COMMISSIONER OF INCOME TAX, GUJARAT versus M/S. ARTEX MANUFACTURING COMPANY

Citation: [1997] SUPP. 1 S.C.R. 608 · Decided: 08-07-1997 · Supreme Court of India · Bench: S.C. AGRAWAL · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX, GUJARAT 
v. 
M/S. ARTEX MANUFACTURING COMPANY 
JULY 8, 1997 
B 
(S.C. AGRAWAL AND G.B. PATTANAIK, JJ.] 
Income Tax Act, 1961 : 
Section 41(2) and Section 4!r--Balancing Charge-Sale of Business as 
C a going concern-Difference between the wlitten down value of plant, 
machinery and dead stock transferred and sale consideration receive<i--Held, 
is chargeable to tax under Section 41(2)-Surplus, if any in excess of the said 
difference taxable as capital gains under Section 45. 
D 
The assessee, a partnership firm carrying on the business of 
manufacturing artsilk cloth, sold its business as a running concern to a 
private limited company which was formed with a view to take over the 
business. The sale consideration of Rs. 11,50,400 was paid and satisfied by 
the allotment of 11,504 fully paid-up equity shares of Rs. 100 each 
according to the original shares of partners of the assessee. The assessee 
E ceased to carry on its with effect from 1st April 1966 and in respect of the 
Assessment year 1967-68, the assessce filed its return showing 'nil' income. 
The previous return filed was revised showing 'nil' income with a note that 
since the partnership firm was converted into a private limited company 
as a going concern, there was no income chargeable to tax either under 
F Section 41(2) or 45 of the Income Tax Act, 1961. During the assessment 
proceedings, the purchase consideration was shown at Rs. 11,50,400 being 
the difference between Rs. 15,87,296 the value of plaint, machinery and 
dead-stock as revalued, and Rs. 4,36,896 being the written down value of 
plant, machinery and dead stock, as per assessee's books. 
G 
The Income Tax Officer was of the view that tax was payable under 
Section 41(2) on the surplus amount i.e. aggregating to Rs. 12,56,020 which 
was arrived at after deducting the written down value of plant, machinery 
and dead stock as per income tax records aggregating to Rs. 3,32,276 from 
the amount of Rs. 15,87,296, being the value of the plant, machinery and 
H dead stock, as revalued. 
608 
C.l.T. GUJARATv. ARTEXMANUFACTURING CO. 
609 
However, the Appellate Assistant Commissioner on appeal held that A 
(i) the surplus was assessable under the head 'Capital gains' and not under 
the head 'business', (ii) the Assessee must be taxed in the status of'Associa-
tion of persons' and not in the status of a 'Registered firm'. In the cross-
appeals filed by the Assessee and the Revenue, the Income Tax Appellate 
Tribunal, rejecting the contention of the assessee that_ the· principle of B 
mutuality was applicable and consequently that the surplus was not liable 
to tax, held (a) that the surplus was taxable as busine'ss profit under 
Section 41 (2) of the 1961 Act and (b) that the assessee was assessable in 
t_he status of a registered firm. 
On reference, the High Court, held that - (a) Principle of mutuality C 
was not applicable and_ .that the assessee was liable to be taxed; (b) the 
surplus was capital gains and not business income taxable under Section 
41(2); (c) Status of assessee was not a registered firm but an association of 
persons; ( d) Asses see was entitled to relief on the basis of the two circulars 
relied on by it and (e) the ti·ansfer of a going concern is liable to tax under 
Section 45 and not under Section 41(2) of the Act and it was not a realisa- D 
tion sale not liable to tax. Aggrieved, the Revenue filed the present appeal. 
Partly allowing the appeal, this Court 
HELD : 1.1. The High Court was not right in holding that Section 
41(2) of the Income Tax Act, 1961 was not applicable. The Transfer of a E 
going concern is liable lo tax under Section 41 (2) and not under Section 45 
(•f the Act. [624-H] 
1.2. In the instant case a cannot be said that the price attributed to 
the items transferred is not indicated and hence Section 41 (2) of the 1961 
Act could not be applied. Although in the agreement there was no reference F 
to the value of plant, machinery and dead-stock, but on the basis of the 
information furnished by the assessee before the Income Tax Officer, it 
became evident that the figure of Rs.11,50,400 had been arrived at by taking 
into consideration the value of plant, machinery and dead-stock as as-
sessed by the valuer at Rs. 15,87,296. [624-C-E] 
G 
1.3. Surplus amount resulting from the transfer of plant, machinery 
and dead stock is taxable under Section 41 (2) of the Act. Liability under 
Section 41 (2) is however limited to 

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