Supreme Court Clarifies Capital Gains Tax on Slump Sale of Business: Commissioner of Income Tax vs. Equinox Solution Pvt. Ltd. (2017)

Can the sale of an entire running business be treated as a short-term capital gain? The Supreme Court of India addressed this question in a case involving the Income Tax Department and Equinox Solution Pvt. Ltd. The court clarified that the sale of a whole business as a going concern is considered a long-term capital asset and is not subject to short-term capital gains tax. This judgment provides clarity on the tax implications of slump sales.

This judgment was delivered by a two-judge bench comprising Justice R.K. Agrawal and Justice Abhay Manohar Sapre. The majority opinion was authored by Justice Abhay Manohar Sapre. The case is cited as Commissioner of Income Tax, Ahmedabad v. Equinox Solution Pvt. Ltd., Civil Appeal No. 4399 of 2007, decided on April 18, 2017.

Case Background

Equinox Solution Pvt. Ltd., the respondent, was in the business of manufacturing sheet metal components. On December 31, 1990, they sold their entire running business, including all assets and liabilities, to Amtrex Appliances Ltd. for ₹58,53,682.

In their income tax return for the assessment year 1991-1992, Equinox claimed a deduction under Section 48(2) of the Income Tax Act, 1961. They argued that the sale was a “slump sale” of a going concern, resulting in a long-term capital gain.

Timeline

Course of Proceedings

The Assessing Officer (AO) did not accept the assessee’s claim for deduction under Section 48(2) of the Income Tax Act, 1961. The AO determined that the sale was a short-term capital gain under Section 50(2) of the Act. Consequently, the AO recalculated the deduction, which led to an unfavorable assessment order for Equinox.

Equinox appealed to the Commissioner of Income Tax (Appeals), who ruled in favor of the assessee. The Commissioner held that the sale of an entire business as a going concern could not be treated as a sale of individual assets, and therefore, Section 50(2) did not apply. The Commissioner determined that the sale was a long-term capital gain.

The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner’s decision. The Revenue then appealed to the High Court of Gujarat. The High Court dismissed the appeal, stating that no substantial question of law was involved. The Revenue then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of Section 48(2) and Section 50(2) of the Income Tax Act, 1961.

Section 48(2) of the Income Tax Act, 1961, deals with the computation of capital gains. It provides for deductions when calculating long-term capital gains.

Section 50(2) of the Income Tax Act, 1961, applies to the sale of depreciable assets, which are treated as short-term capital assets. This section is applicable when any block of assets are transferred.

The core issue is whether the sale of an entire running business should be treated as a transfer of individual assets (attracting Section 50(2)) or as a transfer of a long-term capital asset (attracting Section 48(2)).

Arguments

The Revenue argued that the sale should be treated as a transfer of individual assets, specifically a block of assets, and thus, Section 50(2) of the Income Tax Act, 1961, should apply. They contended that the sale resulted in short-term capital gains.

Equinox argued that the sale was a “slump sale” of an entire running business as a going concern. They contended that the business itself was a long-term capital asset and that the sale should be treated as a long-term capital gain under Section 48(2) of the Income Tax Act, 1961.

The Commissioner of Appeals and the Income Tax Appellate Tribunal (ITAT) accepted the assessee’s argument, stating that the sale was not a sale of individual assets but of a going concern.

The High Court dismissed the Revenue’s appeal, stating that no substantial question of law was involved.

Submissions of Parties

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the sale of an entire running business as a going concern should be treated as a short-term capital gain under Section 50(2) of the Income Tax Act, 1961, or as a long-term capital gain under Section 48(2) of the same Act.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• Commissioner of Income Tax, Gujarat vs. Artex Manufacturing Co. [1997(6) SCC 437] – The Supreme Court cited this case to support its view that the sale of an entire running business is a slump sale of a long-term capital asset.
• Premier Automobiles Ltd. vs. Income Tax Officer & Anr., 264 ITR 193 (Bombay) – The Bombay High Court’s decision was cited, which held that the sale of a running business is not a sale of individual assets but of a going concern.

The court also considered:

• Section 48(2) of the Income Tax Act, 1961 – Regarding the computation of long-term capital gains.
• Section 50(2) of the Income Tax Act, 1961 – Regarding the computation of short-term capital gains on depreciable assets.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court affirmed the decisions of the Commissioner of Appeals and the Income Tax Appellate Tribunal (ITAT). The Court held that the High Court was correct in dismissing the appeal, as no substantial question of law was involved.

