Income Tax Notifications/Circulars

Taxability of surplus arising on sale of business as a going concern

Circular No. 23-D (LXXV III-6), Date 1965


Going Concern Lost

Recently, in the case of Mugneeram Bangur & Co. (Land Department), Calcutta (56 ITR Short Notes page 13) [reported as (1965) 57 ITR 299 (SC)] 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 lump 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 Rai Bahadur Lakshmandas Mohanlal and Sons vs. 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 vs. CIT (1963) 48 ITR 483 (Pat.) 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 Acts are found applicable should also be considered.

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