VATSALA SHENOY versus JOINT COMMISSIONER OF INCOME TAX

Citation: [2016] 12 S.C.R. 1 · Decided: 18-10-2016 · Supreme Court of India · Bench: A.K. SIKRI · Disposal: Case Partly allowed

Judgment (excerpt)

[2016) 12 S.C.R. 1 
VATSALA SHENOY 
v. 
JOINT COMMISSIONER OF INCOME TAX 
I 
(ASSESSMENT), MYSORE 
(Civil Appeal No. 1234of2012) 
OCTOBER 18, 2016 
[A. K. SIKRI AND N.V. RAMANA, JJ.] 
Income Ta:x Act, 1961: 
A 
B 
ss. 2(14), 45 - Capital asset - Profit/gain arising from transfer 
C 
thereof to be taxed as "Capital gains" -Assessees, erstwhile partners 
of a dissolved partnership firm - Winding up proceedings file.d to 
sell the assets of the firm and distribute the share thereof - Firm 
sold as an ongoing concern to three partners forming Association 
of Persons (AOP-3) - Assesseeslerstwhile partners received their D 
net share of the value of the assets of the firm - Taxed as capital 
gains in the hands of assessees by Assessing Officer - Held: Result 
of winding up proceedings, after dissolution of firm, was to sell the 
assets of the firm and distripute the share thereof - On facts, it is 
clear that asset of the firm that was sold was capital asset within the 
meaning of s. 2(14) of the Act - Thus, once it is held to be the 
"capital asset'', gain therefrom is to be treated as capital gains within 
the meaning of s. 45 - Capital gains uls. 45 is deemed income which 
arises at a fixed point of time, viz. on the date of transfer - 'Transfer' 
of the assets triggered the provisions of s.45, making the capital 
gains subject to payment of tax at the hands of assessees - However, 
business income/revenue income of the firm in the Assess111e1it Year 
in question to be assessed at the hands of AOP-3 and not 
assessees - Companies Act, 1956 - s.583(4J(a) - Tax/Taxation. 
E 
F 
s.2(42)C - Slump &Ile - When not - Held: As per the definition 
of 'slump sale', sale in question could be treated as slump sale only 
if there was no value assigned to the individual assets and liabilities 
G 
in such sale - In the present case, not only value was assigned to 
individual assets, even liabilities were taken care of - Hence, sale 
in question not slump sale. 
Partly allowing the appeals by assessees, the Court 
,, 
H 
2 
A 
B 
c 
D 
E 
F 
SUPREME COURT REPORTS 
[2016] 12 S;C.R. 
.., 
HELD: 1.1 The firm stood dissolved with effect from 
December 06, 1987; the company petition-was filed by two 
partners in view of eruption of disputes among the partners; the 
business was carried on by the partners with controlling interest 
as an interim arrangement; the income was assessed in their 
hands as AOP and not in the hands of the firm which had already 
been dissolved; assets of the company were put to sale in 
accordance with the Partnership Deed of a dissolved firm, though 
as an ongoing concern; and outgoing partners (assessees herein) 
received their net share of the value of the assets of the firm out 
·or the amount received by way of sale of the assets of the firm as 
per the Partnership Deed. On the aforesaid facts, it becomes 
clear that asset of the firm that was sold was the capital asset 
within the meaning of Section 2(14) of the Act. Once it is held to 
be the "capital asset", gain therefrom is to be tn;ated as capital 
gains within the meaning of Section 45 of the Act. [Paras 24, 27) 
[18-E-H; 19-AJ 
1.2 Capital gains under Section 45 of the Act is deemed 
income which arises at a fixed point of time, viz. on the date of 
transfer. When the said legal principle is applied to the facts of 
the instant case, it is found that the partnership firm had dissolved 
and thereafter winding up proceedings were taken up in the High 
Court. The result of those proceedings was to sell the assets of 
the firm and distribute the share thereof to the erstwhile partners. 
Thus, the 'transfer' of the assets triggered the provisions of 
Section 45 of the Act and making the capital gains subject to the 
payment of tax. [Paras 27, 28] [20-G-H; 21-A-B) 
1.3 The assessees, however, were attempting to wriggle 
out from payment of capital gains tax on the ground that it was a 
"slump sale" within the meaning of Section 2(42)C of the Act and 
there was no mechanism at that time as to how the capital gains 
is to be computed in such circumstances, which was provided for 
G the first time by Section SOB of the Act with effect from April 01, 
2000. As per the definition of 'slump sale' in Section 2(42)C, sale 
in question could be treated as slump sale only if there was no 
value assigned to the individual assets and liabilities in such sale. 
This had obviously not happened. Not only value was assigned to 
individual assets, even the liabilities were t

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