My whole business was taken over for one lump sum with no item-wise breakup and I cannot work out what the undertaking cost me. Can the Department still tax me on capital gains?
No, not on those facts and not for years before section 50B. The Supreme Court held that where a business undertaking is transferred as a going concern for a composite price, the capital asset transferred is the undertaking itself, which includes intangibles such as goodwill, tenancy rights, manpower and the value of a banking licence whose cost is not determinable. Since the consideration could not be earmarked item-wise and no cost of acquisition could be found, the computation provisions failed, and on B.C. Srinivasa Setty the case fell outside section 45 altogether. Compensation of Rs 10.20 crore was not taxable.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J) on 2008-11-06, reported as Civil Appeal No. 3721 of 2002. It bears on section 45, section 48, section 41(2), section 55(2) of the Income Tax Act 1961, in Capital Gains matters.
This is the Supreme Court's clearest statement of the three tests for a slump transaction, and it rescues Mugneeram Bangur from the reading the Department had built on Artex Manufacturing. Artex was being cited for the proposition that cost can always be found on a going concern sale; PNB Finance points to Electric Control Gear, decided by the same Bench and printed 18 pages later in the same volume, and confines Artex to its facts, where a valuer had produced an itemised valuation that fixed the price. It also identifies the asset correctly: the undertaking, not the sum of its components. That distinction is what keeps section 45 out where the price was never built up asset by asset.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
Punjab National Bank Ltd, set up in 1895, was nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, its undertaking vesting in Punjab National Bank on 19 July 1969. The appellant, PNB Finance Ltd, received compensation of Rs 10.20 crore, computed by capitalising the last five years profits, in the year ended 31 December 1969, relevant to assessment year 1970-71. It returned income of Rs 2,03,364. In a covering letter of 30 September 1970 it said that, while denying that section 45 applied, it exercised its option to substitute the fair market value of the undertaking as on 1 January 1954, and claimed a capital loss of about Rs 7.02 crore by deducting a 1954 value of Rs 10,41,51,625 plus improvement cost of Rs 6,81,21,621. The Assessing Officer rejected the loss and computed a gain of Rs 1,65,34,709 on the capitalisation basis. The Appellate Assistant Commissioner held the compensation could not be allocated among the assets, so cost was indeterminate and nothing was taxable. The Tribunal restored the Assessing Officer's figure, reasoning that having exercised the 1954 option the assessee could not say cost was incomputable. On a reference under section 256(1) the Delhi High Court decided against the assessee, relying on Artex Manufacturing Co.
The appeal was allowed. On the facts of assessment year 1970-71 capital gains could not be computed, and the Rs 10.20 crore was not taxable under section 45. The impugned judgment of the Delhi High Court was set aside, with no order as to costs. Section 41(2) had no application: the Department had never relied on it and no authority below the High Court had, and in any event it applies only to a sale of depreciable assets where the consideration is capable of allocation between assets. Artex Manufacturing Co was distinguished because there a valuer's itemised report had fixed the price. Section 55(2)(i) never operationalised, because substituting the 1 January 1954 fair market value presupposes that both that figure and the cost of acquisition are ascertainable, the assessee's letter did not in fact make the choice, and the Assessing Officer's capitalisation of five years profits produced the enterprise value of the undertaking rather than its cost of acquisition.
The Court set out three tests. The first is that the charging section and the computation provisions are inextricably linked and together form an integrated code, so a case in which the computation provisions cannot apply was never intended to fall within section 45 - the rule of CIT v B.C. Srinivasa Setty (1981) 128 ITR 294. The second is the test of allocation or attribution, drawn from CIT v Mugneeram Bangur & Co (1965) 57 ITR 299: on a slump transaction one asks whether the price is capable of being attributed to individual assets, that is, whether there was item-wise earmarking. Where an entire business including depreciable assets and liabilities goes for a composite price with no item-wise earmarking, section 41(2) is not attracted; where the contract does show item-wise consideration, it is. The third is the conceptual difference between an undertaking and its components. Plant, machinery and dead stock are items within an undertaking, but an undertaking may also carry intangibles - goodwill, manpower, tenancy rights, the value of a banking licence - whose cost is not determinable. Applying these, the Court found no item-wise earmarking of the Rs 10.20 crore, unlike Artex where the valuer's figures had built up the price, and noted that the High Court had overlooked CIT v Electric Control Gear Manufacturing Co (1997) 227 ITR 278, in which the same Bench that decided Artex held that where a business is transferred as a going concern for a slump price and there is no evidence how the price was arrived at, section 41(2) does not apply. Cost of acquisition of the undertaking being unascertainable, section 48 could not work and section 45 could not bite.
the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45.
