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TMI Blog2012 (3) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... a slump sale." 2. Earlier this case came up for hearing before a division bench. Members of the bench were not satisfied with the correctness of certain decisions of the Tribunal relied on behalf of the assessee in support of its case, which had found favour with the learned CIT(A). A reference was made to the Hon'ble President for the constitution of Special Bench, who constituted the present Special Bench to consider and decide the following question and also dispose the appeal:- "Whether in the facts and circumstances of the case, the Assessing Officer was right in adding the amount of liabilities being reflected in the negative net worth ascertained by the auditors of the assessee to the sale consideration for determining the capital gains on account of slump sale?" 3. Initially when the Special bench took up hearing of the appeal, the assessee raised a preliminary objection against the very constitution of special bench. Such objection has since been rejected vide our separate order in DCIT VS. Summit Securities Ltd. reported at (2011) 132 ITD 1(Mum)(SB). That is how this appeal is now before us for disposal on merits. 4. Briefly stated the facts of the case are tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of income. In the audit report the net worth of the undertaking was quantified at a negative sum of Rs.157.19 crore. As such, the entire sale consideration of Rs.143 crore was treated as long term capital gain by the assessee in its return of income. Pursuant to the Scheme, the assessee-company also transferred "Investments" to KEC Holdings Limited for a consideration of Rs. 115 crore and claimed long term capital loss of Rs.455.94 crore thereon. In the present appeal we are concerned only with the issue of capital gain arising from the transfer of PTB and not with the long term capital loss from the transfer of "Investments". Coming back to the transfer of PTB, the assesseecompany received sale consideration of Rs.143 crore by way of equity and preference shares. It received 3,76,35,858 equity shares of Rs. 10 each fully paid up at a total premium of Rs.92.36 crore. The assessee also received 12,99,966 preference shares of Rs.100 each. The receipt of these equity and preference shares constituted total sale consideration of Rs. 143 crore. The shares so received were distributed amongst the equity and preference shareholders of the assessee-company in the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of accounts is in excess of the aggregate value of assets ( Rs. 1360 crore). Whereas the case of the assessee is that the capital gain should be computed at Rs. 143 crore by adopting the figure of sale consideration at Rs. 143 crore and that of net worth as per section 50B at Rs. Nil, the Revenue is pleading that the capital gain be computed at Rs. 300 crore by either taking the sale consideration at Rs. 300 crore ( Rs. 143 crore plus Rs. 157 crore) [Ground no. 1] or by taking the amount of sale consideration at Rs. 143 crore but adding to it the negative net worth of Rs. 157 crore [Ground no. 2]. 7. We have heard the rival submissions at length and perused the relevant material on record in the light of precedents cited by both the sides. There is no dispute on the fact that the assessee transferred its PTB to KEC Infrastructure Limited (presently known as KEC International Limited) on the basis of Scheme u/s 391 to 394 of the Companies Act, 1956 duly approved by the Hon'ble Bombay High Court. A copy of the judgment of the Hon'ble Bombay High Court approving the Scheme is available in the paper book starting from page 121. As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y classified into four broad categories, viz., (i) Depreciable assets (ii) Non-depreciable tangible assets (iii) Non-depreciable intangible assets (iv) Other assets Let us see how capital gain is computed when these assets are separately transferred. (i) Depreciable assets Section 50 contains special provision for computation of capital gains in case of depreciable assets. When this section is read in conjunction with section 50A providing special provision for cost of acquisition in case of depreciable assets, it emerges that the capital gains in the case of depreciable assets is computed by reducing from the full value of consideration received or accruing as a result of transfer of the asset, the expenditure incurred wholly and exclusively in connection with such transfer and the written down value of the block of assets at the beginning of the year as increased by the actual cost of any asset falling within the block of assets acquired during the year, where such block of assets ceases to exist as such. Section 50A provides that the cost of acquisition in case of depreciable asset shall, for the purposes of sections 48 and 49, be considered as the written down val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of any improvement. Further Explanation to section 48 defines the meaning of 'indexed cost of acquisition' to mean 'an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later'. Ongoing through section 48 along with other relevant sections, it can be noticed that where a long term capital asset is transferred, the cost of acquisition and cost of improvement attain a higher value by the reason of application of Cost Inflation Index. Apart from that, section 112 provides tax on long term capital gains at rates