2017 (1) TMI 982 - AT - Income Tax

Addition on account of negative net worth of the undertaking under slump sale while computing capital gains u/s.50B - Held that - We find that the assessee and FHL had entered into a business agreement, that as per the agreement excess liabilities arising during the transition period had to be adjusted from the lump-sum amount of ₹ 186.58 crores,that during the process of transaction liability of ₹ 43.36 crores arose. In these circumstances, the FAA had rightly held that lump-sum consideration received by the assessee had to be taken at ₹ 143.1 crores Rs.1 86.58 crores(-) ₹ 43. 36 crores . We are of the opinion that the order of the FAA does not suffer from any factual or legal infirmity. Therefore, upholding the same we decide ground 1.b(i) against the AO. Allowing deduction from lump-sum consideration received by the assessee - Held that - We find that in pursuance of the agreement, entered into by the assessee, with FHL Escrow Account was opened,that ₹ 15 crores was kept in the said account for settling the future liabilities,that the assessee was to receive the amount from the Escrow a/c.after a period of 2 years,that a liability amounting to ₹ 2.79 crores arose and was settled during the year,that the assessee had filed a revised return and made the claim about it, that there is no doubt about the incurring of the expenditure.The assessee had produced necessary evidences in that regard and same were found to be genuine by the FAA. In these circumstances,we are of the opinion that there is no need to interfere with the order of the FAA. Treating the short term capital gains(STCG) as long term capital gains (LTCG) - Held that - As referred to proviso (1) of section 50B of the Act if assets were to be assessed under the head STCG all should have existed below 36 months,that even if one of the assets existed for a period more than three years same has to be treated as Long term asset. There is no need to interfere with the order of the FAA,as four hospitals of the assessee were owned by it for a period of more than 36 months and that it is a case of slump sale.Upholding his order,we dismiss Gr.No.2. Disallowance u/s 14A - Held that - We find that assessee had not earned any exempt income during the year, nor had it claimed any expenditure against any tax free income.Thus,the twin pre-condition for invoking the provisions of section 14A r.w.r.8D of the Rules i.e.,earning of exempt income and claiming expenditure to earn the same,are missing.Therefore,confirming order of the FAA we decide the last ground of appeal against the AO.

Issues Involved:
1. Addition of ?252.61 crores on account of negative net worth under slump sale for computing capital gains u/s 50B of the Income Tax Act.
2. Levy of interest u/s 234B of the Income Tax Act.
3. Deleting the disallowance of ?18.43 crores claimed as expenses incurred in connection with slump sale.
4. Enhancement of slump sale consideration from ?143.21 crores to ?186.58 crores.
5. Allowing deduction of ?2.79 crores from lump-sum consideration received.
6. Treating short-term capital gains (STCG) as long-term capital gains (LTCG) for the slump sale.
7. Disallowance of ?48.71 lakhs made u/s 14A r.w.r. 8D of the Income Tax Rules.

Detailed Analysis:

1. Addition of ?252.61 crores on account of negative net worth under slump sale for computing capital gains u/s 50B:
The assessee challenged the addition of ?252.61 crores made by the AO on account of negative net worth while computing capital gains under section 50B. The AO had observed that the net worth of the assessee was negative because liabilities exceeded assets, and thus, added the negative net worth to the full value of consideration for computing capital gains. The FAA upheld the AO's order. The Tribunal referred to the case of Summit Securities Ltd., which held that the negative net worth should be added to the sale consideration for determining capital gains. Respectfully following the above, the first ground of appeal was decided against the assessee.

2. Levy of interest u/s 234B:
The second ground related to the levy of interest u/s 234B, which was consequential in nature and not elaborated upon.

3. Deleting the disallowance of ?18.43 crores claimed as expenses incurred in connection with slump sale:
The AO disallowed the expenditure of ?18.43 crores claimed by the assessee under the head expenses incurred in connection with the slump sale, stating that section 50B did not provide for such deductions. The FAA, however, allowed the appeal, holding that section 50B was a code in itself only for determining the cost of acquisition and improvement but not for computing capital gains. The Tribunal, following the Summit Securities Ltd. case, upheld the FAA's decision, deciding the ground against the AO.

4. Enhancement of slump sale consideration from ?143.21 crores to ?186.58 crores:
The AO enhanced the slump sale consideration from ?143.21 crores to ?186.58 crores, stating that the liabilities exceeded ?599.61 crores and adjustments were necessary. The FAA held that the excess liability of ?43.36 crores should be deducted from the lump-sum consideration, as it was not received by the assessee. The Tribunal upheld the FAA's decision, stating that the order did not suffer from any factual or legal infirmity.

5. Allowing deduction of ?2.79 crores from lump-sum consideration received:
The AO disallowed the deduction of ?2.79 crores claimed by the assessee, stating it amounted to double deduction. The FAA allowed the deduction, holding that the amount was paid from the escrow account as per the agreement and was not received by the assessee. The Tribunal upheld the FAA's decision, confirming that the expenditure was genuine and there was no need to interfere with the order.

6. Treating STCG as LTCG for the slump sale:
The AO treated the entire gain on slump sale as STCG, while the assessee claimed it as LTCG. The FAA held that the holding period of the entire undertaking should be considered as a whole unit, not individual assets, and since some assets were held for more than 36 months, the gain should be treated as LTCG. The Tribunal, following the Summit Securities Ltd. case, upheld the FAA's decision.

7. Disallowance of ?48.71 lakhs made u/s 14A r.w.r. 8D:
The AO made a disallowance of ?48.71 lakhs u/s 14A r.w.r. 8D, stating that the investment was capable of earning exempt income in the future. The FAA allowed the appeal, noting that the assessee had not earned any exempt income during the year nor claimed any expenditure against it. The Tribunal upheld the FAA's decision, confirming that the twin pre-conditions for invoking section 14A r.w.r. 8D were missing.

Conclusion:
The appeals filed by the AO and the assessee were dismissed, and the order was pronounced in open court on 06th January 2017.

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