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TMI Blog2017 (2) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. - ITA NO.1878/Mum/2015 - - - Dated:- 22-11-2016 - Shri Joginder Singh, Judicial Member, and Shri N.K. Pradhan, Accountant Member For The Assessee : Shri Nitesh Joshi and Shri Sunil Jhunjhunwala For The Revenue : Shri Anandi Verma-CIT-DR ORDER Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 06/01/2015 of the Ld. First Appellate Authority, Mumbai, confirming the 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 at ₹ 65,58,16,402/- instead of ₹ 45,02,94,597/- offered by the assessee in its computation of income. 2. At the outset, Shri Anadi Verma, Ld. CIT-DR, claimed that the impugned issue is covered against the assessee by the decision of the Mumbai Special Bench in the case of Summit Securities Ltd, 135 ITD 99 (SB)(Mum. Trib.); ITA No.4977/Mum/2009, order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s how this appeal is now before us for disposal on merits. 4. Briefly stated the facts of the case are that the assessee-company is engaged in the business of real estate, investment activities, manufacturing of transmission line towers and undertaking turnkey projects in India and abroad. In the return filed for the immediately preceding year i.e A.Y. 2005-2006 the assessee claimed long term capital loss of ₹ 278,98,07,932 on slump sale. While finalizing the assessment order for such earlier year, the Assessing Officer did not consider long term capital gain on slump sale by observing that the scheme for the transfer of undertaking came into operation after closure of business hours of 31.03.2005. It was further observed that the assessee may claim slump sale issue in the next year. Consequently the assessee reflected long term capital loss brought forward at a sum of ₹ 281.41 crore in the current year. In the revised return, the long term capital loss was increased to ₹ 3267873707. Once again a revised computation of long term capital gain was filed showing long term capital loss at ₹ 3129443625. Factual matrix leading to the capital loss is as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of ₹ 143 crore. The shares so received were distributed amongst the equity and preference shareholders of the assessee-company in the ratio of 1:1. On perusal of the report furnished by the auditor u/s 50B(3) and the Valuer s report, the A.O. held that PTB was not sold at an arm s length. Considering the net worth of the assessee-company at a negative figure of ₹ 157,19,00,953, the A.O. came to hold vide para 4.2 of the assessment order : that the total consideration ought to have been received of ₹ 300 crore (Rs. 143 crore + ₹ 157 crore) on slump sale, which is to be treated as long term capital gains on slump sale . To fortify his view, the A.O. also took note of the fact that by following the `Price earning multiple method , the Valuer also determined the value of the undertaking at a sum of ₹ 391 crore, even if finally the fair value was fixed at ₹ 143 crore. He further noted that the report of the Valuer was prepared in the context of scheme u/s 391 to 394 of the Companies Act and as such the contention of the assessee that the price was fixed for the basket of investments was not tenable because the value was not reflected at arm s lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the judgment of the Hon ble Bombay High Court approving the Scheme is available in the paper book starting from page 121. As per this judgment the assessee transferred its PTB. The composite Scheme of arrangement which has been approved by the Hon ble Bombay High Court is available on page no. 132 onwards of the paper book. As per clause 1(7) of this composite Scheme of arrangement, the assessee transferred its Power Transmission Business as a going concern by transferring not only all the assets whether movable or immovable, real or personal, corporeal or incorporeal, tangible or intangible, present, future or contingent but also the liabilities of PTB. The details of the assets and liabilities of PTB have been included in sub-clauses (a) to (g) of clause 1(7.2) in a very wide manner. This fact shows that the assessee transferred its PTB as a going concern and not any separate assets or liabilities. 8. Section 14 of the Act, with the heading `Heads of income , which resides in Chapter IV of the Act dealing with the `Computation of total income provides that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition in case of depreciable asset shall, for the purposes of sections 48 and 49, be considered as the written down value as defined u/s 43(6). It can be observed that for the purposes of computing capital gain on transfer of depreciable assets, the adjusted written down value of the block of assets is considered as the cost of acquisition. The logic behind considering the written down value and not the historical cost of the fixed asset as the cost of acquisition at the time of transfer is that during the period of user of such asset, the assessee is granted depreciation allowance in computing the total income for such years. Such amount of depreciation allowed reduces the cost of acquisition of the assets to that extent. If for the purposes of the computing capital gain at the time of transfer of such depreciable asset, the original cost at the time of purchase is adopted as the cost of acquisition, it would be like giving double benefit to the assessee, firstly, by allowing depreciation during the years of user of such asset and then again by adding