lower than the maximum marginal rate. For the sake of simplicity, we are restricting ourselves to the transfer of a short term non-depreciable asset. To illustrate if Land was purchased for Rs. 5 and it is transferred for a sum of Rs. 78, then the amount of capital gain shall be Rs. 73 (Full value of consideration received at Rs. 78 - original cost of acquisition of Rs. 5) (iii) Non-deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of capital gain will be Rs. 0 (Full value of consideration received at Rs. 2 - Cost of acquisition and cost of improvement of Rs. 2) 10. From the above discussion it is manifest that for the purposes of computing capital gain on the transfer of capital assets their cost of acquisition may undergo change vis-à-vis the cost at which these were actually acquired. It can be elevation to a higher level in case long term capital assets due to indexation; reduction to written down value in case of depreciable assets; and consistent in case of other short term capital assets. There arises no difficulty in computing capital gain when the full value of consideration received or accruing to the assessee as a result of transfer of such capital assets along with their cost of acquisition and the cost of any improvement are ascertainable. As can be seen from the examples given in para 9 above that the amount of capital gain on the transfer of all the capital assets collectively (or individually) is Rs. 95 (from Depreciable assets at Rs. 2; from Nondepreciable tangible assets at Rs. 73; from Non-depreciable intangible assets at Rs. 20; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such a case, the computation of capital gain poses difficulty because full value of consideration cannot be attributed to distinct assets and for computing capital gain not only the full value of consideration but also the cost of acquisition and cost of improvement of such asset is separately required. It is quite possible that some of the assets in such a bundle of assets transferred may be depreciable and others short term or long term. In this scenario, the cost of acquisition and cost of improvement may be different from the book value depending upon the time when the long term capital assets were acquired. The problem worsens and the difficulty in computing the capital gain is compounded when the entire undertaking is transferred as a whole not only with all its assets but also liabilities (both existing and contingent). The computation of capital gain in such cases becomes a tedious task because the full value of consideration of the undertaking will be the value assigned by the parties to all assets of the undertaking as on the date of transfer as reduced by the value of liabilities. 12. Some courts held that when business as a whole is transferred for a lump sum conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets tenancy rights etc. was not allocable item-wise. In para no.5 of this judgment, the Hon'ble Supreme Court noted that by an amendment to section 50B inserted by the Finance Act, 1999 with effect from 1st April, 2000, the cost of acquisition is now notionally fixed in case of 'slump sale' and the assessee is required to draw up his balance sheet as on the date of transfer for its undertaking and net worth of that date is now required to be taken into account. It has been observed by Their Lordships that "it is only after 1st April, 2000 that computation machinery came to be inserted in s. 48 which deals with mode of computation." SLUMP SALE 14.1 Failure to compute the capital gain in case of transfer of undertaking due to reasons discussed above propelled the Finance Act, 1999 to give birth to section 50B and section 2(42C) along with other relevant provisions with effect from 1.4.2000 to facilitate the computation of capital gain in case of the transfer of undertaking as a whole. Section 2(42C) of the Act defines "slump sale" to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288 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 in accordance with the provisions of this section. Explanation 1.-For the purposes of this section, ''net worth'' shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account : Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.-For computing the net worth, the aggregate value of total assets shall be,- (a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43 ; and (b) in the case of other assets, the book value of such assets." 14.3 Following are the salie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. In such a case even if some assets of the undertaking were purchased a day before its transfer, they will also form part of the undertaking as a long term capital asset. So long as the undertaking is owned and held by the assessee for a period of more than 36 months, the capital gain arising from its slump sale is considered as long term capital gain notwithstanding the period for which its individual assets were owned and held. (c) The net worth of the undertaking or the division is deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49. What is "net worth" has been defined in Explanation 1 to section 50B to mean the aggregate value of the total assets of the undertaking or the division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account. Explanation 2, as is applicable to the year in question, further elaborates the ambit of 'aggregate value of total assets' by providing that in case of depreciable assets it shall be the written down value of block of