Taxation of a Discontinued Business in India

TAXATION OF A DISCONTINUED BUSINESS: PRINCIPLES, STATUTORY PROVISIONS AND PRACTICAL APPLICATIONS

Abstract: This article analyses in-depth the income-tax consequences that arise when a business or an undertaking is discontinued, wound up, sold, reconstituted or otherwise transferred in India. It examines statutory provisions applicable to different legal forms — sole proprietorship, partnership firms, limited liability partnerships (LLP), companies, associations of persons (AOP), bodies of individuals (BOI), societies and trusts — and integrates important judicial pronouncements, administrative clarifications and practical illustrations. The discussion is intended for practicing chartered accountants and tax advisers and focuses on statutory mechanics, timing of chargeability, computation rules, carry-forward and set-off issues, and planning traps that attract revenue attention.

I. General principles and the statutory framework

A business discontinuance or dissolution raises two broad streams of tax questions: (a) the computation and chargeability of income arising on transfer or distribution of assets and stock-in-trade, and (b) the administrative mechanics of assessment, recovery and the continuing liability of persons associated with the business. The Income-tax Act 1961 contains express provisions addressing both. Sections 176 and 177 provide for assessment where a business is discontinued or where an association is dissolved; sections dealing with capital gains (section 45 and associated sections) and special computation provisions (for example, section 50B for slump sale) determine the quantum of tax. In addition, targeted amendments introduced in recent years — notably sections 9B and the substituted subsection (4) of section 45 introduced by the Finance Act, 2021, and exit-tax rules such as sections 115TD to 115TF for certain charitable or registered entities — are particularly relevant when a business form changes or when assets are not transferred to eligible successors.

II. Discontinued business: administrative provisions (sections 176 and 177)

Sections 176 and 177 address the assessment and recovery aspects when a business is discontinued or an association is dissolved. Section 176 enables the Assessing Officer to include, in the assessment year in which the business is discontinued, the income of the period from the expiry of the previous year up to the date of discontinuance; separate assessments may be made in respect of each completed previous year or part thereof included in that period. Section 177 is a protective provision for the Revenue when an association or firm dissolves: the AO may make assessments as if no discontinuance took place, and members/partners existing at the time of dissolution may be held jointly and severally liable for tax, interest and penalties. In practice, these provisions compel careful closure accounting, contemporaneous record-keeping and timely notification to the AO: section 176(3) requires an assessee discontinuing a business to notify the AO within 15 days. (See Income-tax Act: sections 176–177 and official guidance.)

III. Sole proprietorship (individual entrepreneur)

A sole proprietor is the simplest form of commercial vehicle but also the most manually intensive at exit. From an income tax perspective, a proprietary business is indistinguishable from the individual: business receipts, closing stock, and disposal of capital assets are reflected in the owner’s assessable income for the relevant previous year. Key points for a proprietor who discontinues business include:

• Final accounting period: the last previous year or an interim accounting period that ends on the date of discontinuance becomes the terminal period for computing profits and gains. The AO may charge income of the period per section 176. Practical consequence: recognise accrued income, value closing stock at realistic market values and compute profits/losses for short periods correctly.
• Stock-in-trade and work-in-progress: unsold inventory on discontinuance is taxable as business income at its saleable value. For an item transferred to the proprietor for personal use, the market value would normally be treated as full value of consideration. The proprietor should ensure contemporaneous stock ledgers and evidencing of any disposals to avoid later adjustments.
• Capital assets: transfer or sale of capital assets on cessation gives rise to capital gains under section 45. The proprietor must distinguish business income (e.g., profits from sale of trading stock) from capital gains (e.g., sale of land or building used in business). If an asset qualifies as depreciable asset under section 32, special computation rules under section 50 may apply.
• Losses and set-off: an unabsorbed business loss arising in the final year can be carried forward under the general carry-forward rules (subject to timely filing under section 139(1) and the conditions of sections 72 et seq.). Notably, the discontinuance of the trade does not per se extinguish the right to carry forward losses so long as other statutory conditions are satisfied. Practitioners should verify audit and filing compliance to preserve carry-forward rights.

