My client sold its whole running business in one go. The Assessing Officer says the plant and machinery were part of a block on which depreciation was allowed, so the gain is short-term under s.50. Is he right?
No. Where the entire running business with all its assets and liabilities is sold in one go, the short-term fiction in s.50 has no application; the undertaking itself is the capital asset, and if it was held for the long-term period the gain is long-term. The Supreme Court dismissed the Revenue's appeal.
Decided by the Supreme Court (R.K. Agrawal J and Abhay Manohar Sapre J (judgment by Abhay Manohar Sapre J)) on 2017-04-18, reported as Civil Appeal No. 4399 of 2007 (Supreme Court of India). It bears on section 50, section 48, section 45, section 2(42C), section 50B of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
This is the Supreme Court's answer to the single most common attack on a business transfer — that because depreciation was claimed on the assets inside the undertaking, the gain must be short-term. It matters for the rate of tax, for indexation in pre-s.50B years, and for the exemption sections that require a long-term asset. It is now also the judicial support for the structure of s.50B(1), under which the gain on a slump sale is long-term if the undertaking was owned and held for more than thirty-six months, whatever the holding period of the individual assets inside it. Note the limit: the case is AY 1991-92, decided under s.48(2) and s.50(2) as they then stood, before s.50B existed. For a transfer today the computation is governed by s.50B, and the full value of consideration is the fair market value under Rule 11UAE, not the price in the agreement. The characterisation point in this judgment survives; the computation in it does not.
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The assessee manufactured sheet metal components out of CRPA and OP sheds at Ahmedabad. It decided to sell its entire running business in one go, and on 31 December 1990 sold that business with all its assets and liabilities to Amtrex Appliances Ltd for Rs.58,53,682. For AY 1991-92 it returned the gain as a long-term capital gain on a slump sale of a going concern and claimed deduction under s.48(2) as it then stood. By order dated 4 March 1994 the Assessing Officer held the case fell under s.50(2) as a short-term capital gain and reworked the deduction. The CIT(Appeals) allowed the assessee's appeal on 6 October 1995, holding that the assessee had sold its entire running business in one go with assets and liabilities at a slump price, that this was not the sale of any individual or one block asset, and that the undertaking had been owned for nearly six years and was a long-term capital asset. The Tribunal concurred on 27 June 2002 and the Gujarat High Court dismissed the Revenue's s.260A appeal on 29 July 2003 for want of a substantial question of law. The Revenue appealed by special leave.
The appeal was dismissed. Section 50(2) applies where the assessee transfers one or more blocks of assets used in running the business; it does not apply where the entire running business with assets and liabilities is sold in one go, and such a sale cannot be considered a transfer of short-term capital assets (para 11). The entire running business having been sold in one go, it was a slump sale of a long-term capital asset and had to be taxed accordingly (para 12). The Court recorded that counsel for the Revenue was unable to cite any decision taking a contrary view or to point out any error in the decisions cited for the assessee (para 15).
The Court found no fault in the reasoning of the CIT(Appeals), upheld by the Tribunal and the High Court, and held that the case did not fall within the four corners of s.50(2) (paras 10-11). The distinction it drew is between a transfer of one or more blocks of assets used in the business, which is what s.50(2) is aimed at, and the sale of the business itself as a running concern; the assessee here had done the latter. Because the undertaking was the capital asset and it had been held for about six years, the gain was on a long-term capital asset (para 12). The Court said its view found support in Artex Manufacturing Co. (para 13) and expressly concurred with the Bombay High Court's exposition in Premier Automobiles Ltd v. ITO, 264 ITR 193, delivered by Kapadia J as he then was, as correctly summarising the legal position on similar facts (para 14).
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, it was a slump sale of a "long-term capital asset".
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Handle my notice → Ask a CA on WhatsAppNo. Where the entire running business with all its assets and liabilities is sold in one go, the short-term fiction in s.50 has no application; the undertaking itself is the capital asset, and if it was held for the long-term period the gain is long-term. The Supreme Court dismissed the Revenue's appeal. This was decided by the Supreme Court (R.K. Agrawal J and Abhay Manohar Sapre J (judgment by Abhay Manohar Sapre J)) and bears on section 50, section 48, section 45, section 2(42C), section 50B of the Income Tax Act 1961. It is reported as Civil Appeal No. 4399 of 2007 (Supreme Court of India). This is the Supreme Court's answer to the single most common attack on a business transfer — that because depreciation was claimed on the assets inside the undertaking, the gain must be short-term. It matters for the rate of tax, for indexation in pre-s.50B years, and for the exemption sections that require a long-term asset. It is now also the judicial support for the structure of s.50B(1), under which the gain on a slump sale is long-term if the undertaking was owned and held for more than thirty-six months, whatever the holding period of the individual assets inside it. Note the limit: the case is AY 1991-92, decided under s.48(2) and s.50(2) as they then stood, before s.50B existed. For a transfer today the computation is governed by s.50B, and the full value of consideration is the fair market value under Rule 11UAE, not the price in the agreement. The characterisation point in this judgment survives; the computation in it does not. If it applies to you, the first step is this: Establish on the documents that what was sold was the business as a running concern with assets and liabilities together, not a block of assets — the sale deed, the employee transfers, the liabilities assumed and the continuity of operations after the date of transfer are the proof.