assets determined as per section 43(6) and in case of other assets, their book value. Special care has been taken to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities, the concept of market value of the specific assets and liabilities of the undertaking or division has been made redundant insofar as the computation of capital gain is concerned. (e) Sub-section (2) of section 50B makes it abundantly clear that the undertaking or division as a whole is considered as one capital asset and the net worth of this capital asset is considered as cost of acquisition and cost of improvement for the purposes of sections 48 and 49. Therefore, it becomes patent that section 50B is a code in itself only for the determination of cost of acquisition and cost of improvement of the undertaking but not for the computation of capital gains in case of slump sale. The object of section 50B is to simply determine and supply the figure of cost of acquisition and cost of improvement of the undertaking to section 48 which eventually computes the amount of capital gain u/s 45. Once the cost of acquisition and cost of improvement of the undertaking or division, being its net worth along with the decision as to whether the undertaking is a long term or short term capital asset is decided and forwarded to section 48, the computation provision in the later section is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t permits computation of capital gain on the transfer of capital assets and not on any liabilities. It is so for the reason that unlike the value of assets that undergoes change at a given time over the purchase price, the current value of liabilities at a given time is equal to or insignificantly different from that reflected in the books of account. In a case of non-interest bearing liabilities, say a sum of Rs. 2, the amount shown as payable will be the current liability of Rs. 2; and in a case of interest bearing liability of say Rs. 2, the amount of interest, if unpaid, say Rs. 1, shall automatically be included in the value of liability in the books at Rs.3. In that case also the amount shown as payable in the books will be the value of current liability. There may be a possibility of a contingent liability not appearing in the books of account, which may or may not get eventually converted into real liability at a later point of time. Unless there is a positive reference to any contingent liability, the liabilities appearing in the books of account represent the amount actually payable by the undertaking. So, if the assessee wants to close the underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value Agreed value 1. WDV of depreciable assets as per Balance Sheet 3 2. Non-depreciable tangible assets as per Balance Sheet 5 108 105 3. Non-depreciable intangible assets 0 0 4. Other assets 2 A. Aggregate value of assets of the undertaking 10 108 105 1. Secured loans 2 5 2. Unsecured loans and other liabilities 3 B. Total liabilities 5 5 5 A-B Net 5 103 100 It can be seen that the full value of consideration received or accruing as a result of transfer of all the depreciable assets, non-depreciable tangible assets, nondepreciable intangible assets and other assets collectively as one unit without assigning value of individual assets comes to Rs. 105. As against that, the cost of acquisition and cost of improvement of all the assets collectively comes to Rs. 10 resulting into the capital gain on transfer of all the assets collectively at Rs. 95. Now suppose that instead of purchasing all the assets collectively as one unit, the transferee also undertakes to pay the liabilities of the undertaking worth Rs. 5, he will pay only a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is what section 50B specifically provides that the cost of acquisition and cost of improvement of the undertaking, being the 'net worth' is 'the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account'. 14.6. To sum up, in case of a slump sale Capital gain on transfer of 'Undertaking' (All assets minus All liabilities) = Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking - 'Net worth' or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking SCOPE OF APPEAL - WHETHER RESTRICTED ONLY TO PRECISE QUESTION BEFORE SB OR OVER THE SUBJECT MATTER 15.1 It has been noted above that the grievance of the Revenue is dual reflected through two grounds. First that the sale consideration of the undertaking ought to have been taken at Rs. 300 crore and the second, which appears to be alternative is that the learned CIT(A) was not justified in ignoring the negative figure of net worth for computing capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, but the subject matter of the appeal before us is the computation of capital gain. This special bench has not only to answer the specific question but also dispose the entire appeal. Obviously there can be no fetters on the power of the Tribunal to consider the point of negative net worth also as the ultimate question for determination before us is the computation of capital gain. Such computation involves not only ascertaining the full value of consideration but also all other aspects which are germane to such computation. It may be relevant to note Rule 11 of Income Tax Appellate Tribunal Rules, 1963 specifically provides that : "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule". This rule empowers the appellant, which is Revenue in the instant case, to urge any ground not set forth in the memorandum of appeal