We sold our land development business as a going concern for a lump sum, and the schedule to the agreement showed a figure for land. Can the officer tax a profit on the land as stock-in-trade?
No. The Supreme Court held that the sale was of the whole concern and that no part of the slump price was attributable to the cost of the land, so no part of it was taxable. The firm was not carrying on a business of purely buying and selling land; it bought land, developed it and sold it, and the agreement itself recorded liabilities for roads, drains, sanitation, electricity and a school. The figure for land in the schedule was the cost price as it stood in the books, and there was no evidence of any attempt to value the land at the date of sale.
Decided by the Supreme Court (Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J)) on 1965-03-31, reported as 1966 AIR 50; 1965 SCR (3) 611. It bears on section 66 of the Indian Income-tax Act, 1922, section 28, section 45, section 2(42C) of the Income Tax Act 1961, in Capital Gains matters.
This is the Indian slump sale case built on Doughty v Commissioner of Taxes. It supplies the two questions to ask. Was the sale a realisation of the concern as a whole, or an ordinary trading sale? And if it was the former, is any part of the price attributable to stock-in-trade? Doughty's warning was that in a business of purely buying and selling the two are hard to tell apart; the Court's answer is that where land is bought, developed and then sold, the distinction is easy to draw and it becomes very difficult to attribute part of a slump price to the cost of the land. The reasoning about the schedule is the practical part: an itemised figure carried over from the books is a cost figure, not a valuation, and does not create an attributable profit.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The respondent firm carried on the business of land development in Calcutta. By an agreement of 7 July 1948 its partners agreed to sell the whole business, with effect from 8 July 1948, to Amalgamated Development Limited, a company promoted by those same partners, together with the goodwill, stock in trade, fixtures, tools, furniture, fittings and the benefit of all contracts. The price of Rs 34,99,300 was satisfied by allotting the vendors or their nominees 17,500 redeemable preference shares and 17,493 ordinary shares of Rs 100 each. The company undertook the firm's debts and liabilities, including development expenses such as opening out roads, laying drains, sanitary arrangements, providing electricity and providing a school at Tollygunge under an undertaking given to the municipality, and the liability for deposits made by intending purchasers of land. A schedule arrived at the price by listing land at Rs 12,68,628-7-7, goodwill at Rs 2,50,000, motor cars and lorries, furniture and fixtures, mortgages, deposits, advances and cash, less liabilities. The Income-tax Officer treated the Rs 2,50,000 as a lump sum of profit on the sale of stock in trade rather than goodwill. The Appellate Assistant Commissioner held it was goodwill and, the transfer being of a going concern, not taxable. The Tribunal held there was little goodwill and that the Rs 2,50,000 was really the excess value of the land, but dismissed the Department's appeal on the ground that the transaction was a mere adjustment of the partners' business position and that book-keeping entries were not evidence of profit. The Calcutta High Court answered the fourth question by holding there was no profit, and answered the second against the assessee and the third in its favour.
The appeal was dismissed with costs. The third referred question - whether by the sale of the whole business concern there was a taxable profit of Rs 2,50,000 - was answered in the negative, and in view of that answer the second and fourth questions were not answered; the first had been given up before the High Court. The Tribunal had held the sale to be a sale of a business as a going concern, and clause 1 of the agreement bore that out, so Doughty applied and the only remaining question was whether any part of the slump price was attributable to stock in trade. It was not. On these facts the vendors were not carrying on a business of purely buying and selling land: they bought land, developed it and then sold it, as the agreement's recital of development liabilities showed. In such a business a realisation sale is easy to distinguish from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of the land sold. The statement of the price of land in the schedule did not lead to the conclusion that part of the price was necessarily attributable to it; what was put in the schedule was the cost price as it stood in the vendors' books, no attempt had been made to evaluate the land at the date of sale, and none would ordinarily have been made where the concern was being transferred to a company constituted by the vendors themselves. Even adding the Rs 2,50,000 to the cost of land, nobody suggested the total was the market value.
The Court took its framework from Doughty, where two partners sold their New Zealand merchant business to a company in which they were the only shareholders, and a new balance sheet showing a higher stock value was treated by the Commissioner as producing a taxable profit. The Privy Council held for the taxpayer on the footing that if the transaction were a sale there was no separate sale of the stock and no valuation of the stock as an item in the aggregate sold. Lord Phillimore's reasoning has two edges. Income tax being a tax on income, the sale of a whole concern at a price above cost or book value does not give rise to a taxable profit. But where the business consists entirely in buying and selling, a realisation sale is harder to tell from an ordinary one, and if an item could be traced as representing the stock sold, the profit on it might conceivably be taxable even though made in conjunction with the sale of the whole concern. The Court had already read Doughty in West Coast Chemicals as showing that where a slump price is paid and no portion is attributable to stock in trade, there may be no profit beyond an appreciation of capital, the essence being whether it can fairly be said that there was a trading. Applying that, the Court answered the Revenue's two points: the business was not one of purely buying and selling, and the itemisation in the schedule did not make any part of the price attributable to the land. It did not need to decide the Revenue's argument that the corporate veil could not be lifted to identify the vendors with the shareholders of the vendee.