Practical illustration 1 – Proprietor closure (simple numerical)

Mr A, a sole proprietor, discontinues his business on 30 September 2024. His accounting year ended March 31, 2024 (previous year 2023–24). For the period 1 April 2024 to 30 September 2024 he realises the following: closing stock sold ₹3,00,000 (cost ₹1,80,000); plant and machinery (capital asset) sold for ₹6,00,000 (cost ₹10,00,000; WDV for depreciation purposes ₹4,00,000). Compute tax consequences in broad terms:

• Business income: profit on sale of stock = ₹1,20,000 (taxable as business income).
• Depreciable asset: sale proceeds ₹6,00,000 vs WDV ₹4,00,000: gain of ₹2,00,000. Under section 50, the difference between sale consideration and written down value is treated as short-term capital gain (subject to the specific classification of the asset and rule applicability); in substance this component will attract tax as prescribed. Practical note: ensure correct classification and compute depreciation adjustments before concluding the tax effect.
• Carry-forward: if Mr A has an unabsorbed business loss from an earlier year that was legally eligible for carry-forward and he complied with the return-filing conditions, the loss can be set off against the business income arising on discontinuance.

IV. Partnership firms, LLPs, Association of Persons (AOP), Body of Individuals (BOI)

Partnership firms — and their close cousins LLPs, AOPs and BOIs — pose structured tax challenges at the time of reconstitution or discontinuance. In 2021 Parliament introduced statutory clarifications to plug perceived avoidance routes (Finance Act 2021): the substitution of section 45(4) and insertion of section 9B specifically target transfers of capital assets, stock-in-trade and money to partners or members during reconstitution or dissolution. Administratively, these provisions are intended to prevent the firm from converting unrealised appreciation or stock profits into partner capital accounts without recognising income.

A. The mechanics of section 45(4) and section 9B

• Section 45(4) (substituted): treats amounts (including money) credited to partners’ capital accounts in consequence of revaluation, distribution or otherwise as a deemed transfer by the firm; profits and gains arising on such deemed transfers are brought to tax in the hands of the firm under capital gains principles, in the previous year in which the asset or money is received by the partner. This provision was used by the Revenue (and upheld in some decisions) to tax revaluation credits which earlier had been used to circumvent capital gains realisation.
• Section 9B (new): addresses the taxation of distribution of capital assets or stock-in-trade by a specified entity (firm/LLP/AOP/BOI—other than a company or co-operative society) to a specified person (partner/member) on dissolution or reconstitution. Under section 9B, such distributions are deemed transfers in the hands of the entity; the computation and the head of taxation (capital gains or business income) depend on the nature of the asset and circumstances. The chargeability in the specified entity’s hands avoids double counting and ensures the firm is taxed on realisation equivalents irrespective of the label used in bookkeeping.

Judicial perspective: Mansukh Dyeing and allied cases

Judicial scrutiny of revaluation and distribution strategies culminated in important decisions. In particular, the Supreme Court in CIT v. Mansukh Dyeing and Printing Mills (2022) held that revaluation of assets followed by credit to partners’ capital accounts could be treated as a distribution or transfer within the ambit of section 45(4); accordingly, the firm was taxable on the deemed capital gains. This authoritative pronouncement demonstrates the judicial willingness to look to economic substance over form and to apply section 45(4) where partners’ capital accounts become a channel for converting accrued value into withdrawal rights. Practitioners dealing with revaluation or partner-admission transactions should study the ratio carefully before attempting restructuring.

Practical illustration 2 – Reconstitution and section 45(4)

A partnership firm holds a parcel of land acquired in 2000 for ₹40 lakhs. On reconstitution in 2024 the partner accounts are credited with a revaluation surplus and the land is treated as transferred to Partner X who receives title. Market value on that date is ₹2.00 crores. For illustration, the firm’s computation will show a capital gain of ₹1.60 crores (₹2.00 crores − ₹0.40 crores). This capital gain is chargeable in the hands of the firm by virtue of section 45(4), and normal capital gains computation (indexation if applicable, classification as long‑term or short‑term depending on period) and compliance formalities follow. Note: the Finance Act, 2021 amendments, and the Supreme Court pronouncement together make this an area of high departmental scrutiny.