provided the Tribunal gives sanction to it. That apart, the second limb of rule 11 empowers the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also our duty to determine the point as to whether the figure of negative net worth should be taken as zero or in negative, which has a direct bearing on the overall question of computation of capital gain in case of slump sale, which is subject matter of appeal before us. FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING 16.1 Having noted supra the unique nature of the capital asset being the 'undertaking' as defined u/s 2(42C) read with Explanation 1 to section 2(19AA) as including not only the positive assets but also the liabilities attached to it, we shall now delve on the determination of 'full value of consideration received or accruing' as a result of its transfer, which is the question posted before the special bench. In common parlance this expression means the sale price received or accruing as a result of the transfer of capital asset. Here it is important to mention that the expression "full value of consideration" is succeeded by the words "received or accruing". Thus the full value of consideration representing the sale price is only the amount which is actually received or accrues to the assessee as a result of the transfer of capital asset. What is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of transfer, include land or building or both, the stamp value shall be ignored insofar as the computation of full value of consideration of the undertaking as a whole is concerned. 16.2 It is pertinent to note that the expression 'fair market value' of a capital asset has been used in different provisions under the head 'Capital gains' for denoting in certain cases as the 'full value of consideration' and in certain others as the 'cost of acquisition'. For example, section 45(1A) provides that where any person receives at any time during the previous year any money or any other assets under an insurance from an insurer on account of damage to, or destruction of the any capital asset as a result of flood, typhoon or riot etc., then any profit or gain arising from the receipt of such money or other assets shall be chargeable to income-tax under the head 'Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the 'fair market value' of other assets on the date of such receipt shall be deemed to be ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital asset became the property of the previous owner. 16.4. Thus it can be noticed that the concept of "fair market value" in relation to a capital asset, as defined in section 2(22B), has been used interchangeably in certain sections of this Chapter to represent the cost of acquisition' while in others as the full value of consideration received or accruing'. The principle which thus follows is that the full value of consideration for the purposes of section 48 has to be considered as only the amount actually received or accruing as a result of the transfer of capital asset except where it has been substituted with fair market value or by any other mode. It is only in such specific cases that the actual amount received or accruing shall be replaced with the fair market value or such other mode as specified. In the absence of any specific provision, the general meaning of the amount actually received or accruing is to be considered as the full value of consideration received or accruing as a result of transfer of capital asset. Coming back to the legal position under consideration, it is noted that nowhere in any provision, either section 50B or sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value of a capital asset to a Valuation Officer. It is further relevant to note that in determining such fair market value, the Valuation Officer also obeys the mandate of relevant provisions of the Wealth-tax Act as have been referred to in section 55A itself. This indicates that the Assessing Officer cannot suo moto determine the fair market value of a capital asset. Coming back to the facts of the instant case it is observed that the A.O. had not made any reference to the Valuation Officer for determining the so called fair market value of the undertaking to substitute it with its full value of consideration received or accruing. He has simply added the amount of negative net worth to the consideration received for determining the so called fair market value' of the undertaking to substitute it with the full value of consideration received or accruing. Thus it is manifest that the process of determining fair market value as adopted by the Assessing Officer has no sanction of law despite the fact that there is no such provision for substituting the fair market value with the full value of consideration received or accruing as a result of transfer of an undertaking u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferee then it would mean that the full value of consideration of the undertaking be taken as the amount actually received plus the liabilities which will be discharged by him. We do not find any merit in such contention. The full value of consideration of the undertaking in Table A at Rs. 100 indicates its two inbuilt components, that is, the value of all assets ( Rs. 105) and all liabilities ( Rs. 5), which have submerged into this value of consideration of the undertaking. It is wholly improper to argue that since the transferee after paying Rs. 100 will also discharge liabilities of Rs. 5, the full value of consideration