Slump Sale of entire running business with all assets & liabilities in one go was LTCG us 48(2) for taxation purpose-Supreme Court

Slump Sale of entire running business was LTCG us 48(2). Sale in one go with assets and liabilities cannot be considered as STCG for Taxation-Supreme Court

ABCAUS Case Law Citation:
ABCAUS 1216 (2017) (04) SC

The Grievance:
The appellant Commission of Income Tax (CIT) was aggrieved by the order of the High Court by which it dismissed the Revenue’s appeal on the ground that the appeal does not involve any substantial question of law under Section 260-A of the Income Tax Act, 1961 ( “the Act”).

Assessment Year : 1991-92

Important Case Laws Cited/relied upon:
Commissioner of Income Tax, Gujarat vs. Artex Manufacturing Co.
Premier Automobiles Ltd. vs. Income Tax Officer & Anr.

Brief Facts of the Case:
The respondent assessee was a Private Limited Company engaged in the business of manufacturing sheet metal components out of CRPA & OP sheds.. The respondent sold its entire running business in one go with all its assets and liabilities to a Company (“purchasing company”).

The respondent company filed their income tax return for the relevant Assessment Year. In the return, the respondent claimed deduction under Section 48(2) of the Act as it stood then by treating the sale to be in the nature of “slump sale” of the going concern being in the nature of long term capital gain in the hands of the assessee.

However, the Assessing Officer (“AO”) did not accept the contention of the assessee in claiming deduction. According to the AO, the case of the assessee was covered under Section 50(2) of the Act because it was in the nature of short term capital gain as specified in Section 50(2) of the Act and hence did not fall under Section 48(2) of the Act as claimed by the assessee. The AO accordingly reworked the claim of the deduction treating the same to be falling under Section 50(2) of the Act and framed the assessment order.

Aggrieved with the order of the AO, the assessee company filed appeal before the CIT (appeals) who allowed the assessee’s appeal in so far as it related to the issue of deduction. He held that when it is an undisputed fact that the assessee had sold their entire running business in one go with its assets and liabilities at a slump price and, therefore, the provisions of Section 50 (2) of the Act could not be applied to such sale. He held that it was not a case of sale of any individual or one block asset which may attract the provisions of Section 50(2) of the Act. He then examined the case of the assessee in the context of definition of “long term capital gain” and “short term capital asset” and held that since the undertaking itself was a capital asset owned by the assessee nearly for six years and being in the nature of long term capital asset and the same having been sold in one go as a running concerned, it could not be termed a “short terms capital gain” so as to attract the provisions of Section 50(2) of the Act as was held by the AO.

The Tribunal also concurred with the reasoning and the conclusion arrived at by the CIT(A) and accordingly dismissed the Revenue’s appeal.

The Revenue, feeling aggrieved of the order of the Tribunal, carried the matter to the High Court in further appeal under Section 260-A of the Act. However, the High Court dismissed the appeal holding that the appeal did not involve any substantial question of law within the meaning of Section 260-A of the Act.

Now, against the order of the High Court, the Revenue carried the matter to the Hon’ble Supreme Court in appeal by way of special leave.

Observations made by the Hon’ble Apex Court:

The Hon’ble Supreme Court observed that no fault could be found in the reasoning and the conclusion arrived at by the CIT (appeal) in his order which, in view of the Hon’ble Supreme Court, was rightly upheld by the Tribunal and then by the High Court calling no interference by the Hon’ble Supreme Court.

The Hon’ble Supreme Court opined that the respondent assessee did not fall within the four corners of Section 50(2) of the Act. It was clarified that section 50(2) applies to a case where any block of assets are transferred by the assessee but where the entire running business with assets and liabilities is sold by the assessee in one go, such sale, in our view, cannot be considered as “short-term capital assets”. In other words, the provisions of Section 50(2) of the Act would apply to a case where the assessee transfers one or more block of assets, which he was using in running of his business.

It was observed that the view taken by their Lordships was supported with the law laid down by the Hon’ble Supreme Court and also by the Bombay High Court when the Division Bench of the Bombay High Court examined this question in detail on somewhat similar facts and has taken the same view.

Held:
The appeal of the Revenue was dismissed as devoid of any merit.