such depreciation allowed to the written down value of asset. That is why the Act provides that to the extent of depreciation actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on received at ₹ 78 original cost of acquisition of ₹ 5) (iii) Non-depreciable intangible assets An assessee may be having certain intangible assets, such as Goodwill or a Trade mark or Brand name etc., either purchased from someone or self created over a period of time. If such assets are purchased and depreciation is also claimed, then at the time of their transfer, the capital gain shall be computed by taking resort to the provisions of section 50 read with section 50A. But if such intangible assets were not purchased but acquired over a period without identifying any specific cost, then also capital gain arises on their transfer. Certain courts had held that since such intangible assets do not have a definite cost of acquisition, except where these are purchased for a consideration, no capital gain can arise on their transfer. With a view to set to naught this legal position, the legislature came out with section 55(2)(a) providing that for the purposes of sections 48 and 49, the cost of acquisition of intangible assets in the nature of goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts at ₹ 73; from Non-depreciable intangible assets at ₹ 20; and from Other assets at ₹ 0). It is so for the reason that all the components required for the computation of capital gain, such as the identification of capital asset(s) under transfer, its(their) full value of consideration and also cost of acquisition and cost of improvement can be separately found out. Continuing with the above example, the cost of acquisition and cost of improvement of all the assets collectively (or separately) is ₹ 10 (Rs. 3 in case of Depreciable assets; ₹ 5 in case of Non-depreciable tangible assets ; ₹ 0 in case of Non-depreciable intangible assets; and ₹ 2 in case of Other assets) and the full value of consideration received or accruing as a result of transfer of all the assets collectively (or separately) is ₹ 105 (Rs. 5 in case of Depreciable assets ; ₹ 78 in case of Non-depreciable tangible assets; ₹ 20 in case of Non-depreciable intangible assets ; and ₹ 2 in case of Other assets). 11. Thus it can be noticed that there arises no difficulty in computing capital gain when all or any of the capital assets are distinctly trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess as a whole is transferred for a lump sum consideration, the capital gain cannot at all be charged to tax because of non-allocation of full value of consideration to separate assets. Though the capital gain cannot be computed because of impossibility of attributing a part of the total consideration to the distinct assets, but the full value of consideration of the undertaking is eventually determined by taking the current value of all the assets and the value of liabilities of the undertaking on the date of its transfer. In that case also one can find out the aggregate full value of the all the assets of the undertaking as a composite figure instead of itemized assets by adding the amount of liabilities to the full value of consideration of the undertaking. It will be seen infra that there is usually no difference in the book value and the current value of liabilities on a given date. The problem in computation of capital gain on the transfer of individual assets still remains because of the non-availability of separate full value of consideration in respect of such assets, despite the availability of full value of all the assets taken together. 13. In the case of PNB Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration without values being assigned to the individual assets and liabilities in such sales . The word undertaking has been defined in Explanation 1 to section 2(42C) to have the same meaning as assigned to it under Explanation 1 to section 2(19AA). Explanation 1 , in turn provides that : For the purposes of this clause, `undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity . Thus it can be noticed that the concept of `slump sale as set out in section 2(42C) refers to the transfer of an undertaking by way of sale for a lump sum consideration ` without assigning values for individual assets and liabilities . What is relevant to note is that albeit the value of individual assets and liabilities on the date of transfer is mutually agreed to between the parties which ultimately stands embedded in overall figure of lump sum consideration of the undertaking, but such lump sum consideration does not separately divulge the values of individual assets and liabilities. 14.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) in the case of other assets , the book value of such assets. 