of the undertaking should be considered as Rs. 105. If we add liabilities of Rs. 5 to the agreed consideration of the undertaking at Rs. 100, it would give us the agreed value of the assets alone at Rs. 105, whereas the question is about the determination of the full consideration of the undertaking remaining after the reduction of the value of liabilities from those of assets. In our considered opinion the full value of consideration of the undertaking cannot be anything other than Rs. 100, which in the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering not only the value of all the assets but also all the liabilities of the undertaking, a part of such liabilities representing negative net worth cannot be again added to the sale consideration. In the case of George Henderson & Co. Ltd. (supra) it has been categorically held that "the consideration for the transfer of a capital asset is what the transferor receives in lieu of the asset he parts with, viz. money or money's worth ........". It follows that the expression "full value of consideration" in section 48 cannot be construed as anything other than the full value of the thing received by the transferor as a consideration for transfer of undertaking. This case is thus of no help to the Revenue. Similar is the position regarding the other judgment relied by the ld. DR in CIT Vs. Gillanders Arbuthnot & Co.[(1973) 87 ITR 407 (SC)] in which it has been held that where the first proviso to section 12B(2) is not attracted, full value means, sale price actually received. These two cases support the proposition that in the absence of substitution of full value of consideration of the capital asset with the fair market value of the asset, it is impermissible to deviate from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for the purpose of computing capital gain. In the instant case the capital asset transferred is the undertaking which comprises not only its positive assets but the liabilities as well. The assessee realized a sum of Rs. 143 crore as full value of consideration of the undertaking as a whole. This amount of Rs. 143 crore represents excess of the agreed/market value of all the assets of the undertaking as reduced by the liabilities undertaken to be discharged. In other words, the value of total liabilities including Rs. 157 crore is already included in Rs. 143 crore. The situation would have been different if the transferee company paying Rs. 143 crore to the assessee had also undertaken to discharge certain other liabilities of the assessee unrelated with the undertaking. In that case the full value of consideration of the undertaking would have been Rs. 143 crore plus the value of such outside liabilities agreed to be paid by the transferee, having no relation with the undertaking. As it is an undisputed position that the sum of Rs. 157 crore represents excess of liabilities over the book value/w.d.v. of the assets of the undertaking i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ull value of consideration of the undertaking. As such, we are not inclined to find any assistance to the Revenue's case from the judgment of the Hon'ble Gujarat High Court in so far as the question of the adequacy of the sale consideration is concerned. 16.13. In the light of the above discussion it is held that the full value of consideration of the undertaking for the purposes of computing the capital gain u/s 48 should be taken at Rs. 143 crore and not Rs. 300 crore. The Departmental contention in this regard is jettisoned. NET WORTH 17.1 The Rs. net worth' of the undertaking has been determined by the assessee's auditor u/s 50B(2) as under :- Free hold Land 4,85,107 Leasehold Land 15,37,83,274 Depreciable assets at w.d.v. 35,43,13,503 CWIP at book value 15,21,72,070 Current assets at book value 1294,54,52,830 Total assets 1360,62,06,784 Less : Liabilities 1517,81,07,737 Net worth (-) 157,19,00,953 17.2 It can be seen from the above calculation that the written down value in respect of the depreciable assets is Rs. 35.43 crore and the book value of all other assets is at Rs. 1325.19 crore thereby giving aggregate value of total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting capital gain on the transfer of assets which are embedded in the undertaking, the process of calculating net worth of the undertaking is taken up so as to match it with the full value of consideration which is settled at a lump sum figure for all the assets minus all liabilities of the undertaking. When we reduce the full value of the consideration from the net worth of the undertaking, what we in fact get is the capital gain on the transfer of bundle of assets of the undertaking by impliedly negating the effect of the value of liabilities from both the full value of consideration and the cost of acquisition at the same figure because the book value and current value of liabilities remains the same as discussed in para 14.4 above. 