Recently in the case of CIT v. Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299 , the Supreme Court considered the question about the taxability of the surplus amount arising on the sale of a business as a going concern. The decision of the Supreme Court was that where the sale was of the concern as a whole and a slump price was paid, no portion of this price was attributable to the stock-in-trade and, therefore, it was not possible to hold that there was a profit other than what resulted from the appreciation of capital. It follows, therefore, that where a business is sold as a going concern, the excess may not be a business profit, but will be capital gain chargeable to tax. This view also finds support from the case of R.B. Lachman Das Mohanlal & Sons v. CIT [1964] 54 ITR 315 (All.). The last mentioned decision, however, gives the impression that tax would not be chargeable in a case, where a firm transfers its assets to a limited company and the persons constituting the assessee-firm are the only substantial shareholders of the company. This view has not been accepted by the Board in view of the decision in the case of Maharajadhiraj Sir Kameshwar Singh v. CIT [1963] 48 ITR 483 , where the Patna High Court took the view that the doctrine that no man can make a profit out of himself, is not applicable to transactions between a person and a limited company even though all the shares of the company are owned by that person. Hence, even in all those cases, where a business is converted into a limited company, the question of charging capital gains as well as gift-tax wherever provisions of the relevant Act are found applicable, should also be considered.

Circular : No. 23D(XXIII-6) of 1965.

Judicial analysis

Referred to inThe above circular was referred to in Mrs. Mangala S. Paranjape v. ITO [1994] 116 CTR (Pune – Trib.) (TM) 312, with the following observations :

19. In these circumstances, I conclude that the whole of the undertaking or 100 per cent of controlling interest in the company has been transferred as a matter of fact and in substance, though in the form of transfer of shares. Accordingly, the principles laid down by the Supreme Court in the case of CIT v. Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299 and CIT v. West Coast Chemicals & Industries Ltd. [1962] 46 ITR 135 (SC) would be applicable to these cases also. In Mugneeram’s case, the whole of the concern was sold for slump price and no portion of the price was attributable to stock-in-trade. The Supreme Court held that the business is sold as a going concern and the excess may not be the business profit but will be capital gains chargeable to tax. This decision of the Supreme Court has been explained with approval in the Board’s Circular No. 23-D(LXXV III-6) of 1965. . . .” (p. 328)

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