14.3 Following are the salient features of this provision:- (a) In the case of a slump sale, that is where one or more undertakings is or are transferred for a lump sum consideration without separate values being assigned to assets and liabilities, any profit or gain is chargeable to income-tax as capital gain arising from the transfer of long term capital assets. What is relevant to attract the provisions of this section is the transfer of one or more undertakings. Thus where an undertaking or a unit or a division of an undertaking is transferred as a going concern as a whole, profits or gains arising from such slump same is chargeable to tax as capital gains arising from the transfer of long term capital assets. Here it is pertinent to note that in common parlance a capital asset connotes a property, right or advantage. Section 2(14) also defines a `capital asset to mean `property of any kind held by an assessee .. It also refers to some positive possession. Further the word used `held in the definition of `capital asset pre-supposes some benefit or advantage in the positive sense in contrast to some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of other assets, their book value. Special care has been taken to ensure that it is the book value or the depreciated value of the assets, as the case may be, which is considered as the cost of acquisition. In order to reflect true and fair value of the assets, the assessee might have revalued its assets in books of account in past. For example a piece of land purchased 10 or 15 years ago will definitely have much more market value than the cost at which it was acquired. In such a case an assessee may think of revaluing such a piece of land by bringing it to its market value and correspondingly creating revaluation reserve in the balance sheet. Since the revalued figure of the assets cannot be construed as the cost of acquisition, the legislature has inserted proviso to Explanation 1 to section 50B which provides : that any change in the value of asset on account of revaluation of assets shall be ignored for the purposes of computing the net worth . Thus it can be seen that the net worth is deemed to be the cost of acquisition and the cost of improvement of the undertaking transferred. In nutshell, the process of calculating `net worth , being the cost of acquisition and cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the computation provision in the later section is activated for determining the income chargeable under the head `Capital gains in accordance with the mode of such computation as prescribed therein. The modus operandi to compute capital gain from the transfer of undertaking thus provides for reducing the cost of acquisition and cost of improvement of the capital asset from the full value of consideration received or accruing as a result of the transfer of capital asset. Coming back to the nature of capital asset being undertaking, which comprises of `All assets minus All liabilities of the undertaking, the amount of capital gain means reducing the net worth, being cost of acquisition and cost of improvement of `All assets minus All liabilities of the undertaking from the full value of consideration of `All assets minus All liabilities of the undertaking. (f) In computing the net worth of the undertaking or the division, as the case may be, the benefit of indexation as provided in the second proviso to section 48 has been withheld. The possible reason may be quid pro quo . By extending the benefit of lower rate of taxation on long term capital gain as provided u/s 112 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wants to close the undertaking after the transfer of all its assets individually, it may realize the amount from the transfer of assets separately and discharge the liabilities of the undertaking at the book value from the consideration so received. In such a situation the amount of total capital gain chargeable to tax will be the Agreed/Market value of all the assets separately transferred minus Book value and w.d.v. of all the assets, as the case may be. The payment of liabilities from the amount realized towards the sale of assets shall have no impact over the computation of capital gain for two reasons. Firstly, the book value of the liabilities and the amount actually payable shall be the same figures. Secondly, the law does not contemplate any profit or gain from the transfer of liabilities as chargeable under the Act. 14.5 Slump sale involves transfer of an undertaking or a division as one capital asset consisting of all its assets and liabilities. If in a case of sale of separate assets of the undertaking, the transferor discharges the liabilities himself out of the sale consideration so realized, then the full value of consideration liable to be considered for computin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, non-depreciable intangible assets and other assets collectively as one unit without assigning value of individual assets comes to ₹ 105. As against that, the cost of acquisition and cost of improvement of all the assets collectively comes to ₹ 10 resulting into the capital gain on transfer of all the assets collectively at ₹ 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 ₹ 5, he will pay only a sum of ₹ 100 to the transferor (Rs. 105 as the agreed value of all the assets without values being assigned to individual assets minus ₹ 5 as the liabilities to be paid by him directly). Whether the liabilities are also taken over or not by the transferee, it is in fact the profit from the transfer of the assets of the undertaking as one unit which constitutes capital gain chargeable to tax in the hands of the transferor. Such amount in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 capital gain on the sale of PTB. 15.2 The Special Bench has been constituted to determine as to whether the A.O. 