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2016 (10) TMI 704 - SUPREME COURT

2016 (10) TMI 704 - SUPREME COURT - TMI - 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 .....

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ir 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 .....

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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 supp .....

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N.V. RAMANA JJ. 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 the Revenue) are preferred by the assessees. The respondent in these appeals is the Joint Commissioner of Income Tax (Assessment), Special Range, Mysore, who would be referred to .....

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di 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 appr .....

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e 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 a .....

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ng up of the affairs of the firm in terms of Section 583(4)(a) thereof. The said petition was registered as Company Petition No. 1 of 1988. Significantly, though the firm stood dissolved on December 06, 1987, and thereafter Company Petition No. 1 of 1988 for the winding up proceedings after dissolution was filed in the High Court, the business of the partnership firm continued because of the interim order passed by the High Court. This was because of the agreement of the partners, as stipulated .....

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y of the partners desire to retire from the partnership he or she can do so, if all the other partners agree to the said retirement. However, if all the other partners do not agree to the said retirement, the partner intending to retire shall give six months' notice in writing of his or her intention to retire and on expiration of the period of the said notice the said Partner shall cease to be a Partner and subject to Para 14 infra from that date all his or her liabilities and rights as a P .....

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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 da .....

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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 interest @ 15% per annum towards the amount of price .....

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377;92 crores, turned out to be the highest and the same was accepted by the High Court vide order dated September 21, 1994. AOP-3 deposited this amount of 92 crores with₹ the Official Liquidator on November 17, 1994 and with the occurrence of this event, assets of the firm were treated as having been sold to AOP-3 on November 20, 1994. Even actual handing over of the business of the firm along with its assets by the Official Liquidator to the said AOP-3 took place on January 07, 1995. 7) .....

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seven in number) to continue the business as an interim arrangement till the completion of winding up proceedings. (iv) Winding up order dated June 14, 1991 is passed fixing minimum price of₹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 the₹ highest bid, is on November 17, 1994. 8) With the aforesaid background facts, we .....

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eed. 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 .....

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he assessment was treated as that of AOP-3). While doing so, the Assessing Officer observed that the entire capital gains on the sale as a going concern of the business of the firm as well as the proportionate profits for the period April 01, 1994 to November 20, 1994, when the controlling AOP was carrying on business as computed in accordance with the order of the High Court in Company Petition No. 1 of 1988, on a notional basis a sum of 9,57,57,007 should be taxed in the hands of the firm. How .....

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sessment of the income of the firm, insofar as the assessees as individuals are concerned, on the same date the Assessing Officer made assessment in their cases also by including therein the proportionate share from out of ₹92 crores (the amount of auction bid) as capital gain at their hands and bifurcated the same into long term and short term gain. The manner in which it is done can be discerned from one such Assessment Order where the capital gain is computed in the following manner: IN .....

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nts 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. Seshag .....

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y the Assessing Officer was to take into consideration market value of the assets of the firm, viz. land, building and plant & machinery, which had already been evaluated by the Registered Valuers as reflected in the Table above. The market value of these three assets was ₹21,52,90,000. Since total sale consideration at which the firm was sold was ₹92 crores, balance amount of 70,47,10,000 was treated as representing goodwill of the₹ firm which was taxed as long term gain. .....

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tionale of the aforesaid assessments, are the following: (i) After referring to the averments made in the winding up petition that was filed in the Karnataka High Court, order of winding up and the final order of confirmation of sale, Mr. Vohra pointed out that the firm was admittedly sold as a going concern. Predicated on this fact, his submission was that there could not have been any capital gain on the sale of ongoing concern. For this purpose, he drew sustenance from the definition of ' .....

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the partnership were to be treated as capital assets. 16) He, thus, argued that undertaking that was transferred as a going concern was a capital asset. However, at that time, there was no provision 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 computatio .....

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rt 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 ap .....

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x Manufacturing Co. In fact, both the judgments are reported on after other in 227 ITR at pages 260 and 278 respectively. In the present case, as can be seen from the impugned judgment of the Delhi High Court, the judgment of this court in Electric Control Gear Mfg. Co. is missed out. That judgment has not been considered by the High Court. As stated above, this court has clarified its judgment in Artex Manufacturing Co. in its judgment in the case of Electric Control Gear Mfg. Co. Therefore, se .....

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such a case was not intended to fall within the charging section, which, in the present case, is section 45. That section contemplates that any surplus accruing on transfer of capital assets is chargeable to tax in the previous year in which transfer took place. In this case, transfer took place on July 18, 1969. The second test which needs to be applied is the test of allocation/attribution. This test is spelt out in the judgment of this Court in Mugneeram Bangur and Co. (Land Department) [196 .....

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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 tha .....