17.5 Section 50B stipulates that the net worth of an undertaking is equal to the aggregate value of total assets of the undertaking as reduced by the value of liabilities. The aggregate value of the assets and the value of liabilities as per Expl. 2 is the w.d.v of the depreciable assets, book value of other assets and the book value of all the liabilities. To be more elaborate the aggregate value of total assets' shall require not only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition at more than book value of such assets, the computation will give absurd results. Similarly we cannot ignore part of the liabilities from the net worth because the full value of consideration is determined by considering the effect of all the liabilities. If only a part of the liabilities are included in the net worth, the computation of capital gain will be incorrect as the full value of consideration has been determined by reducing the value of all the liabilities. Thus it is evident that for the purposes of working out the amount of capital gain u/s 45, the computation u/s 48 can be correctly done only by keeping intact all the assets and all the liabilities of the undertaking in full value of consideration and also net worth. 17.7 The figure from Table A will demonstrate the calculation of capital gain as under : - Capital gain on transfer of Undertaking' (All assets minus All liabilities) is Rs. 95 ( Rs. 95 minus Rs. 0) , that is Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking Rs. 100 ( Rs. 105 minus Rs. 5) - Rs. Net worth' or in other words the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion which emerges is that the full value of consideration of the undertaking comes to Rs. 90 as against the net worth at a figure of Rs. (-)5. Whereas the case of the assessee is that negative net worth of Rs. (-)5 be ignored and capital gain be worked out at Rs. 90, the Revenue is contending that the net worth of Rs. (-)5 should be taken at a negative figure so that the capital gain on the transfer of undertaking comes to Rs. 95 [ Rs. 90 +5 {-(-5)}]. When we consider Tables A & B above it can be easily noticed that though the agreed value of all the assets of the undertaking as on the date of transfer is Rs. 105, but the full value of consideration of the undertaking in Table A has come to Rs. 100 because of the value of liabilities at Rs. 5 and in Table B it has come to Rs. 90 because of the value of liabilities at Rs. 15. The value of assets being equal, higher the value of liabilities lower the value of consideration of the undertaking and vice versa. Further it is relevant to note that in case of slump sale what is transferred is not only the assets but also all the liabilities of the undertaking for the full v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a result of the transfer of the undertaking Rs. 90 ( Rs. 105 minus Rs. 15) - Rs. Net worth' or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking Rs. - 5 ( Rs. 10 minus Rs. 15) 17.10 Now we will take up various arguments put forth by the learned A.R. in support of his case that the figure of negative net worth be ignored and taken at nil value for the purpose of computing capital gain. The following broad submissions have been made in this regard which we will take up one by one for consideration. (i) Cost of acquisition cannot be in negative. 17.11.1 The ld. AR argued that since the net worth of the undertaking represents cost of acquisition and cost of improvement of the undertaking, such cost can never be in negative. In other words it cannot be contemplated that a person purchases an asset without paying anything but rather taking something more from the seller. He contended that the Act has not ascribed any meaning to the words cost', worth', net worth' in the context of section 50B and hence their dictionary meaning should be adopted for this purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the words but those meanings do not help. It has been specifically observed : "We have to understand the meaning of those words in the context in which they are used. Words in the section of a statue are not to be interpreted by having those words in one hand and the dictionary in the order. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve." In the case of CIT v. Anand Theaters etc. [(2000) 244 ITR 192 (SC)] it has been held by Their Lordships that dictionary meaning of a word should not be adopted where the context conveys a different meaning. It has been laid down : "In our opinion dictionary meanings, however helpful in understanding the general sense of the words, cannot control where the scheme of the statute or the instrument considered as a whole clearly conveys a somewhat different shade of meaning. It is not always a safe way to construe a statute or a contract by dividing it by a process of etymological dissection and after separating words from their context to give each word some particular definition given by lexicographers and then to rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1517 crore undertaken by the transferee and not only the negative net worth of Rs. 157 crore which is a fraction of total liabilities. 17.12.2 This contention of the learned AR defies the very rationale behind the computation of capital gain in case of slump sale. It has been noticed above that the value of assets fluctuates over the period vis-à-vis their book value/w.d.v. but the amount of liabilities appearing in the balance sheet as on a particular date normally coincides with the current value of such liabilities on a given date. In that view of the matter the figure of net worth is the result of consideration of current value of liabilities which also happens to be their book value vis-à-vis the only written down value / book value of the assets. If the amount of all liabilities is added to the full value of consideration of the undertaking, it will mean that current/book value of liabilities to the extent it equalizes book value/w.d.v. of the assets has been considered twice in the computation of capital gain on the sale of