The Assessing Officer says that because depreciation of a known amount was allowed on the assets over the years, that figure must be the excess over written down value and can be taxed. Nothing in our documents allocates the price. Can he do that?
No. The Supreme Court held that where there is nothing to indicate the price attributable to the machinery, plant or building out of the total consideration, the balancing charge cannot be applied, and the mere fact that a particular sum had been allowed as depreciation does not make that sum the excess between price and written down value. The Revenue's appeal on that question failed.
Decided by the Supreme Court (S.C. Agrawal J and G.B. Pattanaik J; judgment delivered by Agrawal J) on 1997-07-08, reported as (1997) 141 CTR (SC) 302. It bears on section 41(2), section 45, section 2(42C), section 50B of the Income Tax Act 1961, in Capital Gains, Evidence & Burden of Proof and How Tax Law Is Read matters.
This is the other half of the pair decided on the same day as Artex Manufacturing and it is the half assessees need. Artex shows what happens when the price was built from a valuation; this shows what happens when it was not. Together they set the real test: not whether the agreement is silent, but whether anything in the record indicates a price attributable to the individual assets. It also disposes of a shortcut Assessing Officers still use — treating the cumulative depreciation allowed as if it were automatically the balancing charge. The judgment is the authority for saying that the Revenue must point to material, not arithmetic. It is a 1967-68 assessment decided under s.41(2), so the statutory route today is s.50 and s.50B; the evidential principle is what carries over into the s.2(42C) question of whether values were assigned to individual assets.
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The assessee was a partnership concern of thirteen partners. By agreement dated 31 March 1966 it transferred the entire assets of its business together with its liabilities as a going concern to a limited company, M/s Electric Control Gear Pvt. Ltd., for a consideration of Rs.8 lakhs; the erstwhile partners were allotted shares of the same value in their profit-sharing proportion. For AY 1967-68 the Income Tax Officer held that depreciation of Rs.3,32,863 allowed to the firm on the assets transferred was chargeable under s.41(2), and also taxed capital gains of Rs.8 lakhs, bringing Rs.7,95,000 to charge after the basic exemption. The Appellate Assistant Commissioner held the profits taxable under s.41(2) but held that capital gains could not be taxed in the hands of a registered firm under s.114. Cross appeals followed. The Tribunal remitted the recomputation to the Income Tax Officer and held the correct status to be registered firm rather than association of persons, and referred eight questions. The High Court, relying on its own judgment in Artex Manufacturing Co. v. CIT, (1981) 131 ITR 559 (Guj), answered questions 1, 3 and 5 for the Revenue and questions 2, 4 and 8 for the assessee; question 6 was not pressed and question 7 did not survive. The Revenue's appeal concerned questions 2, 4 and 8.
The appeal was partly allowed: the High Court's answer to question 8 (relief on the basis of two circulars) was set aside and that question was answered in favour of the Revenue for the reasons given in Artex Manufacturing Co.; the answers to questions 2 and 4 were affirmed; no order as to costs. On question 2, s.41(2) was rightly held inapplicable, because in the present case there was nothing to indicate the price attributable to assets such as the machinery, plant or building out of the consideration of Rs.8 lakhs, and merely because Rs.3,32,863 had been allowed as depreciation to the firm it could not be said that that was the excess between the price and the written down value. On question 4, the High Court's view on status was affirmed on the same footing as in Artex Manufacturing Co.
The Court decided the case by direct comparison with Artex Manufacturing Co., delivered on the same day. In Artex it had held s.41(2) applicable because the price attributable to the plant, machinery and dead stock had been disclosed by the assessee during the assessment proceedings before the Income Tax Officer and that price was the value assessed by the valuers at the time of execution of the agreement. Here the record contained no such material: nothing indicated the price attributable to the machinery, plant or building out of the Rs.8 lakhs. The Court refused to supply that missing attribution by inference from the depreciation that had been allowed. On the circulars, question 8 was treated as the counterpart of question 5 in Artex, where the Court had reversed the High Court, and it was answered the same way.
