While upholding the order of the Karnataka High court, the two-judge bench of the Supreme Court observed that the income arising out of the sale of capital assets of a going concern by a partner to other partners are taxable from the hands of the assessee, after the dissolution of the firm. The Court held that such income are assessable to tax under section 45 of the Income Tax Act, 1961.
In the instant case, the assessee approached the Apex Court impugning the assessment order as per which, the assessing officer held that the assets of a going concern, transferred by the assessesto other partners are liable to be treated as capital gain. The assessee maintained that the above amount is not subject to tax since it is a capital receipt. Rejecting this contention, the assessing officer passed the impugned order which was upheld by all the appellate authorities including the High Court.
Diving deeply into the facts of the case, the bench comprising of Justice A K Sikri and Justice N V Ramana observed that asset of the firm that was sold was the capital asset within the meaning of Section 2(14) of the Act. Therefore, the gain arising out of such asset should be treated as “capital gain” within the meaning of section 45 of the Act.The Court rejected the contention raised by the assessee that, the impugned transaction was a “slump sale” within the meaning of Section 2(42C) of the Income Tax Act and there was no mechanism at that time as to how the capital gain is to be computed in such circumstances, on ground that,the assets were put to sale after their valuation. The Court emphasized that 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.Therefore, in the opinion of the Court, the transaction does not come within the ambit of the term “slump sale.”
The bench further noted that the partnership firm had dissolved and thereafter winding up proceedings were taken up in the High Court. The result of those proceedings was to sell the assets of the firm and distribute the share thereof to the erstwhile partners. Thus, the ‘transfer’ of the assets triggered the provisions of Section 45 of the Act and making the capital gain subject to the payment of tax under the Act.
Regarding the next submission of the assessee, i.e, the income of the firm cannot be taxed in the hands of the assesses, the Court held that “First, and pertinently, it is an admitted case that 40% of the said income was allowed by the High Court to be retained by the successful bidder (AOP-3) precisely for this very purpose. This 40% represented the tax which was to be paid on the income generated by the ongoing concern being run by the Association of Persons, as authorised by the High Court. Secondly, in the previous years, the Department had taxed the AOP and this procedure had to continue in the Assessment Year in question as well”. In view of this, the Court arrived at a conclusion 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 taxamount from the consideration which was payable to the assesses herein and it is AOP-3 which was supposed to file the return in that behalf and pay tax on the said revenue income.
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