2017 (2) TMI 912 - AT - Income Tax

Slump sale - Addition of excess liabilities over assets of the division to sale consideration for the purpose of computation of long term capital gain on the sale of the division - computation of income - whether the Assessing Officer was right in adding the amount of liability reflected in the negative net worth to the sale consideration for determining the capital gain on account of slump sale? Held that - The Revenue not only specifically challenged the finding of the Ld. Commissioner of Income Tax (Appeal) for ignoring the negative figure of net worth but also submissions were made on the issue. The Tribunal duly considered the decision the case of Ahmedabad Electricity Company Ltd. vs CIT (1992 (4) TMI 29 - BOMBAY High Court ) and CIT vs Mahalaxmi Textiles Mills Ltd. (1967 (5) TMI 4 - SUPREME Court) and then reached to a conclusion by holding that the Assessing Officer was right in adding the amount of liability reflected in the negative net worth of the assessee to sale consideration for determining the capital gain on account of slump sale. Respectfully following the order of the Special Bench and the factual matrix that neither any contrary decision nor the plea that the facts are different were brought to our notice by the assessee, therefore, the appeal of the assessee is dismissed.

Issues Involved:
1. Addition of excess liabilities over assets to sale consideration for computing long-term capital gain.
2. Determination of full value of consideration received or accruing.
3. Computation of net worth and its impact on capital gain calculation.
4. Whether negative net worth should be ignored or considered in capital gain computation.

Detailed Analysis:

1. Addition of Excess Liabilities Over Assets to Sale Consideration for Computing Long-Term Capital Gain:
The assessee contested the addition of excess liabilities over assets to the sale consideration for computing long-term capital gain. The Revenue argued that the negative net worth should be added to the sale consideration, as per the decision in Summit Securities Ltd. The Tribunal agreed with the Revenue, holding that the negative net worth must be considered in the computation of capital gains in slump sales under Section 50B of the Income Tax Act, 1961.

2. Determination of Full Value of Consideration Received or Accruing:
The Tribunal examined whether the full value of consideration for the slump sale should include the negative net worth. It was determined that the full value of consideration should be the amount actually received or accruing, not the fair market value unless specified otherwise by law. The Tribunal noted that the Assessing Officer's method of adding the negative net worth to the sale consideration was incorrect as it did not follow the legal process for determining fair market value.

3. Computation of Net Worth and Its Impact on Capital Gain Calculation:
The net worth of the undertaking was calculated by subtracting the value of liabilities from the aggregate value of total assets. The Tribunal emphasized that the net worth, whether positive or negative, must be considered in the computation of capital gains. The Tribunal rejected the assessee's argument that negative net worth should be ignored and taken as nil, stating that the cost of acquisition and cost of improvement of the undertaking should reflect both assets and liabilities.

4. Whether Negative Net Worth Should Be Ignored or Considered in Capital Gain Computation:
The Tribunal held that the negative net worth must be considered in the computation of capital gains. Ignoring the negative net worth would lead to an incorrect calculation of capital gains. The Tribunal clarified that the negative net worth should be added to the full value of consideration to determine the correct amount of capital gain, thus aligning with the Revenue's contention.

Conclusion:
The Tribunal concluded that the Assessing Officer was correct in adding the amount of liabilities reflected in the negative net worth to the sale consideration for determining capital gains on account of a slump sale. The appeal of the assessee was dismissed, and the computation of capital gains was upheld as per the Revenue's method, resulting in a capital gain of ?300 crore instead of the ?143 crore declared by the assessee.

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