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ng was not possible. On the facts, we find that the compensation (sale consideration) of ₹ 10.20 crores was not allocable (sic) item-wise as was the case in Artex Manufacturing Co. 17) Mr. Vohra pointed out that in the instant case itself, insofar as AOP-3 is concerned (who were the successful bidders and purchased the assets of the firm), they were treated as purchasers of an ongoing concern by this Court in the case of their assessment in Mangalore Ganesh Beedi Works v. Commissioner of I .....

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92 crores and in the absence of provisions relating to mode of computation and deductions at the relevant time, which were inserted subsequently only with effect from April 01, 2000, as per PNB Finance Limited, the 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 the provisions of capital gain were applicable and the amount waste be taxed as the capital gain, valuation .....

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n to goodwill of a business is concerned, cost of acquisition would be the cost at which it was purchased from the previous owner. According to him, this yardstick could not have been applied prior to April 01, 2002 in the absence of any statutory scheme and the instant case needed to be covered by the law laid down by the courts in this behalf in various judgments. The learned counsel referred to the following judgments in support: (i) CIT v. B.C. Srinivasa Setty (1981) 2 SCC 460 : 128 ITR 294 .....

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artners 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 as .....

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ruing as a result of the transfer. 19) Second submission of the learned senior counsel for the assessees pertained to the payment of tax on the income which the business earned from April 01, 1994 till November 20, 1994. The learned counsel argued that as per the orders of the High Court in the winding up petition, 40% of this income was retained by AOP-3 as a tax component because of the reason that for business income of the earlier years, after the dissolution, the same was taxed as an AOP. T .....

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rst submission of the assessees, it can be seen that it is founded on the premise that the assets of the firm were sold to AOP-3 as a going concern with further premise that it was a slump sale. It is pointed out that the firm was doing business even after the winding up petition was filed and as a going concern, it was put to sale. 21) Mr. Radhakrishnan, learned senior counsel appearing for the Revenue, has refuted the aforesaid premise of the argument by submitting that though it was sold as a .....

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e 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 .....

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ed, 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 hands of such erstwhile partners as an AOP. It is this AOP which was filing the returns and getting the same assessed in that capacity and paying the income tax thereupon. Further, in the orders passed by the High C .....

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of the winding up petition before the High Court, the High Court had passed various orders which included an order for valuation of the assets of the firm. This valuation was done to enable the Court to fix the reserve price for the purpose of inter se bidding between the erstwhile partners and/or association of erstwhile partners. The Chartered Accountants had done the valuation and submitted reports on the basis of which base price was fixed at 30 crores taking into account₹ the value o .....

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d with effect from December 06, 1987; the company petition had to be filed by two partners in view of eruption of disputes among the partners; the business was carried on by the partners with controlling interest as an interim arrangement; the income was assessed in their hands as AOP and not in the hands of the firm which had already been dissolved; assets of the company were put to sale in accordance with Clause 16 of the Partnership Deed of a dissolved firm, though as a going concern; and out .....

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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 valuat .....

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is clause, undertaking shall have the meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2. - For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the 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 the aforesaid definition, sale in question could be treated as slump sale only if there was .....

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tion of capital gains in case of slump sale. As a fortiorari, the judgment in the case of PNB Finance Limited also would not apply. 27) In the aforesaid scenario, when the Official Liquidator has distributed the amount among the nine partners, including the assessees herein, after deducting the liability of each of the partners, the High Court has rightly held that the amount received by them is the value of net asset of the firm which would attract capital gain. Scope of Section 45 of the Act w .....

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legal provisions (like Section 54-F). 17. Section 45(1) of the 1961 Act speaks about capital gains arising out of transfer of a capital asset. The definition of the expression 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 p .....

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ts 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 principle to the facts of the instant case, we find that the partnership fi .....

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ncerned, 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. E .....

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ership is dissolved, the partners would become entitled to specific share in the assets of the firm which is proportionate to their share in sharing the profits of the firm and they are placed in the same position as the tenants in common and for the purpose of dissolution and u/s 47 of the Indian Partnership Act, 1932, it is clear that even after the dissolution of the firm, the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue notwi .....

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e 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 .....

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d 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 applic .....

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hat they may not interfere with the carrying on business which is vested in the name of MGBW and all the trademarks used in the course of said business and therefore it is clear that the appellants who are erstwhile partners were not successful bidders for continuation of business in the individual capacity of the MGBW and in view of Clause 16, all tangible and intangible assets vested with Association of 3 partners whose highest bid of ₹ 92 crores was accepted and admittedly after the pas .....

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espective share in the sale of net assets of the firm after their undertaking that they cannot interfere with the business of MGBW which is vested with all assets in favour of 3 partners have received the value of their net asset which has been distributed by the Official Liquidator and AOP 3 who have purchased the business of the old firm, succeeded to it 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 .....

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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, .....

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