The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that the sale was of the whole concern and that no part of the slump price was attributable to the cost of the land, so no part of it was taxable. The firm was not carrying on a business of purely buying and selling land; it bought land, developed it and sold it, and the agreement itself recorded liabilities for roads, drains, sanitation, electricity and a school. The figure for land in the schedule was the cost price as it stood in the books, and there was no evidence of any attempt to value the land at the date of sale. This was decided by the Supreme Court (Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J)) and bears on section 66 of the Indian Income-tax Act, 1922, section 28, section 45, section 2(42C) of the Income Tax Act 1961. It is reported as 1966 AIR 50; 1965 SCR (3) 611. This is the Indian slump sale case built on Doughty v Commissioner of Taxes. It supplies the two questions to ask. Was the sale a realisation of the concern as a whole, or an ordinary trading sale? And if it was the former, is any part of the price attributable to stock-in-trade? Doughty's warning was that in a business of purely buying and selling the two are hard to tell apart; the Court's answer is that where land is bought, developed and then sold, the distinction is easy to draw and it becomes very difficult to attribute part of a slump price to the cost of the land. The reasoning about the schedule is the practical part: an itemised figure carried over from the books is a cost figure, not a valuation, and does not create an attributable profit. If it applies to you, the first step is this: Check the current statutory treatment of a slump sale before relying on this case, because the Act now has a definition and a computation provision for such sales that did not exist when it was decided.
The respondent firm carried on the business of land development in Calcutta. By an agreement of 7 July 1948 its partners agreed to sell the whole business, with effect from 8 July 1948, to Amalgamated Development Limited, a company promoted by those same partners, together with the goodwill, stock in trade, fixtures, tools, furniture, fittings and the benefit of all contracts. The price of Rs 34,99,300 was satisfied by allotting the vendors or their nominees 17,500 redeemable preference shares and 17,493 ordinary shares of Rs 100 each. The company undertook the firm's debts and liabilities, including development expenses such as opening out roads, laying drains, sanitary arrangements, providing electricity and providing a school at Tollygunge under an undertaking given to the municipality, and the liability for deposits made by intending purchasers of land. A schedule arrived at the price by listing land at Rs 12,68,628-7-7, goodwill at Rs 2,50,000, motor cars and lorries, furniture and fixtures, mortgages, deposits, advances and cash, less liabilities. The Income-tax Officer treated the Rs 2,50,000 as a lump sum of profit on the sale of stock in trade rather than goodwill. The Appellate Assistant Commissioner held it was goodwill and, the transfer being of a going concern, not taxable. The Tribunal held there was little goodwill and that the Rs 2,50,000 was really the excess value of the land, but dismissed the Department's appeal on the ground that the transaction was a mere adjustment of the partners' business position and that book-keeping entries were not evidence of profit. The Calcutta High Court answered the fourth question by holding there was no profit, and answered the second against the assessee and the third in its favour. The matter was decided on 1965-03-31 by the Supreme Court (Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, J)). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. The third referred question - whether by the sale of the whole business concern there was a taxable profit of Rs 2,50,000 - was answered in the negative, and in view of that answer the second and fourth questions were not answered; the first had been given up before the High Court. The Tribunal had held the sale to be a sale of a business as a going concern, and clause 1 of the agreement bore that out, so Doughty applied and the only remaining question was whether any part of the slump price was attributable to stock in trade. It was not. On these facts the vendors were not carrying on a business of purely buying and selling land: they bought land, developed it and then sold it, as the agreement's recital of development liabilities showed. In such a business a realisation sale is easy to distinguish from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of the land sold. The statement of the price of land in the schedule did not lead to the conclusion that part of the price was necessarily attributable to it; what was put in the schedule was the cost price as it stood in the vendors' books, no attempt had been made to evaluate the land at the date of sale, and none would ordinarily have been made where the concern was being transferred to a company constituted by the vendors themselves. Even adding the Rs 2,50,000 to the cost of land, nobody suggested the total was the market value.