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, not on those facts and not for years before section 50B. The Supreme Court held that where a business undertaking is transferred as a going concern for a composite price, the capital asset transferred is the undertaking itself, which includes intangibles such as goodwill, tenancy rights, manpower and the value of a banking licence whose cost is not determinable. Since the consideration could not be earmarked item-wise and no cost of acquisition could be found, the computation provisions failed, and on B.C. Srinivasa Setty the case fell outside section 45 altogether. Compensation of Rs 10.20 crore was not taxable. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J) and bears on section 45, section 48, section 41(2), section 55(2) of the Income Tax Act 1961. It is reported as Civil Appeal No. 3721 of 2002. This is the Supreme Court's clearest statement of the three tests for a slump transaction, and it rescues Mugneeram Bangur from the reading the Department had built on Artex Manufacturing. Artex was being cited for the proposition that cost can always be found on a going concern sale; PNB Finance points to Electric Control Gear, decided by the same Bench and printed 18 pages later in the same volume, and confines Artex to its facts, where a valuer had produced an itemised valuation that fixed the price. It also identifies the asset correctly: the undertaking, not the sum of its components. That distinction is what keeps section 45 out where the price was never built up asset by asset. If it applies to you, the first step is this: Establish first what was actually transferred. If it was the undertaking as a whole, say so in those words and resist any attempt to recast the transaction as a sale of listed assets.
Punjab National Bank Ltd, set up in 1895, was nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, its undertaking vesting in Punjab National Bank on 19 July 1969. The appellant, PNB Finance Ltd, received compensation of Rs 10.20 crore, computed by capitalising the last five years profits, in the year ended 31 December 1969, relevant to assessment year 1970-71. It returned income of Rs 2,03,364. In a covering letter of 30 September 1970 it said that, while denying that section 45 applied, it exercised its option to substitute the fair market value of the undertaking as on 1 January 1954, and claimed a capital loss of about Rs 7.02 crore by deducting a 1954 value of Rs 10,41,51,625 plus improvement cost of Rs 6,81,21,621. The Assessing Officer rejected the loss and computed a gain of Rs 1,65,34,709 on the capitalisation basis. The Appellate Assistant Commissioner held the compensation could not be allocated among the assets, so cost was indeterminate and nothing was taxable. The Tribunal restored the Assessing Officer's figure, reasoning that having exercised the 1954 option the assessee could not say cost was incomputable. On a reference under section 256(1) the Delhi High Court decided against the assessee, relying on Artex Manufacturing Co. The matter was decided on 2008-11-06 by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J). On those facts the Supreme Court held as follows. The appeal was allowed. On the facts of assessment year 1970-71 capital gains could not be computed, and the Rs 10.20 crore was not taxable under section 45. The impugned judgment of the Delhi High Court was set aside, with no order as to costs. Section 41(2) had no application: the Department had never relied on it and no authority below the High Court had, and in any event it applies only to a sale of depreciable assets where the consideration is capable of allocation between assets. Artex Manufacturing Co was distinguished because there a valuer's itemised report had fixed the price. Section 55(2)(i) never operationalised, because substituting the 1 January 1954 fair market value presupposes that both that figure and the cost of acquisition are ascertainable, the assessee's letter did not in fact make the choice, and the Assessing Officer's capitalisation of five years profits produced the enterprise value of the undertaking rather than its cost of acquisition.
