Capital gains on going-concern transfer, long-term land relief, real valuation of closing stock, and mandatory interest under section 234B.

Transfer of an entire business as a going concern, with assets and liabilities vesting in the transferee, was treated as a transfer attracting capital gains; the assessee failed on that issue. Separately identifiable land, acquired in 1981 and not shown to form part of the depreciable block, retained the character of a long-term capital asset and deduction under section 48(2) was allowed. On cessation of business, closing stock had to be valued on a real basis, so the revaluation addition was sustained. Interest under section 234B was held to be mandatory and automatic, and no separate hearing was required.

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Issues: (i) Whether the transfer of the entire business as a going concern gave rise to capital gains; (ii) whether the land transferred along with the business was entitled to treatment as a long-term capital asset with deduction under section 48(2); (iii) whether the addition made on account of revaluation of closing stock was sustainable; (iv) whether interest under section 234B could be levied without affording a hearing.

Issue (i): Whether the transfer of the entire business as a going concern gave rise to capital gains.

Analysis: The agreement provided for transfer of the business in its entirety to the company, with all assets and liabilities vesting in the transferee from the specified date. The transaction was treated as a transfer for income-tax purposes by reason of the provisions corresponding to section 2(47)(v), read with the principle that a transaction falling within section 53A of the Transfer of Property Act is a transfer for section 45(1). The contention that transfer of a running business as a whole is outside capital gains was rejected on the basis of the governing precedents applied to the facts.

Conclusion: The transfer of the business as a going concern was exigible to capital gains, against the assessee.

Issue (ii): Whether the land transferred along with the business was entitled to treatment as a long-term capital asset with deduction under section 48(2).

Analysis: The land was separately valued and there was no material to show that its value had been included in the block of assets. The asset had been acquired in 1981, and the Revenue did not rebut the finding that it stood apart from the depreciable block. On that footing, the land retained the character of a long-term capital asset and the statutory deduction was available.

Conclusion: The land was correctly treated as a long-term capital asset and the deduction under section 48(2) was allowable, in favour of the assessee.

Issue (iii): Whether the addition made on account of revaluation of closing stock was sustainable.

Analysis: Once the entire business had been transferred, the firm had ceased to function in law. In a case where the business has come to an end, closing stock has to be valued on a real basis and not merely at book value. The rule applied by the Supreme Court in relation to discontinuance of business and taking accounts on cessation governed the case, and the Tribunal's distinction on the ground that the firm survived for recovery of dues was rejected.

Conclusion: The deletion of the closing stock addition was not justified, against the assessee.

Issue (iv): Whether interest under section 234B could be levied without affording a hearing.

Analysis: Interest under section 234B was treated as mandatory and automatic on the authority applied by the Court. In that view, no separate opportunity on the levy was necessary.

Conclusion: The Tribunal was not right in directing a hearing before levy of interest under section 234B, against the assessee.

Final Conclusion: The references were answered in mixed terms, with the assessee succeeding only on the land-related capital gains issue and the Revenue succeeding on the remaining issues concerning transfer as a going concern, closing stock valuation, and interest under section 234B.

Ratio Decidendi: A transfer of an entire business as a going concern, where all assets vest in the transferee and the transfer is effective in law, can attract capital gains; separately identifiable land may remain a long-term capital asset; and on cessation of business the closing stock must be valued on a real basis, while interest under section 234B is mandatory.

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