V. Limited Liability Partnerships (LLPs) and conversions

Limited liability partnerships combine elements of corporate form and partnership flexibility, and the tax law treats them largely along the lines of partnerships for distribution/transfer issues. However, specific provisions interact when a corporate entity converts to or from an LLP: section 47(xiiib) provides an exemption (subject to conditions) for conversion of an unlisted company into an LLP, and section 47A contains anti–abuse consequences where conditions are breached. Where the conversion meets all statutory conditions (continuity of shareholding partners, transfer of all assets and liabilities, no extraneous consideration except capital contribution), the transaction is not regarded as a transfer for capital gains purposes. If conditions are not satisfied, the rollback provisions in section 47A will cause the previously sheltered gains to crystallise. The CBDT and tribunals have issued clarifications and the jurisprudence is evolving: therefore any conversion plan must be structured with precision and opinionated professional documentation.

Practical note – conversion of company to LLP

When a private company converts into an LLP using section 47(xiiib), the successor LLP succeeds to the block values (for depreciation) and the cost of acquisition of assets for the partners will derive from the predecessor’s cost in many cases. Form 3CEA (auditor’s report) and other compliance steps are typically required for large transfers; also an opinion on whether the transaction satisfies the conditions of non-transfer must be retained to resist later reassessment challenges. Reliable commentary and recently reported tribunal decisions have emphasised that failure to adhere to the strict conditions under section 47(xiiib) nullifies tax neutrality. See professional guidance notes.

VI. Companies: slump sale, itemised sale and liquidation

Companies frequently discontinue business by selling an undertaking, by slump sale, or by winding up and liquidating. The Income-tax Act contains a separate taxonomy for these events:

A. Slump sale: Section 2(42C) defines slump sale and section 50B provides a special computation mechanism. When an undertaking or division is transferred for a lump sum consideration without allocation to individual assets, the transfer is a slump sale. Section 50B deems the net worth of the undertaking (book value of assets adjusted for specified items and WDV for depreciable assets, less liabilities) to be the cost of acquisition for capital gains computation; the Seller’s capital gain is the excess of consideration over the net worth. The net worth computation ignores revaluation increments and requires certification by an accountant (Form 3CEA). The courts, including the Supreme Court in Artex and Equinox decisions, have examined the boundaries of slump-sale doctrine and have held that an economic sale of the going concern will normally be treated as lump‑sum and governed by slump sale jurisprudence.

B. Liquidation and distribution to shareholders: Sections 46 and 47

Liquidation of a company triggers an interplay between sections 46 and 47. Section 46 prescribes the taxation consequences in the hands of shareholders when they receive money or assets on liquidation: the shareholder may be chargeable to tax on the receipt, and the manner of determining cost and capital gain can vary. Section 47 lists certain transactions that shall not be regarded as ‘transfer’ for the purpose of section 45: for instance, certain distributions undertaken for specified purposes. The correct legal analysis typically requires examining whether a distribution is treated as a return of capital or as consideration for transfer, and whether the receiving shareholder is taxable under section 46(2). Recent judicial and editorial analysis also discuss whether the cost of acquisition for the recipient should be the fair market value or the cost that was in the hands of the liquidating company; different benches have taken positions and practitioners must apply the latest relevant authority.

Practical illustration 3 – Slump sale under section 50B

A company sells an undertaking as a slump sale on 31 March 2025 for a lump sum consideration of ₹20,00,00,000. The undertaking’s net worth (computed in accordance with explanation to section 50B, taking WDV for depreciable assets and book values for others, and excluding revaluation surplus) is ₹14,00,00,000. Capital gain under section 50B = ₹20,00,00,000 − ₹14,00,00,000 = ₹6,00,00,000. Whether the gain is long‑term or short‑term depends on the period the undertaking was held by the seller (Section 50B and associated explanations). The seller needs to file a Chartered Accountant’s report in Form 3CEA certifying the net‑worth computation and report the transaction in its return.