The Court set out three tests. The first is that the charging section and the computation provisions are inextricably linked and together form an integrated code, so a case in which the computation provisions cannot apply was never intended to fall within section 45 - the rule of CIT v B.C. Srinivasa Setty (1981) 128 ITR 294. The second is the test of allocation or attribution, drawn from CIT v Mugneeram Bangur & Co (1965) 57 ITR 299: on a slump transaction one asks whether the price is capable of being attributed to individual assets, that is, whether there was item-wise earmarking. Where an entire business including depreciable assets and liabilities goes for a composite price with no item-wise earmarking, section 41(2) is not attracted; where the contract does show item-wise consideration, it is. The third is the conceptual difference between an undertaking and its components. Plant, machinery and dead stock are items within an undertaking, but an undertaking may also carry intangibles - goodwill, manpower, tenancy rights, the value of a banking licence - whose cost is not determinable. Applying these, the Court found no item-wise earmarking of the Rs 10.20 crore, unlike Artex where the valuer's figures had built up the price, and noted that the High Court had overlooked CIT v Electric Control Gear Manufacturing Co (1997) 227 ITR 278, in which the same Bench that decided Artex held that where a business is transferred as a going concern for a slump price and there is no evidence how the price was arrived at, section 41(2) does not apply. Cost of acquisition of the undertaking being unascertainable, section 48 could not work and section 45 could not bite. In the words reproduced by the source cited on this page: "the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45."
It was decided by the Supreme Court on 2008-11-06 and is reported as Civil Appeal No. 3721 of 2002. 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 45, section 48, section 41(2), section 55(2), 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 allowed. On the facts of assessment year 1970-71 capital gains could not be computed, and the Rs 10.20 crore was not taxable under section 45. The impugned judgment of the Delhi High Court was set aside, with no order as to costs. Section 41(2) had no application: the Department had never relied on it and no authority below the High Court had, and in any event it applies only to a sale of depreciable assets where the consideration is capable of allocation between assets. Artex Manufacturing Co was distinguished because there a valuer's itemised report had fixed the price. Section 55(2)(i) never operationalised, because substituting the 1 January 1954 fair market value presupposes that both that figure and the cost of acquisition are ascertainable, the assessee's letter did not in fact make the choice, and the Assessing Officer's capitalisation of five years profits produced the enterprise value of the undertaking rather than its cost of acquisition. It arises in Capital Gains matters, on section 45, section 48, section 41(2), section 55(2) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia 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 the price was not arrived at item-wise: no valuer's schedule, no asset-by-asset annexure, no working papers allocating the consideration. Absence of that material is the point, so put the negative on record early. Identify the intangibles the undertaking carried - goodwill, tenancy, licences, workforce - and show their cost of acquisition cannot be determined. For any transfer from assessment year 2000-01 onwards, do not run this argument. Section 50B fixes cost notionally by net worth, so compute under it instead and check whether the transaction meets the slump sale definition.
Still good law. The three tests and the treatment of Artex are undisturbed so far as this judgment shows, and the reasoning on the identity of the asset transferred continues to matter. The result does not carry forward to current years: the judgment itself records that section 50B, inserted by the Finance Act 1999 with effect from 1 April 2000, notionally fixes cost of acquisition on a slump sale by reference to net worth, so the computation no longer fails for want of cost. I checked no later judgment on 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 batch line carried no reporter citations, so reported gives the Supreme Court appeal number from the cause title. The judgment does not reproduce the terms of the nationalisation compensation provisions, so the record does not say how the Rs 10.20 crore was fixed beyond the capitalisation of five years profits stated in it. I have not read the Delhi High Court judgment that was set aside, nor checked how later benches have applied these three tests. 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 allowed. On the facts of assessment year 1970-71 capital gains could not be computed, and the Rs 10.20 crore was not taxable under section 45. The impugned judgment of the Delhi High Court was set aside, with no order as to costs. Section 41(2) had no application: the Department had never relied on it and no authority below the High Court had, and in any event it applies only to a sale of depreciable assets where the consideration is capable of allocation between assets. Artex Manufacturing Co was distinguished because there a valuer's itemised report had fixed the price. Section 55(2)(i) never operationalised, because substituting the 1 January 1954 fair market value presupposes that both that figure and the cost of acquisition are ascertainable, the assessee's letter did not in fact make the choice, and the Assessing Officer's capitalisation of five years profits produced the enterprise value of the undertaking rather than its cost of acquisition.
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 sold a depreciable asset held for over three years. Can I still claim the capital gains exemption?
The AO says I sold below market value and wants to tax the difference. Can he do that?
A court order delayed my sale deed. Does my s.54 exemption run from the agreement to sell?