undertaking, which will be irrational. It can be seen from Table B above that the actual profit from the transfer of bundle of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... void of merits. The reason is obvious for using the words "deducting from" in section 48 and not "deducting from or adding to" to the full value of consideration received or accruing as a result of transfer of the capital asset. When we talk of "deducting" net worth from the full value of consideration for computing capital gain u/s 48, it automatically implies that whatever way the net worth be, that is positive or negative, it will be taken care of accordingly. If the net worth is positive, "deducting from" the full value of consideration shall mean that the positive figure as supplied by section 50B in absolute terms shall be deducted. However, if it is negative then deducting a negative figure will ultimately mean adding to the full value of consideration for determining the income chargeable under the head "Capital gains". If the legislature had used the expression "deducting from or adding to", as contended by the ld. AR, in between the full value of consideration' and net worth', then the ridiculous results would have followed. Talking of the net worth in negative and considering it in juxtaposition to "adding to" the full value of consideration, would have had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of consideration of the undertaking, though not separately indicated, will be depressed accordingly. In case the book value of all the liabilities is more than the book value/w.d.v. of all the assets, it is quite natural that the capital gain on the transfer of undertaking will be more than the full value of consideration because of the reason that the value of liabilities undertaken by the transferee stands embedded in and has the effect of reducing the full value of consideration accordingly. As such we are not inclined to accept this contention raised on behalf of the assessee. (v) The words as reduced by' pre-suppose that preceding figure is higher than the succeeding 17.15.1 The ld. AR contended that Explanation 1 to section 50B provides that the net worth shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking as appearing in the books of account'. He emphasized on dictionary meaning of the word "reduced" as referring to "diminish in size, amount, extent or number : make smaller". As the word reduce' refers "to bring down", the learned AR contended that "the value of liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of assets, therefore, fails at the very outset. The further argument that if the value of liabilities is more than the aggregate value of total assets then the "net worth" should be restricted to zero, runs contrary to the main argument that the words as reduced by' can never mean that the value of liabilities will be more than the aggregate value of the assets. 17.15.3 Insofar as the reliance of the learned AR on clause 315 of the Direct Tax Code Bill, 2010 is concerned, we find that the same does not advance his case any further. The said clause reads as under:- "315. In this Code, unless otherwise stated, - (a) a reference to any income, or to the result of any computation, shall be construed as a reference to both the negative and positive variation of the income or the result, as the case may be; (b) any direction for aggregation of two or more items, which are expressed as amounts, shall be construed also to include a direction for aggregation of negative and positive amounts in all their combinations; (c) the value of any variable in a formula shall be deemed to be nil, if the value of such variable is indeterminable or unascertainable." 17.15.4 The first co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, transpires that nothing new has been brought in to the Code by way of insertion of Clause 315 providing that the income or aggregation of two or more items shall include both positive and negative amounts. What was earlier implied has now been sought to be expressed. We, therefore, find this contention as bereft of any force. 17.15.5 It is relevant to note that the cost of acquisition and cost of improvement of an undertaking or its net worth has been incorporated in section 50B(2) by way of a deeming provision. It has been made clear in sub-section (2) that : "the net worth' of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost or improvement for the purposes of sections 48 and 49". It is trite that a deeming provision or a legal fiction presumes a hypothetical state of affairs and mandates to substitute it with the real. Such an artificial meaning is enacted with a specific purpose which is confined to that provision alone. In this way, the deeming provision tends to ignore the characteristics normally attaching to a particular connotation. In such a situation the commonly understood meaning of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account for the purpose of computing profits. The facts of that case are that there was a loss of Rs. 6.86 crore from the export of trading goods and profit of Rs. 3.78 crore from export of self-manufactured goods. The assessee claimed deduction u/s 80HHC on a sum of Rs. 3.78 crore by ignoring the loss of Rs. 6.86 crore from the export of trading goods. The Assessing Officer did not allow any deduction u/s 80HHC for the reason that there was a net loss from export of goods and hence deduction was not permissible. The Hon'ble Supreme Court eventually upheld the Assessing Officer's stand by holding that the negative figure of loss of Rs. 6.86 crore cannot be ignored for computing the income eligible for deduction u/s 80HHC. It is on this strength of this judgment that the learned AR contended that the figure of negative net worth computed u/s 50B be also ignored and taken as nil as has been done by the Hon'ble Supreme Court in this case. 17.15.7 There is no merit what so ever in this contention. The ratio decidendi in the case of IPCA Laboratory Ltd.