Computation of Income for sale of business-whether Business income or capital gains - Professionals - Taxation - TIK Share
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Computation of Income for sale of business-whether Business income or capital gains


Rahul Rai

2014-02-22

I have a very practical doubt.

One of the client was running a bakery in rented premises. The bakery was reputed and had good sales.

Client sold the bakery with full rights. Client received 20 Lakhs for the sale.

Now the doubts are:

  1. Whether the money received is taxable under the head "Profits from Business and Profession"? or,
  2. The money received is taxable under the head "Capital Gains"?

Please reply with valid sections and reasons.

CA Pulkit Sharma

2014-02-25

The income will be chargeable under the head Capital Gains. The transaction is of a slump sale.

As per section 50B of Income Tax Act:

  1. Any profits or gains arising from the slump sale effected in the previous year shall be chargeable as long term capital gains and shall be deemed to be the income of previous year in which transfet took place. If the business is held for less than 3 years, capital gains shall be deemed to be short term capital gains.
  2. In case of slump sale of the capital asset being one or more undertakings the "net worth" of the undertaking shall be taken as cost of acquisition and cost of improvement.
  3. Indexation benefits are not allowed.
  4. Every assessee in case of slump sale, shall furnish along with the return of income, a report of a chartered accountant in form no, 3CEA indicating the computation of the net worth of the undertaking or division as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at.

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