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. The learned Departmental Representative, apart from emphasizing that the sale consideration should be taken at ₹ 300 crore has also assailed the finding of the ld. first appellate authority by urging in altern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 Tribunal suo motu in not confining itself to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal provided the affected party has been given opportunity of being heard on that ground. We are confronted with a situation in which the Revenue has not only specifically challenged the finding of the CIT(A) for ignoring the negative figure of net worth but the learned Departmental Representative also made submissions on this point. The Tribunal not only allowed him to argue on ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 relevant for determining a figure of full value of consideration is the amount `actually received or accruing and not what `ought to have been received or the `fair market value of the capital asset . At this juncture it is important to bear in mind that the expression full value of consideration received or accruing in the Act has not been restricted in all cases to the amount actually received or accruing as a result of transfer. It has been specifically given other connotations in some other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives 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 full value of the consideration received or accruing as a result of the transfer of such capital asset. Similarly section 45(2) dealing with the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him provides that the capital gain shall be chargeable to income-tax as income of the previous year in which such stock-in-trade is sold or transferred by him and for the purposes of section 48, the ` fair market value of the asset on the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 48 or any other section, it has been provided that the `fair market value of the undertaking shall be treated as the full value of consideration received or accruing as a result of its transfer under slump sale. 16.5 The Assessing Officer has discussed the report of RSM Co. which valued PTB. Copy of such report is available on page 215 onwards of the paper book. The A.O. has enhanced the full value of consideration to Rs. 300 crore by considering the value of business determined under `Profit earning multiple method by RSM Co. at Rs. 391 crore. In other words, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under a slump sale. 16.7 We have noted in para 14.5 above that whatever consideration is received for the transfer of the undertaking in a slump sale, it will be approximate to the market value of all the assets, whether depreciable or non-depreciable, fixed or movable, tangible or intangible without being itemized in respect of each asset of the undertaking, as reduced by the amount of liabilities appearing in the balance sheet as on the date of transfer. The full value of consideration towards the transfer of all the assets of the undertaking as one unit, whether recorded or unrecorded in the books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of consideration of the undertaking should be considered as ₹ 105. If we add liabilities of ₹ 5 to the agreed consideration of the undertaking at ₹ 100, it would give us the agreed value of the assets alone at ₹ 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 ₹ 100, which in the facts of the present case is ₹ 143 crore. 16.10. The learned Departmental Representative has relied on the judgment of the Hon ble Supreme Court in the case of CIT Anr. Vs. George Henderson Co. Ltd. [(1967) 66 ITR 622 (SC)] to contend that the full value of consideration be considered at ₹ 300 crore which includes the negative value of net worth at ₹ 157 crore. He submitted that when the transferee paid ₹ 143 crore to the assessee and also undertook to discharge the excess liabilities to the tune of ₹ 157 crore, which represent the negative net worth, the same amount should also be considered as part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the sale price actually received. 16.11. Now we espouse the other judgment of the Hon ble Supreme court in CIT Vs.Attili N.Rao [(2001) 252 ITR 880 (SC)] which has been claimed as trump card of the Revenue s case on this issue. In that case the assessee carried on abkari business. In the course of financial year 1970-71 the assessee mortgaged to the Excise Department of the State of Andhra Pradesh the immovable property belonging to him at Waltair. He did so to provide security for the amount of kist which were due by him to the State. The State sold the immovable property by public auction to utilize its dues. A sum of ₹ 5,62,980 was realized at the auction. After ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 ₹ 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 ₹ 157 crore represents excess of liabilities over the book value/w.d.v. of the assets of the undertaking itself, such an amount cannot be considered as part of the sale consideration. In this view of the position, we are of the considered opinion that the judgment in the case of Attili N.Rao (supra) is not applicable to the facts of the instant case. 16.12. It was argued by the ld. DR that the full value of consideration declared by the assessee at Rs. 143 crore is highly inadequate and is incapable of acceptance. Relying on the judgment in the case of Vodafone Essar Gujarat Ltd., in Re (2011) 239 CTR (Guj) 229 he argued that the Hon ble Bombay High Court cannot be held to have considered and decided the question of full value of consideration of PTB under the Scheme framed by the assessee along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 35.43 crore and the book value of all other assets is at ₹ 1325.19 crore thereby giving aggregate value of total assets of the undertaking transferred at ₹ 1360.62 