(supra) operates in an altogether different field, being the eligibility or otherwise of deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the eligible income then any addition should be made to the total income. Thus in respect of ncome based deductions', there has to be some positive qualifying income so as to avail the benefit of deduction. And no deduction is available when there is either no eligible income at all or a loss. In both such cases the amount of deduction will be Nil. Section 80HHC falls in Chapter VI-A - C. "Deductions in respect of certain incomes". Unless there is an income from exports included in the gross total income, there cannot be any deduction in respect of section 80HHC. The existence of a positive income is a requisite condition to claim deduction under the relevant section falling within this sub-Chapter. Reverting to the case of IPCA Laboratory Ltd. it can be seen that there was a loss from export of trading goods at Rs. 6.86 crore and income from export of self-manufactured goods at Rs. 3.78 crore thereby giving the net loss of Rs. 3.08 crore from the export of goods. As section 80HHC provides for deduction in respect of income' from export of goods, naturally there could not have been any question of granting deduction. On the contrary we are dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp duty should be recovered on the market value of shares of the transferee company allotted to the shareholders of the transferor company plus the liabilities of the transferor company transferred to the transferee company. The Hon'ble Bombay High Court found this contention to be "contrary" to the meaning of the word "conveyance" as provided u/s 2(g)(iv) of the Bombay Stamp Act, 1958. It is on the basis of this finding of the Hon'ble jurisdictional High Court rendered in the context of Bombay Stamp Act, 1958 that the learned A.R. canvassed the view that for the purpose of computing capital gain only the full value of consideration should be taken and the net worth representing excess of liabilities over the book value of assets should be ignored. 17.15.9. Stamp duty is always charged on the sale consideration. In that case the Hon'ble High Court held that the stamp duty was payable on the sale consideration of the undertaking as one unit without increasing it with the amount of liabilities transferred. In fact it supports the contention of the ld. AR, which has been accepted by us above, that for the purposes of calculating full value of consideration for the transfer of underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company was engaged in the business of manufacture and sale of cars. It entered into a joint venture agreement with a foreign company to establish a joint venture company. The assessee sold one of its business undertakings as a whole to the joint venture company for a lump sum consideration. The Assessing Officer took it as a case of sale of itemized assets and allocated sale value to building, plant and machinery and paint shop. After deducting written down value there from, he calculated short term capital gain. The Hon'ble Bombay High Court held that it was an entire business undertaking which was sold as a going concern and not any distinct asset such as land, building and plant and machinery etc. Along with such assets, the assessee also transferred intangible assets and business advantages like licences, quotas etc. It was eventually held that in a case of sale of business as whole, there is no allocation of price to any particular assets and, therefore, the computation of capital gains in such a case should have been done on the business as a whole which business itself is a capital asset. The matter was eventually remanded to the Assessing Officer for computation of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of the assessee and adopt the figure of Full value of consideration at Rs.143 crore which is for All assets minus All liabilities' of the undertaking and take the figure of Net worth at Rs. Nil', it would mean that for computing capital gain on the transfer of undertaking All assets minus All liabilities', the cost of acquisition and cost of improvement has been taken for All assets minus Part of all liabilities' i.e. ( Rs. 1360 crore towards All assets minus only Rs. 1360 crore towards Part of all liabilities{total liabilities are Rs. 1517 crore}). Obviously it cannot be so because the computation of capital gain is from the transfer of All assets minus All liabilities' and hence both the Full value of consideration and Net worth must be of All assets minus All liabilities'. 20. In view of the detailed discussion made above, we are with utmost respect unable to concur with the view expressed by the Mumbai Bench of the Tribunal in the case of Zuari Industries Ltd. (supra) and Delhi Bench of the Tribunal in the case of Paper Base Co. Ltd. (supra). Thus the question referred to the Special Bench is answered in negative b ..... 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