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TMI Blog2015 (9) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Assessee shows that assessee had starred the computation of business income from (-) ₹ 4,62,67,764/- as per profit and loss account and without increasing it further by the amount of any profit arising on the sale of the business undertaking which is chargeable to tax under the head capital gains and not under the head of profit and gains of the business and profession. It had credited extra-ordinary item in the profit and loss account of ₹ 2,55,74,116/-. As per note no B (6) of schedule 12 of the balance sheet at serial no item no 10 shows profit on sale of non-woven fabrics business under slump sale an amount of ₹ 2,03,46,191/- is shown. In our opinion, said amount has be adjusted in the computation of income and the claim made by the assessee is justified. In the matter of Prithvi Brokers the Hon’ble Bombay High Court [2012 (7) TMI 158 - BOMBAY HIGH COURT] has held that the appellate authorities can admit new claim made before them,though the AO cannot admit such claim without filing of fresh return. We are of the opinion,that in the interest of justice, the matter should be restored back to the file of the FAA for fresh adjudication,who will decide the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Crores. The Assessing Officer(AO)finalised the assessment on 24.12. 2010,u/s.143(3)of the Act, determining the income of the assessee at Rs.(-)56.88lakhs 2. G round No. 1 is against the addition of negative net worth of the undertaking transferred under the slump sale amounting to ₹ 3,38,69,898/-. During the assessment proceedings,the AO found that in pursuance of the scheme of amalgamation approved by the Hon ble high courts of Mumbai and Delhi the assessee sold its fabric lining and carpet manufacturing business to Hitkari hi-tech Filters private Limited on slump sale basis at a net consideration of ₹ 10 lakhs,that the net worth of the undertaking was certified at negative figure of Rs. (-) 3,38,69, 898/- as per para 6(e) of the form no 3CEA. However while filing the return of income assessee computed capital gain u/s. 50B of the Act of ₹ 10,00,000/- only without adjusting the negative net worth. The AO raised the query in that regard and held that the computation of capital gain u/s 50B was incorrect and the benefit arising to the assessee of ₹ 3.38 Crores was further required to be adjusted upward. The assessee submitted that in view of the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking. The rationale for determining net worth in this way is beyond any doubt as it is nothing but a consolidated figure of cost etc. of All assets minus All liabilities of the undertaking, which is a capital asset of typical kind. Consequently capital gain is computed on All assets minus All liabilities of the undertaking by considering the full value of consideration and also net worth with the same composition of assets and liabilities of the undertaking. Thus in order to find a correct amount of capital gain it is sine qua non that all the three variables in this computation must match with their inherent contents being All assets minus All liabilities of the undertaking. 17.4 It had been noticed above that when we compute capital gain on the transfer of undertaking, what we actually compute is the capital gain on the transfer of all the assets of the undertaking as one unit. The full value of consideration is settled as a lump sum figure of the undertaking as a whole comprising of all the assets minus all the liabilities. To attain the ultimate end of computing capital gain on the transfer of assets which are embedded in the undertaking, the process of calcula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the book value of assets so that the ingredients of both the components match with each other. As discussed above that even in slump sale what we in fact calculate is the capital gain on the transfer of all the bundle of assets of the undertaking but as a one unit and not separately. From Table A it can be seen that the composite agreed value of all the assets of the undertaking is ₹ 105 and the w.d.v/book value of all the assets is ₹ 10 leaving the figure of capital gain at ₹ 95. Such figure of capital gain of transfer of all assets as one unit matches with the figure of capital gain on the transfer of undertaking. Thus it is clear that while computing the capital gain from the transfer of the undertaking, we cannot include the book value of the part of the bundle of assets but all the liabilities in the amount of net worth. It had to be of all the assets and all the liabilities. If we consider agreed value for all the assets but reduce book value of only some of the assets or we consider full value of all the bundle of assets but cost of acquisition at more than book value of such assets, the computation will give absurd results. Similarly we cannot ignore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 50B. At the same time it equally relevant to note that these words have been used in the context of undertaking which itself refers to the All assets minus All liabilities of the undertaking. Section 50B contemplates the computation of cost of acquisition and cost of improvement of the undertaking as one unit which does not restrict itself to the bundle of assets but also includes within its ambit the liabilities of such undertaking or unit or division . The contention on behalf of the assessee that cost of an asset cannot be in negative is though true in a general sense but fails in the context of the capital asset referred to in section 50B as Undertaking . 17.11.3 The context of a provision cannot be ignored while finding out the meaning of particular word not defined in the provision or elsewhere in the Act. It had been observed by the Hon ble Supreme Court in several cases that a particular word occurring in one section of the Act, having a particular object cannot carry same meaning when used in different section of the same Act, which is enacted for different object. In Jt. CIT v. Saheli Leasing Industries Ltd. [2010] 324 ITR 170/ 191 Taxman 165 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cost and net worth can have no application in this context. It is pertinent to note that net worth had been defined in section 50B itself as difference between the aggregate value of all assets and value of liabilities. It can be both ways, that is, in some case the aggregate value of all assets may be more than the value of all liabilities and in others it may be value of liabilities exceeding the aggregate value of all assets. In the former case it will be positive net worth and in the latter it will be negative net worth. Negative net