In the present case there is nothing to indicate the price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs. 8 lakhs.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that where there is nothing to indicate the price attributable to the machinery, plant or building out of the total consideration, the balancing charge cannot be applied, and the mere fact that a particular sum had been allowed as depreciation does not make that sum the excess between price and written down value. The Revenue's appeal on that question failed. This was decided by the Supreme Court (S.C. Agrawal J and G.B. Pattanaik J; judgment delivered by Agrawal J) and bears on section 41(2), section 45, section 2(42C), section 50B of the Income Tax Act 1961. It is reported as (1997) 141 CTR (SC) 302. This is the other half of the pair decided on the same day as Artex Manufacturing and it is the half assessees need. Artex shows what happens when the price was built from a valuation; this shows what happens when it was not. Together they set the real test: not whether the agreement is silent, but whether anything in the record indicates a price attributable to the individual assets. It also disposes of a shortcut Assessing Officers still use — treating the cumulative depreciation allowed as if it were automatically the balancing charge. The judgment is the authority for saying that the Revenue must point to material, not arithmetic. It is a 1967-68 assessment decided under s.41(2), so the statutory route today is s.50 and s.50B; the evidential principle is what carries over into the s.2(42C) question of whether values were assigned to individual assets. If it applies to you, the first step is this: Put the Revenue to proof: ask it to identify the document or the material that indicates a price attributable to each asset. If it cannot, the itemised computation fails.
The assessee was a partnership concern of thirteen partners. By agreement dated 31 March 1966 it transferred the entire assets of its business together with its liabilities as a going concern to a limited company, M/s Electric Control Gear Pvt. Ltd., for a consideration of Rs.8 lakhs; the erstwhile partners were allotted shares of the same value in their profit-sharing proportion. For AY 1967-68 the Income Tax Officer held that depreciation of Rs.3,32,863 allowed to the firm on the assets transferred was chargeable under s.41(2), and also taxed capital gains of Rs.8 lakhs, bringing Rs.7,95,000 to charge after the basic exemption. The Appellate Assistant Commissioner held the profits taxable under s.41(2) but held that capital gains could not be taxed in the hands of a registered firm under s.114. Cross appeals followed. The Tribunal remitted the recomputation to the Income Tax Officer and held the correct status to be registered firm rather than association of persons, and referred eight questions. The High Court, relying on its own judgment in Artex Manufacturing Co. v. CIT, (1981) 131 ITR 559 (Guj), answered questions 1, 3 and 5 for the Revenue and questions 2, 4 and 8 for the assessee; question 6 was not pressed and question 7 did not survive. The Revenue's appeal concerned questions 2, 4 and 8. The matter was decided on 1997-07-08 by the Supreme Court (S.C. Agrawal J and G.B. Pattanaik J; judgment delivered by Agrawal J). On those facts the Supreme Court held as follows. The appeal was partly allowed: the High Court's answer to question 8 (relief on the basis of two circulars) was set aside and that question was answered in favour of the Revenue for the reasons given in Artex Manufacturing Co.; the answers to questions 2 and 4 were affirmed; no order as to costs. On question 2, s.41(2) was rightly held inapplicable, because in the present case there was nothing to indicate the price attributable to assets such as the machinery, plant or building out of the consideration of Rs.8 lakhs, and merely because Rs.3,32,863 had been allowed as depreciation to the firm it could not be said that that was the excess between the price and the written down value. On question 4, the High Court's view on status was affirmed on the same footing as in Artex Manufacturing Co.
The Court decided the case by direct comparison with Artex Manufacturing Co., delivered on the same day. In Artex it had held s.41(2) applicable because the price attributable to the plant, machinery and dead stock had been disclosed by the assessee during the assessment proceedings before the Income Tax Officer and that price was the value assessed by the valuers at the time of execution of the agreement. Here the record contained no such material: nothing indicated the price attributable to the machinery, plant or building out of the Rs.8 lakhs. The Court refused to supply that missing attribution by inference from the depreciation that had been allowed. On the circulars, question 8 was treated as the counterpart of question 5 in Artex, where the Court had reversed the High Court, and it was answered the same way. In the words reproduced by the source cited on this page: "In the present case there is nothing to indicate the price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs. 8 lakhs." The decision followed or applied CIT v. Artex Manufacturing Co., Civil Appeal No. 2276 of 1981, (1997) 141 CTR (SC) 290 — applied and distinguished on the facts.
