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Commissioner of Income Tax, Ahmedabad v. Equinox Solution Pvt. Ltd.

Civil Appeal · 2017 INSC 357Decided 18 Apr 2017
Civil Appeal No. 4399 of 2007
Justice R.K. Agrawal · Justice Abhay Manohar Sapre

Background

Equinox Solution, a manufacturer of sheet-metal components, sold its entire running business, all assets and liabilities together, in one transaction for about Rs. 58.5 lakh. In its tax return, it claimed this as a "slump sale" of a long-term capital asset, entitled to a certain deduction. The Assessing Officer disagreed, treating it instead as a short-term capital gain under Section 50(2) of the Income Tax Act, which gave a less favourable tax treatment. The Commissioner of Income Tax (Appeals) and then the Income Tax Appellate Tribunal both sided with the company, and the Gujarat High Court dismissed the Revenue's further appeal, prompting the tax department to approach the Supreme Court.

Decision Breakdown

The Supreme Court held that Section 50(2) applies only when an assessee sells one or more individual "blocks" of assets used in the business, not when the entire running business, with all its assets and liabilities, is sold together as a going concern. Since Equinox had sold its whole business in a single slump sale, the transaction was correctly treated as a long-term capital asset sale, not a short-term capital gain. The Court found no fault in the reasoning of the Commissioner (Appeals), which had been upheld by the Tribunal and the High Court, and relied on its own earlier ruling in CIT, Gujarat vs. Artex Manufacturing Co. and a concurring Bombay High Court decision. Finding no merit in the Revenue's appeal, the Court dismissed it.

Lesson Learnt

When a business is sold as a whole, as a single "going concern" with all its assets and liabilities together, for tax purposes this is treated as a long-term capital asset sale (a "slump sale"), not as a short-term capital gain under the block-of-assets rule, which only applies to the sale of individual assets.

Official source (sci.gov.in)View Judgment (PDF)

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