worth is not something unknown in the business world. SA570 (AAS16) dealing with Going concern is a standard of auditing brought out with a purpose to establish standard on the Auditor s responsibilities in the audit of financial statements regarding the appropriateness of the going concern assumption as a basis for the preparation of the financial statement. Various financial indications have been given in it and the first one is Negative net worth or negative working capital . Therefore to contend that the cost or net worth can never be in negative, in our considered opinion, is too wide a proposition to be accepted in case of the capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of capital gain from transfer of assets is ₹ 95, that would finally turn out to be the figure of capital gain from the transfer of undertaking as well, it can be possible only by adding the amount of negative net worth to the full value of consideration and not the value of all liabilities. That is why the legislature had mandated to consider the figure of net worth supplied by section 50B and not the total liabilities for the purposes of computing capital gain u/s 48. (iii) Section 48 uses the words deducting from and not adding to 17.13.1 The next leg of the ld. AR s submission was that section 48 clearly provides that the capital gain shall be computed by deducting from the full value of the consideration received or accruing as a result of transfer of a capital asset inter alia the cost of acquisition of the asset and the cost of any improvement thereto, which in the present case is the amount of net worth as per section 50B. He contended that in such a case if the negative net worth is added to the full value of consideration, it will be against the language of the section. It was argued that if the intention of the legislature had been t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition and cost of improvement there from. He illustrated his submission by explaining that if a particular asset is sold for ₹ 100, the capital gain cannot be more than ₹ 100 in any case. It had to be ₹ 100 itself in case there is no cost of acquisition or less than that to the extent of the positive cost of acquisition. On the basis of this submission he argued that when the sale consideration of the undertaking is ₹ 143 crore, then the computation of capital gain at any figure more than ₹ 143 crore is not possible. 17.14.2 We are again unconvinced with this submission which is though correct in the case of transfer of an asset of a general nature but fails in the context of a capital asset in the nature of an undertaking. As the capital gain on transfer of undertaking (All assets minus All liabilities) is determined by reducing from the full value of consideration received or accruing of the undertaking (All assets minus All liabilities), the net worth i.e. cost of acquisition and cost of improvement had also to be of the undertaking (All assets minus All liabilities). In a case where the book value of liabilities is less than the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961 does not contain any provision similar to that of clause 315 of Direct Tax Code Bill, 2010, the words reduced by should be understood as having Nil value where the value of liabilities is in excess of the aggregate value of the assets of the undertaking. 17.15.2 We are unable to accept this contention put forth by the learned AR that the words as reduced by employed in Explanation 1 should always be understood to mean that the aggregate value of total assets will be more than the value of liabilities. The dictionary meaning of the word reduced is of no relevance in the computation of capital gain from the transfer of slump sale for the reasons discussed above. The context of a provision is relevant for understanding the meaning of a word which had not been defined in the statute. To contend that the words as reduced by used in Explanation 1 can never have the effect of the value of liabilities more than the aggregate value of the total assets of the undertaking is completely unfounded. It is a fact that the aggregate value of the total assets of the undertaking is ₹ 1360 crore with the value of liabilities at ₹ 1517 crore. The figure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and gains of business or profession . Even though the reference had been made only to the Profits and gains of business or profession , but it is quite clear that there can be income as well as loss under the head. Can anyone imagine that if there is a loss under the head Profits and gains of business or profession then that should be ignored because the reference is only to profits and gains and income . It is obvious that the words income and profits can be both positive as well as negative. Similarly section 45 provides that profits or gains arising from the transfer of capital asset shall be chargeable to income-tax under the head Capital gains . There can be both income as well as loss under this head. Had anyone ever contended that since the words used are profits or gains which imply a positive income, there can be no loss under this head. The answer to all these questions is simple and plain that a reference to an income under the provisions of Income-tax Act, 1961 automatically refers to the loss as well. What is true for the income in both positive and negative terms is equally true for other items as well. Most importantly it is relevant to not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be strictly calculated in the manner prescribed and the result may be positive or negative. In other words, if the aggregate value of total asset is more than the value of liabilities the net worth shall be positive and in the otherwise case it shall be negative. When the legislature in its wisdom had prescribed the scope of net worth in unambiguous terms by way of a deeming provision, we cannot suo motu change it in case it is negative and accept it when it is positive. It had to be invariably accepted in both the situations whether it is positive or negative. If we accept this contention of the learned AR that the amount of negative net worth determined u/s 50B should be taken as zero, then it would mean creating one more legal fiction by ourselves within the existing legal fiction which the legislature had not prescribed. Such a course of action can never have sanction of law. In view of the foregoing reasons we are not inclined to accept this part of the arguments advanced on behalf of the assessee. 17.15.6 To fortify his view that the negative figure of net worth should be ignored, the learned AR had heavily relied on the judgment of the Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section states that where any deduction is required to be made or allowed under any section included in this Chapter under the heading C. Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Further sub-section (2) of section 80A provides that the aggregate amount of the deductions under this Chapter shall not in any case exceed the gross total income of the assessee and the gross total income had been defined u/s 80B(5) to mean the total income computed in accordance with the provisions of this Act before making any deduction under this Chapter. Basically there are deductions either based on certain payments or in respect of certain incomes. The overall amount of all the deductions can in no case e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such other income can be carried forward to subsequent years for set off, subject to the specific provisions. Thus it is abundantly clear that the reliance of the learned AR on the case of IPCA Laboratory Ltd. ( supra) for contending that the negative figure of net worth be ignored, is clearly misconceived. We, therefore, reject the contention that the words as reduced by in section 50B pre-suppose that the aggregate value of all the assets must be invariably more than the total liabilities and in case it is not so, then the resultant negative figure should be taken as zero. 17.15.8 In support of the contention that the negative net worth cannot be added to the full value of consideration for the purposes of computing capital gain, the learned AR relied on the judgment of the Hon ble Bombay High Court in the case of Li Taka Pharmaceuticals Ltd. v. State of Maharashtra [1998] 91 Comp. Cas. 871/[1996] 8 SCL 102 (Bom.). In that case the petitioner initially contended that no stamp duty was at all payable in case of an amalgamation u/s 394 of the Companies Act. There was transfer of a company as a going concern on the basis of compromise on which the Hon ble Bombay High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer, which obviously on a macro level refers to the sale price minus cost. While sustaining the figure of sale consideration at ₹ 143 crore, we have held that the cost price be taken at a minus figure of net worth at ₹ 157 crore, so that the amount of capital gain becomes ₹ 300 crore. As this judgment is related to the determination of the sale price relevant for imposing stamp duty, it can have no application on the other aspects of the computation of capital gain. The situation could have some resemblance if the stamp duty had been payable on the profit from the transfer of undertaking and not the sale consideration. Moreover this is basically a case under the Bombay Stamp Act and that too in the context of amalgamation under section 394 of the Companies Act, 1956, whereas we are not confronted with the question of determination of any stamp value much less in the amalgamation. We, therefore, hold that the reliance of the ld. AR on this judgment in any context other than the question of determination of full value of consideration of the undertaking is of no use. In view of the foregoing reasons we are of the considered opinion that in computing net worth of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net amount of capital gain of ₹ 95 from the transfer of the undertaking as one capital asset and not any separate capital gain arising from the transfer of individual assets. Both the assets and liabilities have been considered as one composite unit and the eventually full value of consideration is for the undertaking as a whole and not towards any separate assets or liabilities. It can be noticed that in that case the computation of capital gain was remitted to the file of Assessing Officer to be determined as per the prescription of sections 45 and 50B. However, in the instant case the Assessing Officer had computed the capital gain by taking resort to these provisions only. This judgment, therefore, does not assist the learned AR in any manner. 19. We have noticed above in para 14.6 that the capital gain on transfer of Undertaking (All assets minus All liabilities) of the undertaking is equal to Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of undertaking (-) Net worth or the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking. Contents of all the thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. G round no 2 is against not allowing deduction of ₹ 2,03,46,191/- from the profits arising out of the sale of undertaking by way of slump sale while working out the income under the head profits and gains from business. During the assessment proceedings,the AO found that on slump sale of the undertaking assessee earned profit of ₹ 2,03,46,191/- which was credited to the books of accounts of the assessee-company,that the sum was not added to the loss of the company while making the computation of total income,that the amount of profit on sale of asset was clubbed under the head of extra ordinary items in the profit and loss account,that the amount was also not excluded by the AO while passing the order,that mistake came to knowledge of the assessee and it raised the issue before the FAA,that the he did not consider the claim by it and observed that no application u/s 154 of the act filed before AO. 3.1. B efore us,the AR submitted that claim was made before CIT (A)for adjustment of the amount by ₹ 2,03,46,191/-,that he should have allowed the claim. The DR supported the order of the FAA. 3.2. W e have carefully perused the material submitted and argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O,that no details of deferred sales tax amount was quantified. We have carefully considered the rival submissions. The assessee had contended that an amount of ₹ 51,12,586/- is pertaining to sales tax deferred scheme and same is not disallowable u/s 43B of the Act in view of the circular no 496 dated 25.09.1987. It is found that the assessee had also not submitted before AO the details of such claim. Further before FAA details of claims,reconciliation and how it is covered by the circular no 496 dated 25.09.1987were not submitted. Therefore such claim requires verification and also ascertainment whether the conditions and requirements mentioned under circular no 496 is met by the assessee or not. Therefore, in the interest of justice,this ground of appeal is set aside to the file of AO with direction to verify the claim of the assessee in accordance with circular no 496 dated 25.09.1987 and decide the issue in accordance with law after providing proper opportunity to the assessee. Ground no.3 of appeal is allowed in favour of the assessee, in part. As a result, appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 31st August, 2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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