Practical considerations at liquidation

When a shareholder receives an asset on liquidation, the cost of acquisition in the hands of the shareholder can be shaped by competing statutory provisions: if the shareholder is taxed under section 46(2) (i.e., on receipt of the asset), then section 55/section 49 may be applied to fix the cost of acquisition and avoid double taxation. The jurisprudence on whether cost should be treated as fair market value on the date of receipt or the predecessor’s historical cost is fact-specific; practitioners must evaluate High Court and Tribunal rulings on point and take well‑documented positions. Taxpayers should also be aware of the possibility of tax being attracted as dividends or as capital gains depending on how the distribution is structured and the nature of the recipient.

VII. Societies, trusts and other non-profit entities (exit tax and accreted income)

Societies and charitable trusts enjoy special tax status under sections 11, 12AA/12AB and other heads when their objects and operations conform to statutory prescriptions. However, where a trust or an institution loses its charitable status (for instance, conversion into a non‑eligible entity, cancellation of registration, merger with a non‑eligible body) or fails to transfer assets upon dissolution to an eligible successor within the prescribed period, the Code deems an ‘accreted income’ and levies an exit tax. Sections 115TD to 115TF (introduced in recent Finance Acts and supported by Rule 17CB for valuation) impose tax on the fair market value of net assets (assets minus liabilities) at the maximum marginal rate. This exit tax is intended to prevent diversion of accumulated tax‑exempt corpus into taxable hands without levy. The statute prescribes valuation methodology and timelines for payment. Consequently, registered societies and trusts must plan dissolutions, mergers or conversions carefully to avoid the harsh consequences of the accreted‑income provisions.

VIII. Practical compliance checklist and risk areas

At the time of discontinuance the taxpayer (and the professional adviser) must not treat the event as merely an accounting closure. Key practical steps include:

1. Timely notification to the Assessing Officer per section 176 and retain proof of compliance.

2. Detailed schedules of assets, liabilities, book values, WDV (for depreciable assets), revaluation reserves and partner/shareholder capital accounts.

3. For slump sales: obtain CA certificate in Form 3CEA and maintain working papers for net‑worth computation under section 50B.

4. For revaluations and reconstitution: retain contemporaneous board/partners’ resolutions showing objective commercial reasons and supporting valuations; be mindful of Mansukh Dyeing principles.

5. For conversions and mergers: ensure conditions for exemption under section 47 (including 47(xiiib) for company→LLP) are fully documented and observed; obtain advance rulings or written tax opinions when structuring complex reorganisations.

6. For trusts/societies: document transfer of assets to eligible entities (registered under section 12AA/12AB or covered clauses) within 12 months where required; obtain valuation evidence and legal opinions to avoid triggering exit tax under section 115TD.

IX. Carry‑forward, set‑off and unabsorbed depreciation

A business discontinuance does not automatically extinguish the statutory rights to carry forward unabsorbed losses and depreciation; however, the availability of carry‑forward depends on compliance with statutory timings for filing returns and other conditions in Chapter VI. Losses under the head ‘Profits and gains of business or profession’ are generally carried forward under section 72 (in normal cases) and matched to future business profits as per the Code. For entities that undergo amalgamation, reconstruction or conversion, special provisions (for example, sections 72A, 72AA and other reorganisation rules) control whether losses survive. The practitioner must map the legal identity and continuity tests carefully to determine whether carry‑forward is available.

X. Case study – corporate group exit (illustrative)

Consider a corporate group whose subsidiary ‘SubCo’ carried an older manufacturing division. The Board decides to discontinue the division and transfer the undertaking to an unrelated buyer by slump sale. The company follows these steps: (a) prepared the net‑worth schedule under section 50B; (b) engaged an independent CA to certify the net‑worth and obtain Form 3CEA; (c) negotiated a lump sum consideration; (d) prepared employee settlements and statutory clearances; (e) filed returns disclosing the slump sale proceeds and capital gain computation. Tax planning points included: whether any special relief for long‑term capital gains applied (dependent on holding period), and whether any benefit under sections referring to capital gains exemptions could be harnessed. The engagement of external valuer and CA evidencing the independence of valuation was crucial to withstand reassessment. The group also considered interaction with GST (transfer as a going concern vs. taxable supply) since GST implications may be determined separately from income‑tax consequences.

