that on facts of this case that may not be situation where firm had dissolved much before transfer of assets of firm and this transfer took place few years after dissolution, that too under orders of High Court with clear stipulation that proceeds thereof shall be distributed among partners. Insofar as firm is concerned, after dissolution on December 06, 1987, it had not filed any return as same had ceased to exist. Even in interregnum, it is AOP which had been filing return of income earned during said period. High Court has touched upon this aspect in greater detail in para 30 of its judgment. Since we agree with same, we reproduce below discussion in said para: 30. In view of provisions of Section 45 it is clear that in present case, effect of sale conducted by this court among partners and under Clause 16 of said Partnership Deed, is that once partnership is dissolved, partners would become entitled to specific share in assets of firm which is proportionate to their share in sharing profits of firm and they are placed in same position as tenants in common and for purpose of dissolution and u/s 47 of Indian Partnership Act, 1932, it is clear that even after dissolution of firm, authority of each partner to bind firm and other mutual rights and obligations of partners continue notwithstanding dissolution so far as may be necessary to wind up affair of firm and to complete transactions begun but unfinished at time of dissolution. Therefore, for realisation of assets, discharging liability of firm and settling accounts of partners, etc., firm will continue to exist Page 25 26 despite dissolution and not for any other purpose. material on record in instant case would clearly show that after dissolution of firm on 06.12.1987, firm has never filed any return and in view of order of this court permitting partners to carry on business in interest of employees, return was filed by AOP-13 consisting of erstwhile 13/12 partners for accounting profits and seeking depreciation in assets of firm and continued to do business in view of order of this court that there was no agreement among partners to continue business during pendency of winding up proceedings. Further having regard to Clause 16 of Partnership Deed of dissolved firm, it is clear that partners intended that assets of firm should not be sold to outsider. It is well settled that every act of partner would be binding on firm and also partners interse and Clause 16 of Partnership Deed which has been culled out supra clearly shows that if Partnership is dissolved, going concern carried on under name of Firm MANGALORE GANESH BEEDI WORKS and all trade marks used in course of said business by said firm and under which business of Partnership is carried on shall vest in and belong to Partner who offers and pays or two or more Partners who jointly offer and pay highest price therefor as single group at sale to be then held as among Partners shall be entitled to bid. other Partners shall execute and complete in favour of purchasing Partner or Partners at his/her or their expense all such deed, instruments and applications and otherwise aid him/her or them for registration his/her name or their names of all said trade marks and do all such deed, acts and transactions as are incidental or necessary to said transferee or assignee Partner or Partners. final order passed by this court to wind up affairs of firm would clearly show that property of firm is purchased by association of 3 partners who submitted their highest bid and that other partners had to given undertaking that they may not interfere with carrying on business which is vested in name of MGBW and all trademarks used in course of said business and therefore it is clear that appellants who are erstwhile partners were not successful bidders for continuation of business in individual capacity of MGBW and in view of Clause 16, all tangible and intangible assets vested with Association of 3 partners whose highest bid of Rs.92 crores was accepted and admittedly after passing of order of this court on 20.11.1994, all appellants herein and Page 26 27 other out-going partners have given requisite undertaking as per order of this court and MGBW as going concern under name and style MGBW and all trademarks used in course of said business by said firm and all tangible and intangible assets of firm vested with purchasers erstwhile 3 partners who paid highest bid and appellants have received consideration of conveyance and their respective share in sale of net assets of firm after their undertaking that they cannot interfere with business of MGBW which is vested with all assets in favour of 3 partners have received value of their net asset which has been distributed by Official Liquidator and AOP 3 who have purchased business of old firm, succeeded to it and constituted new firm in same name (vide order defendant (sic - dated) 14.06.1991 in Company Petition) and therefore it is clear that order passed by Assessing Authority confirmed in first appeal and by Income Tax Appellate Tribunal (Special Bench) holding that appellants as erstwhile partners are liable to pay capital gain on amount received by them towards value of their share in net assets of firm are liable for payment of capital gains u/s 45 of Act. said finding is justified and accordingly we answer substantial question of law in favour of Revenue and against assessee. 30) In view of our aforesaid discussion, arguments that valuation of goodwill was wrongly done may also not survive. In any case, we find that no such plea was taken by assessees in High Court or before Tribunal or lower authorities. 31) We now advert to second argument. 32) It is argued that insofar as income of firm in Assessment Year in question is concerned, it could not be taxed at hands of Page 27 28 assessees. We find merit in this submission. 33) First, and pertinently, it is admitted case that 40% of said income was allowed by High Court to be retained by successful bidder (AOP-3) precisely for this very purpose. This 40% represented tax which was to be paid on income generated by ongoing concern being run by Association of Persons, as authorised by High Court. Secondly, in previous years, Department had taxed AOP and this procedure had to continue in Assessment Year in question as well {See - M/s. Radhasoami Satsang, Saomi Bagh, Agra and Excel Industries Ltd.} From judgment of High Court, we find that this aspect has been dealt with very cursorily, without taking into consideration aforesaid aspects highlighted by us. entire discussion on this issue is contained in para 31, which reads as under: 31. concurrent finding on question of fact that value of profit received during interregnum period for period of 234 days is to be treated as revenue income having regard to reasons assigned that said profit is calculated on basis of notional profit calculated on two years average profit and from this average 40% was to be deducted and net amount was to be paid, finding is unassailable... aforesaid discussion of High Court deals how business income/revenue income is to be treated/calculated, but question of taxability at hands of assessees has not bee touched upon at all. Page 28 29 34) upshot of aforesaid discussion would be to allow appeals partly only to extent that business income/revenue income in Assessment Year in question is to be assessed at hands of AOP-3, in terms of orders of High Court, as AOP-3 retained tax amount from consideration which was payable to assessees herein and it is AOP-3 which was supposed to file return in that behalf and pay tax on said revenue income. 35) Insofar as appeals preferred by Revenue are concerned, they arise out of protected assessment which was made at hands of partnership firm. As we have upheld order of Assessing Officer in respect of payment of capital gain tax by assessees herein, these appeals are rendered otiose and are disposed of as such. There shall be no order as to costs. ...........J. (A.K. SIKRI) ..........J. (N.V. RAMANA) NEW DELHI; OCTOBER 18, 2016. Page 29 Vatsala Shenoy v. Joint Commissioner of Income-tax, (Assessment) Mysore