The Court took its framework from Doughty, where two partners sold their New Zealand merchant business to a company in which they were the only shareholders, and a new balance sheet showing a higher stock value was treated by the Commissioner as producing a taxable profit. The Privy Council held for the taxpayer on the footing that if the transaction were a sale there was no separate sale of the stock and no valuation of the stock as an item in the aggregate sold. Lord Phillimore's reasoning has two edges. Income tax being a tax on income, the sale of a whole concern at a price above cost or book value does not give rise to a taxable profit. But where the business consists entirely in buying and selling, a realisation sale is harder to tell from an ordinary one, and if an item could be traced as representing the stock sold, the profit on it might conceivably be taxable even though made in conjunction with the sale of the whole concern. The Court had already read Doughty in West Coast Chemicals as showing that where a slump price is paid and no portion is attributable to stock in trade, there may be no profit beyond an appreciation of capital, the essence being whether it can fairly be said that there was a trading. Applying that, the Court answered the Revenue's two points: the business was not one of purely buying and selling, and the itemisation in the schedule did not make any part of the price attributable to the land. It did not need to decide the Revenue's argument that the corporate veil could not be lifted to identify the vendors with the shareholders of the vendee. In the words reproduced by the source cited on this page: "The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold."
It was decided by the Supreme Court on 1965-03-31 and is reported as 1966 AIR 50; 1965 SCR (3) 611. 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 66 of the Indian Income-tax Act, 1922, section 28, section 45, section 2(42C), 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 with costs. The third referred question - whether by the sale of the whole business concern there was a taxable profit of Rs 2,50,000 - was answered in the negative, and in view of that answer the second and fourth questions were not answered; the first had been given up before the High Court. The Tribunal had held the sale to be a sale of a business as a going concern, and clause 1 of the agreement bore that out, so Doughty applied and the only remaining question was whether any part of the slump price was attributable to stock in trade. It was not. On these facts the vendors were not carrying on a business of purely buying and selling land: they bought land, developed it and then sold it, as the agreement's recital of development liabilities showed. In such a business a realisation sale is easy to distinguish from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of the land sold. The statement of the price of land in the schedule did not lead to the conclusion that part of the price was necessarily attributable to it; what was put in the schedule was the cost price as it stood in the vendors' books, no attempt had been made to evaluate the land at the date of sale, and none would ordinarily have been made where the concern was being transferred to a company constituted by the vendors themselves. Even adding the Rs 2,50,000 to the cost of land, nobody suggested the total was the market value. It arises in Capital Gains matters, on section 66 of the Indian Income-tax Act, 1922, section 28, section 45, section 2(42C) of the Income Tax Act 1961, and was decided by Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Sikri, 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 do rely on the reasoning, show that the schedule figures are book costs carried across and that no valuation exercise was done at the date of sale. Establish that the business is more than buying and selling - development activity, undertakings to a municipality, work in progress - because that is what let the Court distinguish a realisation sale here. Sell the concern as a whole, with the goodwill and the benefit of contracts, rather than itemising the assets as separate sales.
Validity check could not be completed. Only this judgment was read. It was decided under the 1922 Act on general principles, and the batch line points to a definition of slump sale in the 1961 Act which did not exist at the time and which was not read as part of this exercise, nor was the computation provision that goes with it. The reasoning on realisation sales and on the evidential weight of a schedule remains instructive, but whether the result survives the current statutory treatment of slump sales has not been 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 judgment cites no charging or computation section at all, the reference having come under section 66 of the Indian Income-tax Act, 1922; the sections listed here are those the batch line records and where the subject is dealt with today, not provisions the Court construed - and the slump sale definition it names was introduced long afterwards. Only the third question was answered: the Court expressly left unanswered whether the Rs 2,50,000 was goodwill or surplus on land, and whether there was any profit at all given that the vendors took the vendee's shares, so the Revenue's argument that the corporate veil could not be lifted was not decided. The harvested page names the bench in its citation line as Sikri and Shah, JJ while its bench block also lists K. Subba Rao, J; the two named in the citation line have been given. The page carries a reporter's headnote before the judgment; it has been ignored. 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 with costs. The third referred question - whether by the sale of the whole business concern there was a taxable profit of Rs 2,50,000 - was answered in the negative, and in view of that answer the second and fourth questions were not answered; the first had been given up before the High Court. The Tribunal had held the sale to be a sale of a business as a going concern, and clause 1 of the agreement bore that out, so Doughty applied and the only remaining question was whether any part of the slump price was attributable to stock in trade. It was not. On these facts the vendors were not carrying on a business of purely buying and selling land: they bought land, developed it and then sold it, as the agreement's recital of development liabilities showed. In such a business a realisation sale is easy to distinguish from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of the land sold. The statement of the price of land in the schedule did not lead to the conclusion that part of the price was necessarily attributable to it; what was put in the schedule was the cost price as it stood in the vendors' books, no attempt had been made to evaluate the land at the date of sale, and none would ordinarily have been made where the concern was being transferred to a company constituted by the vendors themselves. Even adding the Rs 2,50,000 to the cost of land, nobody suggested the total was the market value.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Our JDA was never registered and the project collapsed. Am I still taxed on capital gains?
I was paid to stay out of the business. Is the non-compete money capital or income?
The AO says I sold below market value and wants to tax the difference. Can he do that?
We run a shopping mall. Is the income business income or income from house property?