XI. Recent jurisprudence and revenue approach — practical takeaways

Recent tribunal and High Court decisions, coupled with the Supreme Court pronouncements noted above, have shifted the focus to economic substance. Prominent judicial markers include Artex (treating a bona fide sale of the whole business as a slump sale in appropriate circumstances), Equinox (Supreme Court confirmation that sale of running business as going concern is not covered by section 50(2) in certain situations), and Mansukh Dyeing (revaluation and credit to partners’ capital accounts treated as a transfer under section 45(4)). Administratively, CBDT circulars and Form/Rule requirements (for example, Rule 11UAE/3CEA net worth certification) require practitioners to respect documentary evidence, contemporaneous valuation and professional certifications. These judicial and administrative developments evidence that tax authorities will examine revaluation, partner admission/retirement transfers and structured conversions critically.

XII. Drafting and opinion checklist for tax advisers

A professional opinion or working paper addressing a discontinuance should contain: (a) fact chronology; (b) identification of legal form and continuity status; (c) detailed schedules (book values, WDV, revaluation reserves); (d) statutory references and applied provisos; (e) alternative revenue positions and reasoned counterarguments; (f) reliance on decisive case law and administrative circulars; (g) compliance list (Forms 3CEA, 3CB/3CD where required), and (h) post‑transaction filing steps (disclosure in return, annexures). This helps clients resist reassessment and supports voluntary disclosures in case of doubt.

Conclusion

A discontinuance of business — in any legal form — requires meticulous tax planning, cautious execution and robust documentation. The modern statutory landscape (with sections 9B, 45(4), 50B and exit tax provisions like section 115TD) has reduced the room for tax-driven restructurings that alter the economic substance of asset transfers. The tax practitioner’s role is therefore to ensure that the timing of recognition, precise computation (for example net worth under section 50B), contemporaneous certifications and careful mapping of post‑discontinuance obligations (notifications, filing, transfer of assets to eligible entities) are observed. When in doubt, secure specialist opinions or advance rulings for complex reorganisations; when preparing final returns, retain complete working papers to demonstrate commercial substance.

Selected statutory references and judicial authorities (for quick reference):

• Income-tax Act, 1961: sections 45, 46, 47, 50, 50B, 72, 76, 176, 177, 9B and substituted sub‑section (4) of section 45; sections 115TD–115TF (accreted income).
• Slump sale and computation: Section 2(42C) and Section 50B (and Form 3CEA/Rule references).
• Conversion exemptions: Section 47(xiiib) (company to LLP) and Section 47(xiii) (firm to company) and Section 47A (anti‑abuse rollback).
• Important judicial pronouncements: CIT v. Mansukh Dyeing & Printing Mills (Supreme Court, 2022) on revaluation and section 45(4); CIT v. Artex Manufacturing Co. (Supreme Court) and CIT v. Equinox Solutions (Supreme Court, 2017) on slump-sale doctrines; other tribunal and High Court rulings interpreting section 9B and section 50B.

Author: Rahul Sharma, FCA, MBA (Fin), LLB, CAIIB — This article is intended for qualified chartered accountants and tax advisers. It synthesises statute, notable judicial decisions and practical compliance steps. The examples are illustrative and do not substitute a transaction-specific tax opinion.

Annexure: Practical pointers

1. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

2. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

3. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

4. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

5. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

6. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

7. Practical pointer: retain original supporting invoices, valuations, partner resolutions and minutes as contemporaneous evidence for tax positions.

ANNEXURE: DETAILED WORKED EXAMPLES, CALCULATION TEMPLATES AND PRACTICAL CHECKLISTS

Worked Example A — Partnership reconstitution (detailed computation)

Facts: A partnership firm (Firm P) undertakes a reconstitution in which Partner A retires and Partner B is admitted. As part of the reconstitution, the firm transfers the following to Partner A in lieu of his capital account and retirement consideration:

1) Land (capital asset) – Cost to firm ₹50,00,000; Fair market value (FMV) on transfer date ₹3,00,00,000; holding period > 36 months.