crore. The value of liabilities relatable to the undertaking as appearing in the books of account transferred by the assessee is at ₹ 1517.81 crore. This has resulted into the excess value of liabilities over the aggregate value of assets of the PTB transferred giving negative net worth of ₹ 157.19 crore. The learned CIT(A) has inter ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain 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 inclusion of recorded but also unrecorded assets such as Goodwill and brand value, to which no specific cost can be attributed. So the net worth is nothing but the depreciated/book value of all the assets recorded in books of account and Nil in case of intangible/other unrecorded assets. Similarly the value of liabilities shall be that recorded as per books of account plus the value of contingent liability, if any. Our attention has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 95 (Rs. 95 minus ₹ 0) , that is Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking ₹ 100 (Rs. 105 minus ₹ 5) - `Net worth or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking ₹ 5 (Rs. 10 minus ₹ 5) 17.8 Above discussed is a case of a positive net worth, that is where the aggregate value of the assets is more than the value of liabilities. It is quite possible that the net worth of an undertaking may be negative i.e. where the aggregate value of the assets of the undertaking is less than the value of liabilities. The following example i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of (All assets minus All liabilities). In the like manner net worth of the undertaking i.e. the cost of acquisition and cost of improvement also needs to be worked out of (All assets minus All liabilities). When we take the figures from Table B, the position which emerges is that the full value of consideration of the undertaking comes to ₹ 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 ₹ 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 ₹ 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 ₹ 105, but the full value of consideration of the undertaking in Table A has come to ₹ 100 because of the value of liabilities at ₹ 5 and in Table B it has come to ₹ 90 because of the value of liabilities at ₹ 15. The value of assets being equal, higher the value of liabilities lower the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of `Undertaking (All assets minus All liabilities) is ₹ 95 (Rs. 95 minus ₹ 0), that is Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking ₹ 90 (Rs. 105 minus ₹ 15) - `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 ₹ 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 asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fields . The Hon ble Supreme Court in the case of CGT v. N.S.Getti Chettiar [(1971) 82 ITR 599 (SC)] noted that the dictionary gives various meanings 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the negative net worth, the ld AR argued in that view of the matter this logic should have then been extended to the entire liabilities of the undertaking worth ₹ 1517 crore undertaken by the transferee and not only the negative net worth of ₹ 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- -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- -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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 48, the presumption is that the negative figure of the net worth has to be reduced to zero. 17.13.2 This contention is again devoid 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets, as is the case under consideration, then the inherent element of full value of assets in the total full value 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the total assets. The contention that the liabilities cannot be more than the aggregate value 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains covered under Clauses 46 to 55 of the DTC Bill, 2010. It, therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a loss in either of the two then the loss has to be taken into account for the purpose of computing profits. The facts of that case are that there was a loss of ₹ 6.86 crore from the export of trading goods and profit of ₹ 3.78 crore from export of selfmanufactured goods. The assessee claimed deduction u/s 80HHC on a sum of ₹ 3.78 crore by ignoring the loss of ₹ 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 ₹ 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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the law does not say that in case there is a loss instead of the eligible income then any addition should be made to the total income. Thus in respect of `income 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 ₹ 6.86 crore and income from export of selfmanufactured goods at ₹ 3.78 crore thereby giving the net loss of ₹ 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 granti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral in that case contended that the stamp 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and adopt the figure of Full value of consideration at ₹ 143 crore which is for `All assets minus All liabilities of the undertaking and take the figure of Net worth at ` 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 ₹ 1360 crore towards Part of all liabilities{total liabilities are ₹ 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 by holding that the Assessing Officer was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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