We sold our entire business to a company as a going concern for one lump sum — can the Assessing Officer bring the depreciation allowed earlier to tax under section 41(2)?
No, not on these facts. The Supreme Court held that where a firm transfers the entire assets of its business with liabilities as a going concern for a lump sum, and nothing indicates the price attributable to machinery, plant or building out of that consideration, section 41(2) cannot be applied. The fact that a given sum had been allowed as depreciation does not show that it is the excess of price over written down value. The Court affirmed the High Court on that question and on the assessee's status as a registered firm, but reversed it on the circulars question, which was answered for the Revenue. The appeal was partly allowed.
Decided by the Supreme Court (Supreme Court of India; judgment delivered by S.C. Agrawal, J.) on 1997-03-08, reported as (1997) 141 CTR (SC) 302. It bears on section 41(2), section 45, section 114 of the Income Tax Act 1961, in Capital Gains and Assessment & Scrutiny matters.
This is the case that pairs with Artex Manufacturing, decided by the same Bench on the same day, and together they mark the line for the balancing charge on a going-concern sale. In Artex the price attributable to plant, machinery and dead stock had been disclosed during assessment and matched a valuer's figures, so section 41(2) bit. Here the lump sum was never broken up, so it did not. The practical lesson is about the record rather than the label: the Revenue must be able to point to a price for the depreciable assets, and it cannot manufacture one from the quantum of depreciation previously allowed. Advisers structuring or defending a business transfer will find the whole issue turns on what the agreement and the assessment record show about allocation.
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The matter relates to assessment year 1967-68. The assessee was a partnership of 13 partners. On 31 March 1966 it transferred the entire assets of its business together with liabilities as a going concern to a limited company, Electric Control Gear Pvt Ltd, for Rs 8 lakhs, and the erstwhile partners were allotted shares of the same value in their profit-sharing proportion. The Income-tax Officer held that depreciation of Rs 3,32,863 allowed to the firm on the transferred assets was chargeable under section 41(2), and also taxed capital gains of Rs 8 lakhs, including Rs 7,95,000 after the basic exemption of Rs 5,000. The Appellate Assistant Commissioner upheld the charge under section 41(2) but held that capital gains could not be taxed in the hands of a registered firm under section 114. Both sides appealed. The Tribunal remitted the matter for recomputation of the amounts chargeable under section 41(2) and as capital gains, and held the correct status was registered firm and not association of persons. Eight questions went to the Gujarat High Court, which answered questions 1, 3 and 5 for the Revenue and questions 2, 4 and 8 for the assessee.
The appeal was partly allowed. On question 2, section 41(2) was rightly held inapplicable: in this case there was nothing to indicate the price attributable to assets such as machinery, plant or building out of the consideration of Rs 8 lakhs, and merely because Rs 3,32,863 had been allowed to the firm as depreciation it could not be said that this was the excess between price and written down value. On question 4, the status of the assessee, the High Court had taken the view it took in Artex Manufacturing Co., and that view was affirmed. On question 8, whether the assessee was entitled to relief on the basis of two circulars, the High Court's answer was set aside and the question answered in the affirmative, in favour of the Revenue, for the reasons given in the Court's judgment of the same day in CIT v. Artex Manufacturing Co. The answers to questions 2 and 4 were affirmed and there was no order as to costs.
The Court decided the case as a companion to Artex Manufacturing, which it delivered the same day. In Artex it had held section 41(2) applicable because the price attributable to the plant, machinery and dead stock transferred 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 when the agreement was executed. The balancing charge under section 41(2) therefore depends on there being a money value ascribed to the depreciable assets out of the total consideration. In the present case the record showed nothing of the kind: the sale was of the entire business with liabilities as a going concern for Rs 8 lakhs, and no part of that sum was attributed to machinery, plant or building. The Revenue's attempt to work backwards from the depreciation allowance of Rs 3,32,863 was rejected, because the amount of depreciation earlier allowed says nothing about the relationship between the price obtained and the written down value. The status question was governed by the same reasoning as in Artex, and the circulars question was answered against the assessee for the reasons already given in that judgment.
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, not on these facts. The Supreme Court held that where a firm transfers the entire assets of its business with liabilities as a going concern for a lump sum, and nothing indicates the price attributable to machinery, plant or building out of that consideration, section 41(2) cannot be applied. The fact that a given sum had been allowed as depreciation does not show that it is the excess of price over written down value. The Court affirmed the High Court on that question and on the assessee's status as a registered firm, but reversed it on the circulars question, which was answered for the Revenue. The appeal was partly allowed. This was decided by the Supreme Court (Supreme Court of India; judgment delivered by S.C. Agrawal, J.) and bears on section 41(2), section 45, section 114 of the Income Tax Act 1961. It is reported as (1997) 141 CTR (SC) 302. This is the case that pairs with Artex Manufacturing, decided by the same Bench on the same day, and together they mark the line for the balancing charge on a going-concern sale. In Artex the price attributable to plant, machinery and dead stock had been disclosed during assessment and matched a valuer's figures, so section 41(2) bit. Here the lump sum was never broken up, so it did not. The practical lesson is about the record rather than the label: the Revenue must be able to point to a price for the depreciable assets, and it cannot manufacture one from the quantum of depreciation previously allowed. Advisers structuring or defending a business transfer will find the whole issue turns on what the agreement and the assessment record show about allocation. If it applies to you, the first step is this: Check whether any document — the agreement, a valuation report, a schedule, a statement filed in the assessment — attributes part of the consideration to depreciable assets before conceding a balancing charge.