2) Stock-in-trade – Book value ₹10,00,000; FMV on transfer date ₹18,00,000.

3) Cash paid to partner as part of retirement ₹20,00,000.

Compute the tax consequence in the hands of the firm under the applicable provisions after Finance Act 2021.

Step‑1 (Identify applicable provision): Transfer of capital asset, stock‑in‑trade and money to partner in connection with reconstitution falls within substituted section 45(4) and section 9B (where applicable). The firm is deemed to have transferred these assets in the previous year in which Partner A receives them.

Step‑2 (Capital gains on land): Full value of consideration = FMV ₹3,00,00,000 (treated as receipt). Cost of acquisition = ₹50,00,000. Long‑term capital gain (LTCG) = ₹2,50,00,000. Applicable tax: LTCG rates / as per law; computation subject to indexation (if applicable) and exemptions (if any).

Step‑3 (Stock‑in‑trade): The stock’s normal business treatment would be to take FMV as full value of consideration and treat profit on transfer as business income (treated under section 9B as deemed transfer of stock‑in‑trade). Profit on sale = ₹8,00,000 (₹18,00,000 − ₹10,00,000) – taxable as business income in the firm’s hands.

Step‑4 (Cash payments): Cash paid by the firm to the partner as retirement consideration is taxable as a deemed transfer to the extent it represents distribution of business value; under substituted section 45(4) money credited to capital account is chargeable as capital gain of the firm if it effectively represents distribution of assets’ value. The firm must compute net taxable amount accordingly.

Step‑5 (Aggregation and compliance): Aggregate capital gains and business income are reported in the firm’s return. If the firm’s net result includes capital gains, tax computation and any applicable surcharge/cess flows. Form 3CB/3CD and other audit/reporting obligations may be triggered depending on turnover and other thresholds. Documentation: partners’ resolution, board minutes, computation schedules and valuation reports.

Worked Example B — Company liquidation and shareholder receipt (detailed computation)

Facts: Company X is being liquidated. After settling liabilities, the liquidator distributes to Shareholder S an immovable property (land & building) with FMV ₹5,00,00,000. The shareholding cost basis for S in the shares of Company X is ₹1,00,00,000.

Step‑1 (Chargeability under section 46): When a shareholder receives assets on liquidation, section 46 indicates the shareholder shall be chargeable to tax under the head ‘capital gains’ for the difference between amount received (FMV) and cost of acquisition of shares, subject to the adjustments and to the extent not chargeable as dividend under relevant provisions. For the present illustration:

Capital gain in hands of S = FMV of asset received ₹5,00,00,000 − cost of acquisition of shares ₹1,00,00,000 = ₹4,00,00,000 (subject to precise statutory adjustments and the operation of section 55/49 to determine the cost of acquisition of the asset in S’s hands).

Step‑2 (Cost of acquisition of asset in hands of shareholder): If section 46(2) charges the shareholder on receipt, the cost of acquisition for the shareholder may be determined by using the FMV (or other statutory yardstick) so that double taxation is avoided in future transfers. Careful attention is required to determine whether the cost for S should be the predecessor’s cost or FMV on receipt (jurisprudence differs by fact pattern). Keep comprehensive extracts of the liquidation order and valuation evidence.

Step‑3 (Disclosure): The company must make disclosures in the liquidation accounts; the shareholder must disclose the receipt and the basis adopted for cost. A reasoned legal and valuation memorandum helps during subsequent scrutiny.

Worked Example C — Exit tax (accreted income) for a charitable trust

Facts: A charitable trust (registered under section 12AA/12AB) decides to dissolve on 31 March 2025. Total assets (FMV) on specified date ₹25,00,00,000; liabilities ₹5,00,00,000. The trust fails to transfer all assets to another registered trust within 12 months.

Step‑1 (Compute accreted income): Aggregate FMV of assets less liabilities = ₹25,00,00,000 − ₹5,00,00,000 = ₹20,00,00,000 (this is the accreted income base under section 115TD as per the exit tax provisions, subject to valuation rules and specified exclusions).

