Income Tax Case: Equinox Solution Pvt. Ltd. vs. Commissioner of Income Tax, Ahmedabad

The case between the Commissioner of Income Tax, Ahmedabad and Equinox Solution Pvt. Ltd. revolves around a dispute regarding the taxation of a business sale as a ‘slump sale’ under the Income Tax Act, 1961. This case primarily examines whether the transaction falls under Section 50(2) (short-term capital gain) or qualifies as a long-term capital asset, allowing deductions under Section 48(2).

The dispute began when Equinox Solution Pvt. Ltd. sold its entire running business on December 31, 1990, including all assets and liabilities, to Amtrex Appliances Ltd. for Rs. 58,53,682. The company filed its income tax return for the assessment year 1991-92, claiming a deduction under Section 48(2) by treating the transaction as a long-term capital gain.

Assessment and Appeals

The Assessing Officer (AO) disagreed with the company’s claim, asserting that the transaction should be treated as a short-term capital gain under Section 50(2), which applies to the sale of depreciable assets as part of a block of assets. The AO reworked the company’s tax assessment accordingly.

Unhappy with the assessment, Equinox Solution Pvt. Ltd. appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who ruled in favor of the company. The CIT(A) determined that since the entire business, including its assets and liabilities, was sold as a running concern, it could not be treated as a block of assets sale under Section 50(2). Instead, it was a long-term capital asset sale, qualifying for deductions under Section 48(2).

The Income Tax Department then challenged the CIT(A) ruling before the Income Tax Appellate Tribunal (ITAT), which upheld the lower court’s decision. The department subsequently filed an appeal before the Gujarat High Court, arguing that the case involved a substantial question of law.

High Court’s Dismissal

The Gujarat High Court dismissed the Revenue’s appeal, stating that the matter did not raise a substantial question of law under Section 260-A of the Income Tax Act, 1961. The court found no error in the decisions of the lower authorities and held that the transaction was a long-term capital asset sale.

The Revenue, dissatisfied with the High Court’s ruling, filed an appeal before the Supreme Court of India.

Supreme Court’s Decision

The Supreme Court, in its judgment delivered by Justices R.K. Agrawal and Abhay Manohar Sapre on April 18, 2017, upheld the findings of the lower courts, dismissing the Revenue’s appeal.

Key Arguments from the Judgment

The Supreme Court carefully analyzed the tax implications of the sale and addressed the arguments presented by both parties.

Arguments by the Petitioner (Revenue):

The Revenue contended that the sale was not a ‘slump sale’ but rather a sale of individual assets, making it subject to taxation under Section 50(2) as a short-term capital gain.
The Assessing Officer had correctly applied Section 50(2) by treating the depreciable assets as part of a block, which could not qualify for long-term capital gain treatment.
The lower authorities had misinterpreted the nature of the transaction, leading to an incorrect ruling in favor of the assessee.

Arguments by the Respondent (Equinox Solution Pvt. Ltd.):

The company asserted that the transaction involved the transfer of an entire business undertaking, not just individual assets.
The business had been owned for over six years, making it a long-term capital asset under the provisions of the Income Tax Act.
The provisions of Section 50(2) only apply to the sale of individual blocks of assets, not to the sale of an entire business as a going concern.
The company relied on past judicial precedents supporting the classification of such transactions as long-term capital gains.

Supreme Court’s Ruling

After reviewing the arguments, the Supreme Court ruled in favor of Equinox Solution Pvt. Ltd., confirming that:

The sale of an entire running business, including assets and liabilities, is not a sale of a block of assets but a ‘slump sale.’
The transaction qualifies as a long-term capital gain, making the assessee eligible for deductions under Section 48(2).
Section 50(2) is applicable only when individual depreciable assets are sold, which was not the case here.
The decisions of the CIT(A), ITAT, and High Court were correct, requiring no interference from the Supreme Court.

The Supreme Court also referred to the cases of Commissioner of Income Tax, Gujarat vs. Artex Manufacturing Co. (1997) 6 SCC 437 and Premier Automobiles Ltd. vs. Income Tax Officer (264 ITR 193), which supported the view that a sale of a business as a going concern constitutes a long-term capital gain.

Conclusion

The Supreme Court’s judgment reaffirmed the principle that the sale of a business as a running concern should be classified as a long-term capital gain rather than a short-term gain under Section 50(2). The ruling clarified that unless a transaction involves the sale of specific depreciable assets separately, Section 50(2) is not applicable.

This decision set an important precedent in income tax law, guiding similar cases where businesses sell entire undertakings rather than just specific assets.

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Download Judgment: Commissioner of Inco vs Equinox Solution Pvt Supreme Court of India Judgment Dated 18-04-2017.pdf

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