Are provisions of deemed short term capital gains applicable where assessee sold entire business as going concern in one go?
Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price. The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. Section 45 of Income Tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.
Slump Sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. A slump sale for income tax purposes would be one where an undertaking is sold without considering the individual values of the assets or liabilities contained within the undertaking. The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act. The computation is as follows:
|Full value of consideration||xxx|
|(-) Expenses in relation to transfer||(xxx)|
|(-) Cost of acquisition/ Net worth||(xxx)|
|Capital Gain or (Loss)||xxx|
Let us refer to the case of CIT v. Equinox Solution Pvt Ltd (2017), where the issue under consideration was whether deemed short term capital gains can apply to case where assessee sold entire business as going concern in one go and which sale otherwise qualifies as long term capital asset under the Act?
Facts of the Case:
- The assessee was engaged in the business of manufacturing sheet metal components out of CRPA & OP sheds at Ahmedabad.
- It decided to sell their entire running business in one go.
- With this aim in view, it sold their entire running business in one go with all its assets and liabilities to a Company called “Amtrex Appliances Ltd” for Rs.58,53,682.
- In the return, the assessee 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.
- The 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) because it was in the nature of short-term capital gain as specified in Section 50(2) and hence did not fall under Section 48(2) as claimed by the assessee.
- The AO accordingly reworked the claim of the deduction treating the same to be falling under Section 50(2) and framed the assessment order.
Order of Appellate Authorities and High Court (HC)
- The assessee, felt aggrieved, filed appeal before the CIT (appeals).
- By order, the Commissioner (Appeals) allowed the assessee’s appeal in so far as it related to the issue of deduction.
- He held that when it was an undisputed fact that the assessee has 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) 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).
- 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 is 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 cannot be termed a “short terms capital gain” so as to attract the provisions of Section 50(2) as was held by the AO.
- The CIT (appeals) accordingly allowed the assessee to claim the deduction as was claimed by them before the AO.
- The Revenue, felt aggrieved of the order of the CIT (appeal), filed appeal before the Income Tax Appellate Tribunal.
- By order, the Tribunal concurred with the reasoning and the conclusion arrived at by the Commissioner of Appeal and accordingly dismissed the Revenue’s appeal.
- The Revenue, aggrieved with the order of the Tribunal, carried the matter to the High Court in further appeal.
- By impugned order, 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.
- It was against this order the Revenue felt aggrieved and carried the matter to the Supreme Court (SC) in appeal.
Observations of Supreme Court (SC)
- SC found no fault in the reasoning and the conclusion arrived at by the CIT (appeal) in his order.
- According to SC, it was rightly upheld by the Tribunal and then by the High Court.
- In SC’s opinion, the case of the respondent (assessee) did not fall within the four corners of Section 50 (2) of the Act.
- Section 50 (2) applied to a case where any block of assets was transferred by the assessee.
- However, where the entire running business with assets and liabilities was sold by the assessee in one go, such sale, in SC’s view, could not be considered as “short-term capital assets”.
- In other words, the provisions of Section 50 (2) would apply to a case where the assessee transfers one or more block of assets, which he was using in running of his business.
- Such was not the case here because in this case, the assessee sold the entire business as a running concern.
- As rightly noticed by the CIT (appeal) that the entire running business with all assets and liabilities having been sold in one go by the respondent-assessee, was a slump sale of a “long-term capital asset”. It was, therefore, required to be taxed accordingly.
In simple words, 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. If the assessee sold the entire business as a running concern, it would be a slump sale of long term capital asset.