The Court specifically cited Commissioner of Income Tax, Gujarat vs. Artex Manufacturing Co. [1997(6) SCC 437]* to support the view that the sale of an entire running business is a slump sale of a long-term capital asset. The court also agreed with the Bombay High Court’s view in Premier Automobiles Ltd. vs. Income Tax Officer & Anr., 264 ITR 193 (Bombay)* that such a sale is not a sale of individual assets but of a going concern.

What weighed in the mind of the Court?

The Supreme Court focused on the nature of the transaction. The court emphasized that the sale of an entire running business as a going concern is fundamentally different from the sale of individual assets. The court reasoned that when a business is sold as a whole, it is not merely the transfer of individual assets but the transfer of an entire economic unit with its goodwill and ongoing operations.

The court also considered the practical implications of treating such sales as short-term capital gains. The court noted that such a treatment would be inconsistent with the commercial reality of such sales.

Fact:Law

The Court’s reasoning was primarily based on the factual context of the sale as a going concern. The legal provisions were interpreted in light of this factual context.

Logical Reasoning

The Court reasoned that the sale of an entire running business is not a mere transfer of individual assets. Instead, it is a transfer of a going concern with all its assets and liabilities. Therefore, Section 50(2) of the Income Tax Act, 1961, which applies to the transfer of depreciable assets, does not apply.

The Court concluded that the sale should be treated as a slump sale of a long-term capital asset, and thus, the gains should be taxed accordingly under Section 48(2) of the Income Tax Act, 1961.

The Supreme Court quoted the following from the judgment:

“In our considered opinion, the case of the respondent (assessee) does not fall within the four corners of Section 50 (2) of the Act.”

“Section 50 (2) applies to a case where any block of assets are transferred by the assessee but where the entire running business with assets and liabilities is sold by the assessee in one go, such sale, in our view, cannot be considered as “ short-term capital assets ”.”

“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 ”. It was, therefore, required to be taxed accordingly.”

There were no dissenting opinions in this case.

Key Takeaways

• ✓ The sale of an entire running business as a going concern is considered a long-term capital asset.
• ✓ Section 50(2) of the Income Tax Act, 1961, does not apply to such sales.
• ✓ Gains from such sales should be taxed as long-term capital gains under Section 48(2) of the Income Tax Act, 1961.
• ✓ This judgment provides clarity on the tax implications of slump sales of businesses.

Directions

No specific directions were given by the Supreme Court in this judgment. The court simply dismissed the appeal by the Revenue, affirming the decisions of the lower authorities.

Development of Law

The ratio decidendi of this case is that the sale of an entire running business as a going concern is a slump sale of a long-term capital asset and is not subject to short-term capital gains tax under Section 50(2) of the Income Tax Act, 1961. This judgment reinforces the existing legal position that slump sales are treated differently from the sale of individual assets.

Conclusion

The Supreme Court’s judgment in Commissioner of Income Tax, Ahmedabad v. Equinox Solution Pvt. Ltd. clarifies that the sale of an entire running business is a slump sale of a long-term capital asset. This decision affirms that such sales are not subject to short-term capital gains tax under Section 50(2) of the Income Tax Act, 1961. The judgment provides important guidance for businesses and tax authorities on the treatment of slump sales.

Category

Parent Category: Income Tax Act, 1961
Child Categories:

• Section 48, Income Tax Act, 1961
• Section 50, Income Tax Act, 1961
• Capital Gains Tax
• Slump Sale
• Long-Term Capital Asset
• Short-Term Capital Asset

FAQ

Q: What is a slump sale?
A: A slump sale is the sale of an entire running business as a going concern, including all its assets and liabilities, for a single lump sum price.

Q: What is the difference between short-term and long-term capital gains?
A: Short-term capital gains are profits from the sale of assets held for a short period, while long-term capital gains are from assets held for a longer period. The tax rates for each differ.

Q: How does this judgment affect businesses selling their entire operations?
A: Businesses selling their entire operations as a going concern will have the gains taxed as long-term capital gains, which may have a more favorable tax rate compared to short-term gains.

Q: Does Section 50(2) of the Income Tax Act, 1961 apply to the sale of a business?
A: No, Section 50(2) does not apply to the sale of an entire running business. It applies to the sale of individual depreciable assets.