The matter relates to assessment year 1967-68. The assessee was a partnership of 13 partners. On 31 March 1966 it transferred the entire assets of its business together with liabilities as a going concern to a limited company, Electric Control Gear Pvt Ltd, for Rs 8 lakhs, and the erstwhile partners were allotted shares of the same value in their profit-sharing proportion. The Income-tax Officer held that depreciation of Rs 3,32,863 allowed to the firm on the transferred assets was chargeable under section 41(2), and also taxed capital gains of Rs 8 lakhs, including Rs 7,95,000 after the basic exemption of Rs 5,000. The Appellate Assistant Commissioner upheld the charge under section 41(2) but held that capital gains could not be taxed in the hands of a registered firm under section 114. Both sides appealed. The Tribunal remitted the matter for recomputation of the amounts chargeable under section 41(2) and as capital gains, and held the correct status was registered firm and not association of persons. Eight questions went to the Gujarat High Court, which answered questions 1, 3 and 5 for the Revenue and questions 2, 4 and 8 for the assessee. The matter was decided on 1997-03-08 by the Supreme Court (Supreme Court of India; judgment delivered by S.C. Agrawal, J.). On those facts the Supreme Court held as follows. The appeal was partly allowed. On question 2, section 41(2) was rightly held inapplicable: in this case there was nothing to indicate the price attributable to assets such as machinery, plant or building out of the consideration of Rs 8 lakhs, and merely because Rs 3,32,863 had been allowed to the firm as depreciation it could not be said that this was the excess between price and written down value. On question 4, the status of the assessee, the High Court had taken the view it took in Artex Manufacturing Co., and that view was affirmed. On question 8, whether the assessee was entitled to relief on the basis of two circulars, the High Court's answer was set aside and the question answered in the affirmative, in favour of the Revenue, for the reasons given in the Court's judgment of the same day in CIT v. Artex Manufacturing Co. The answers to questions 2 and 4 were affirmed and there was no order as to costs.
The Court decided the case as a companion to Artex Manufacturing, which it delivered the same day. In Artex it had held section 41(2) applicable because the price attributable to the plant, machinery and dead stock transferred 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 when the agreement was executed. The balancing charge under section 41(2) therefore depends on there being a money value ascribed to the depreciable assets out of the total consideration. In the present case the record showed nothing of the kind: the sale was of the entire business with liabilities as a going concern for Rs 8 lakhs, and no part of that sum was attributed to machinery, plant or building. The Revenue's attempt to work backwards from the depreciation allowance of Rs 3,32,863 was rejected, because the amount of depreciation earlier allowed says nothing about the relationship between the price obtained and the written down value. The status question was governed by the same reasoning as in Artex, and the circulars question was answered against the assessee for the reasons already given in that judgment. 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"
It was decided by the Supreme Court on 1997-03-08 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 114, 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. On question 2, section 41(2) was rightly held inapplicable: in this case there was nothing to indicate the price attributable to assets such as machinery, plant or building out of the consideration of Rs 8 lakhs, and merely because Rs 3,32,863 had been allowed to the firm as depreciation it could not be said that this was the excess between price and written down value. On question 4, the status of the assessee, the High Court had taken the view it took in Artex Manufacturing Co., and that view was affirmed. On question 8, whether the assessee was entitled to relief on the basis of two circulars, the High Court's answer was set aside and the question answered in the affirmative, in favour of the Revenue, for the reasons given in the Court's judgment of the same day in CIT v. Artex Manufacturing Co. The answers to questions 2 and 4 were affirmed and there was no order as to costs. It arises in Capital Gains and Assessment & Scrutiny matters, on section 41(2), section 45, section 114 of the Income Tax Act 1961, and was decided by Supreme Court of India; judgment delivered by S.C. 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. If you want the Artex result avoided, keep the consideration for the undertaking a single lump sum and do not file an itemised valuation during assessment. Meet an assessment that treats the depreciation allowed as the balancing charge head on: the Court held that figure proves nothing about the excess of price over written down value. Deal with the status question and the capital gains question separately — they were separate questions here and were answered differently.
Superseded by amendment. The evidentiary principle stands and the source page records the decision as widely followed. But the charge has been recast: section 41(2) no longer applies to most assessees, and slump sale is now separately defined and charged as capital gains with its own computation, so the outcome on a modern slump sale is governed by those provisions and not by this case. 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.
The library had carried a second page for this same judgment at /caselaw/case/cit-v-electric-control-gear-slump-sale-section-41-2/; the two have been merged and that address now redirects here. The judgment says the appeal relates to questions 2, 4 and 5 answered against the Revenue, but question 5 had been answered in the Revenue's favour and the discussion and final order deal with questions 2, 4 and 8; I have followed the discussion and the order. The reasoning depends on the companion judgment in CIT v. Artex Manufacturing Co., which is not in this text, so what Artex decided is stated here only as this judgment describes it. The Court does not touch questions 1, 3 and 5, which the High Court decided against the assessee, and the definition of slump sale in section 2(42C) is not before it. Only one citation was harvested. No later history checked. 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. On question 2, section 41(2) was rightly held inapplicable: in this case there was nothing to indicate the price attributable to assets such as machinery, plant or building out of the consideration of Rs 8 lakhs, and merely because Rs 3,32,863 had been allowed to the firm as depreciation it could not be said that this was the excess between price and written down value. On question 4, the status of the assessee, the High Court had taken the view it took in Artex Manufacturing Co., and that view was affirmed. On question 8, whether the assessee was entitled to relief on the basis of two circulars, the High Court's answer was set aside and the question answered in the affirmative, in favour of the Revenue, for the reasons given in the Court's judgment of the same day in CIT v. Artex Manufacturing Co. The answers to questions 2 and 4 were affirmed and there was no order as to costs.
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