It was decided by the Supreme Court on 1997-07-08 and is reported as (1997) 141 CTR (SC) 302. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 41(2), section 45, section 2(42C), section 50B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeal was partly allowed: the High Court's answer to question 8 (relief on the basis of two circulars) was set aside and that question was answered in favour of the Revenue for the reasons given in Artex Manufacturing Co.; the answers to questions 2 and 4 were affirmed; no order as to costs. On question 2, s.41(2) was rightly held inapplicable, because in the present case there was nothing to indicate the price attributable to assets such as the machinery, plant or building out of the consideration of Rs.8 lakhs, and merely because Rs.3,32,863 had been allowed as depreciation to the firm it could not be said that that was the excess between the price and the written down value. On question 4, the High Court's view on status was affirmed on the same footing as in Artex Manufacturing Co. It arises in Capital Gains, Evidence & Burden of Proof and How Tax Law Is Read matters, on section 41(2), section 45, section 2(42C), section 50B of the Income Tax Act 1961, and was decided by S.C. Agrawal J and G.B. Pattanaik J; judgment delivered by Agrawal J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Resist the argument that depreciation allowed in earlier years is itself the measure of the surplus — the Court rejected exactly that inference. Keep the record clean: no purchase price allocation given to the department, no asset schedules with figures, no valuation used to fix the price. Anything of that kind moves the case from this judgment to Artex. Read the two judgments together in any reply — this one was decided on the same day and expressly by reference to Artex, and the distinction between them is the whole of the argument. For a current transaction, note that even where the characterisation holds, the consideration for a slump sale is now the fair market value under Rule 11UAE and not the agreed lump sum. Deal with the status question and the capital gains question separately - they were separate questions here and were answered differently.
Still good law. The evidential principle stands and is the mirror of Artex Manufacturing Co., which has been relied on by the Supreme Court as recently as Equinox Solution (2017). The statutory setting has moved on in the same way as for Artex: s.41(2) no longer operates in the ordinary way for assets within a block, s.50B has governed slump sales since AY 2000-01, and s.50B(2) was substituted from AY 2021-22. Later citation history of this particular judgment was not checked; no decision doubting it was located. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two date conflicts have to be recorded. This judgment is carried twice in the reports, once under the date 8 March 1997 and once under 8 July 1997. The text used here is the first of the two, and because it states that the Artex judgment was 'pronounced today' in Civil Appeal No. 2276 of 1981, which the Artex report dates 8 July 1997, that is the date recorded on this page. Of the two reports only the first sets out the reasoning and the disposal; the second carries neither, and nothing on this page is taken from it. The two are one judgment in two reports: the same opening reference to the Gujarat High Court judgment of 29 August 1980, the same facts, the same reliance on Artex Manufacturing, and the same cross-reference to that case having been pronounced the same day. The JUDIS header on the second report states the date of judgment as 8 July 1997, which is the date Artex itself carries, and that document names the full Bench. The 8 March 1997 date appears nowhere in the first document's own text. The first report names only S.C. Agrawal J, so the bench field records only what is established rather than assuming that the Bench matched the one in Artex. One misprint in the report is corrected in this entry and is recorded here instead. Paragraph 1 states that 'The present appeal relates to questions Nos. 2, 4 and 5 which have been answered against the Revenue', but question 5 was answered in favour of the Revenue by the High Court, and the judgment's own discussion in paragraphs 2 and 3 deals with questions 2, 4 and 8. The '5' is read here as a misprint for '8'. Two limits on what this decision settles. It is a case about apportionment: where the agreement fixes no price for the depreciable assets and none can be attributed to them, the s.41(2) balancing charge has no figure to work on. It says nothing about a case where the agreement does assign values, or where values can be attributed on the evidence, and it decides nothing under the slump sale definition in s.2(42C) or the computation machinery in s.50B, neither of which was on the statute book in the form in which a reader will now find them. Anyone applying it to a current transaction must begin with those provisions and not with this judgment. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was partly allowed: the High Court's answer to question 8 (relief on the basis of two circulars) was set aside and that question was answered in favour of the Revenue for the reasons given in Artex Manufacturing Co.; the answers to questions 2 and 4 were affirmed; no order as to costs. On question 2, s.41(2) was rightly held inapplicable, because in the present case there was nothing to indicate the price attributable to assets such as the machinery, plant or building out of the consideration of Rs.8 lakhs, and merely because Rs.3,32,863 had been allowed as depreciation to the firm it could not be said that that was the excess between the price and the written down value. On question 4, the High Court's view on status was affirmed on the same footing as in Artex Manufacturing Co.
TaxSphere, “CIT v Electric Control Gear Mfg. Co.”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-electric-control-gear-no-price-attributable-no-charge/ (validity last checked 2026-09-08)
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I sold my firm's business to a company as a going concern for one lump sum. Is the surplus on plant and machinery still taxable as a balancing charge?
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The Assessing Officer has broken our lump sum into building, plant and paint shop and charged short-term capital gains, relying on the values the buyer later put in its own books. Can he apportion a slump price like that?
