Capital asset treatment of a going concern and refusal to apportion lump sum acquisition compensation.

A business undertaking transferred as a going concern falls within the wide definition of "capital asset" under section 2(14) of the Income-tax Act, 1961, because it comprises property, rights, liabilities and organisational incidents of ownership; capital gains can therefore arise on its transfer. Where the undertaking is acquired for a lump sum, however, the consideration cannot be reliably dissected into separate prices for individual assets, exempt assets or goodwill on a speculative basis. The compensation must be treated as consideration for the undertaking as a whole, and no item-wise apportionment is justified.

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Issues: (i) Whether the business undertaking acquired by the Government was a capital asset on the transfer of which capital gains could arise; (ii) Whether the lump sum compensation for acquisition of the undertaking could be apportioned among the constituent assets, including exempted assets and goodwill.

Issue (i): Whether the business undertaking acquired by the Government was a capital asset on the transfer of which capital gains could arise.

Analysis: The definition of "capital asset" in section 2(14) of the Income-tax Act, 1961 is of wide amplitude and includes property of any kind held by an assessee except what is expressly excluded. A business undertaking as a going concern comprises assets, rights, liabilities, organisation, and other incidents of property, and therefore falls within the statutory concept of capital asset. The transfer of such an undertaking is not excluded merely because it is transferred as a whole.

Conclusion: Yes. The undertaking was a capital asset, and the first part of the reference was answered in the affirmative.

Issue (ii): Whether the lump sum compensation for acquisition of the undertaking could be apportioned among the constituent assets, including exempted assets and goodwill.

Analysis: Where a whole undertaking is acquired for a lump sum, the compensation is not capable of reliable item-wise apportionment among the individual assets and components of the concern. In such a case, no part of the aggregate consideration can be attributed on a speculative basis to particular assets or to goodwill. The better view is that the transaction is of the undertaking as a whole, and the compensation cannot be dissected into separate prices for individual elements on conjectural lines.

Conclusion: No. The compensation could not be apportioned among the various assets, and no separate attribution to goodwill was justified.

Final Conclusion: The reference was answered in part in favour of the Revenue on the character of the undertaking as a capital asset and against the assessee on apportionment of the lump sum compensation, while the remaining questions were declined as premature or left unanswered.

Ratio Decidendi: A business undertaking transferred as a whole is a capital asset within section 2(14) of the Income-tax Act, 1961, but a lump sum consideration for its acquisition cannot be apportioned item-wise among its constituent assets on speculative assumptions.

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