The assessee manufactured sheet metal components out of CRPA and OP sheds at Ahmedabad. It decided to sell its entire running business in one go, and on 31 December 1990 sold that business with all its assets and liabilities to Amtrex Appliances Ltd for Rs.58,53,682. For AY 1991-92 it returned the gain as a long-term capital gain on a slump sale of a going concern and claimed deduction under s.48(2) as it then stood. By order dated 4 March 1994 the Assessing Officer held the case fell under s.50(2) as a short-term capital gain and reworked the deduction. The CIT(Appeals) allowed the assessee's appeal on 6 October 1995, holding that the assessee had sold its entire running business in one go with assets and liabilities at a slump price, that this was not the sale of any individual or one block asset, and that the undertaking had been owned for nearly six years and was a long-term capital asset. The Tribunal concurred on 27 June 2002 and the Gujarat High Court dismissed the Revenue's s.260A appeal on 29 July 2003 for want of a substantial question of law. The Revenue appealed by special leave. The matter was decided on 2017-04-18 by the Supreme Court (R.K. Agrawal J and Abhay Manohar Sapre J (judgment by Abhay Manohar Sapre J)). On those facts the Supreme Court held as follows. The appeal was dismissed. Section 50(2) applies where the assessee transfers one or more blocks of assets used in running the business; it does not apply where the entire running business with assets and liabilities is sold in one go, and such a sale cannot be considered a transfer of short-term capital assets (para 11). The entire running business having been sold in one go, it was a slump sale of a long-term capital asset and had to be taxed accordingly (para 12). The Court recorded that counsel for the Revenue was unable to cite any decision taking a contrary view or to point out any error in the decisions cited for the assessee (para 15).
The Court found no fault in the reasoning of the CIT(Appeals), upheld by the Tribunal and the High Court, and held that the case did not fall within the four corners of s.50(2) (paras 10-11). The distinction it drew is between a transfer of one or more blocks of assets used in the business, which is what s.50(2) is aimed at, and the sale of the business itself as a running concern; the assessee here had done the latter. Because the undertaking was the capital asset and it had been held for about six years, the gain was on a long-term capital asset (para 12). The Court said its view found support in Artex Manufacturing Co. (para 13) and expressly concurred with the Bombay High Court's exposition in Premier Automobiles Ltd v. ITO, 264 ITR 193, delivered by Kapadia J as he then was, as correctly summarising the legal position on similar facts (para 14). In the words reproduced by the source cited on this page: "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, it was a slump sale of a "long-term capital asset"." The decision followed or applied CIT, Gujarat v. Artex Manufacturing Co., 1997(6) SCC 437 — relied on as support; Premier Automobiles Ltd v. ITO & Anr., 264 ITR 193 (Bom) — concurred with.
It was decided by the Supreme Court on 2017-04-18 and is reported as Civil Appeal No. 4399 of 2007 (Supreme Court of India). 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 50, section 48, 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 helps the taxpayer. The appeal was dismissed. Section 50(2) applies where the assessee transfers one or more blocks of assets used in running the business; it does not apply where the entire running business with assets and liabilities is sold in one go, and such a sale cannot be considered a transfer of short-term capital assets (para 11). The entire running business having been sold in one go, it was a slump sale of a long-term capital asset and had to be taxed accordingly (para 12). The Court recorded that counsel for the Revenue was unable to cite any decision taking a contrary view or to point out any error in the decisions cited for the assessee (para 15). It arises in Capital Gains and How Tax Law Is Read matters, on section 50, section 48, section 45, section 2(42C), section 50B of the Income Tax Act 1961, and was decided by R.K. Agrawal J and Abhay Manohar Sapre J (judgment by Abhay Manohar Sapre 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. Show how long the undertaking itself was owned and held; under s.50B(1) more than thirty-six months makes the gain long-term irrespective of when the individual assets inside it were bought. If the Assessing Officer applies s.50 asset by asset, put this judgment and Premier Automobiles to him and ask him to identify which block he says was transferred. For a transfer in AY 2021-22 or later, do not carry the computation across from this case — compute the deemed consideration under s.50B(2)(ii) with Rule 11UAE and take net worth as the cost under s.50B(2)(i). Remember there is no indexation in a s.50B computation: s.50B(2)(i) disapplies the second proviso to s.48.
Still good law. The characterisation holding — a running business sold in one go is a single long-term capital asset, not a block of assets under s.50 — has not been displaced and is now mirrored in s.50B(1). But the case is AY 1991-92 and the computation in it (s.48(2) deduction, no s.50B) is obsolete: s.50B was inserted by the Finance Act 1999 from AY 2000-01, and s.50B(2) was SUBSTITUTED by the Finance Act 2021 from AY 2021-22 so that the full value of consideration is the fair market value under Rule 11UAE and not the agreed price. Later treatment of the judgment itself was not exhaustively checked. 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 full judgment was read in raw form from indiankanoon ?type=print, header through the signature block, and the quoted sentence was separately re-confirmed word for word through /docfragment/. Paragraph numbering in the source is inconsistent — some paragraphs are printed as '(5)' and '(6)' with brackets and others as '5)' — which is how the report itself reads. The judgment refers to Artex Manufacturing as '1997(6) SCC 437 CIT', which is how the citation is printed in the report. 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 dismissed. Section 50(2) applies where the assessee transfers one or more blocks of assets used in running the business; it does not apply where the entire running business with assets and liabilities is sold in one go, and such a sale cannot be considered a transfer of short-term capital assets (para 11). The entire running business having been sold in one go, it was a slump sale of a long-term capital asset and had to be taxed accordingly (para 12). The Court recorded that counsel for the Revenue was unable to cite any decision taking a contrary view or to point out any error in the decisions cited for the assessee (para 15).
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