Step‑2 (Tax at maximum marginal rate): For illustration, if the applicable maximum marginal rate (inclusive of surcharge and cess) is approximately 42.744% (varying with fiscal year and surcharge slabs), the exit tax = ₹20,00,00,000 × 42.744% ≈ ₹8,54,88,000. The trust must also account for the income of the year and other tax liabilities. The tax on accreted income is in addition to income-tax chargeable in respect of the trust’s ordinary income.

Step‑3 (Avoidance strategy): To avoid the exit tax, the trust should arrange transfer of all assets (after settling liabilities) to another registered charitable entity within the permitted period and retain documentation proving the bona fide transfer, beneficiary identity and registration status of the successor.

Expanded compliance checklist and templates for working papers:

• Valuation schedule template: describe asset, date of acquisition, historical cost, accumulated depreciation (WDV), revaluation adjustments (if any), book value, FMV and source of FMV (valuer report or market evidence).
• Partner/shareholder ledger template: opening capital, transactions during year, revaluation credits, withdrawals, retirement/admission entries, closing balance and documentary evidence for each entry.
• Net‑worth computation (for section 50B): segregate depreciable assets (use WDV), non‑depreciable capital assets (book value), inventory (book value), excluded assets (e.g., assets on which 100% deduction under section 35AD has been claimed), and liabilities; compute aggregate and subtract to arrive at net‑worth.
• Documentation to retain for 6–8 years (standard practice): audit reports, Form 3CEA (where applicable), valuation report, statutory registers, Board/Partners’ resolutions, liquidation orders, receipts for notifications to AO, and contemporaneous legal opinions.
• Disclosure drafting tip: in the return of income, disclose the nature of discontinuance, date of discontinuance, details of assets transferred, method of valuation, CA attestation for net‑worth (slump sale), and attach the requisite forms. When tax positions are close to existing adverse precedents, prepare a short legal memo setting out alternative positions and the rationale for the adopted view.

XIII. Interplay with other indirect taxes and employment liabilities

Practitioners must not neglect parallel obligations. When a business (or undertaking) is transferred or discontinued, employment liabilities (PF, gratuity, state statutes), statutory levies and indirect tax consequences (GST—whether the transfer qualifies as ‘supply’, whether it falls within ‘transfer of business as a going concern’ which may be outside the scope or subject to specific treatment) must be separately examined. Income‑tax compliance does not discharge statutory obligations under labour or indirect tax laws; integrated planning minimises post‑transaction disputes.

XIV. Frequently asked questions (concise answers for advisers)

Q1: Does discontinuance automatically kill carry‑forward of losses?

A: No. Carry‑forward rights generally survive subject to statutory filing compliance (timely return under section 139(1)), continuity conditions where applicable, and special rules for reorganisations.

Q2: If a partner is credited with a revaluation surplus but the firm does not transfer title, is there immediate tax?

A: Post‑Mansukh Dyeing, revenue authorities may argue that credit is substantive and taxable under section 45(4); legal advice tailored to facts is advisable.

Q3: Is slump sale always preferable on exit?

A: It depends; slump sale simplifies capital gains computation using net‑worth but eliminates allocation benefits to classify particular asset gains differently; GST and other regulatory consequences also matter.

XV. Concluding practical observation

Taxation of discontinued businesses is driven by a mixture of statutory deeming provisions and judicial interpretation; the recurring theme in modern decisions is the prioritisation of economic substance over form. Tax professionals must therefore combine legal analysis, valuation rigour and impeccable documentation when advising clients contemplating closure, sale or reconstitution. Early engagement with tax counsel and independent valuers, and transparent disclosure in returns, materially reduces downstream reassessment risk.

XVI. Suggested further reading and resources

Practitioners may consult (a) Income‑tax Act, 1961 statutory text for sections referenced, (b) CBDT circulars and forms (Form 3CEA guidance), (c) Supreme Court decisions cited in this article (Artex, Equinox, Mansukh Dyeing), and (d) updated commentary from reputable professional firms and law reports for jurisdictional interpretations. Maintaining a research file with the latest High Court and Tribunal citations relevant to the particular fact pattern is recommended.