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TMI Blog2022 (2) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred the pharma undertaking for a consideration of Rs.100 in view of the negative net-worth and capital gain on such transfer can never be more than Rs.100 (iii) The appellant submits that the above grounds are independent and without prejudice to one another. The appellant leave to add or to alter, by deletion substitution, amendment or otherwise, the above grounds of appeal at any time before, or during the hearing of the appeal." 3. Brief facts of the case 3.1. The assessee is a private limited company engaged in the business as Third party Administrator (TPA) of insurance companies. The assessee company derives income as TPA fees from insurance companies as a percentage of premium paid by policy holders to the insurance companies. The assessee company had filed the return of income on 29/9/2011 declaring a total income of Rs.12,47,60,240/-. The assessee's case was taken up for scrutiny and notice u/s 142(1) was issued. During the course of asst. proceedings, the AO made following disallowances: 1) Disallowance of claims disallowed by insurance company - Rs. 4,68,655/- 2) Short term capital gain on slump sale - Rs.7,80,38,453/- 3) Software expenses - Rs. 16,42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed sale consideration in the normal course. - The net worth itself benefits a positive figure and as such cannot be negative at best this can be taken at nil - If labiality has to be added to the sale consideration, the same had then to be simultaneously reduced from the working of net worth. 8. The CIT(A) in his order relied on the decision of the Special Bench of the ITAT Mumbai, in the case of M/s Summit Securities Ltd., (Supra) where the Hon'ble Spl. Bench specifically considered and distinguishes the reasoning adduced in the case of Zuari Industries Ltd., (Surpa). The observations made by the Mumbai Spl. Bench in the case of M/s Summit Securities Ltd., (Supra) as under:- "17.3. Having held in the para 16 that the full value of consideration had to be considered of all assets minus all liabilities of the undertaking as one unit, now let us examine the question of determination of the cost of acquisition and cost of improvement or 'Net worth' of the undertaking u/s. 50B. the methodology for computing net worth had been given in Explanation 1 read with Explanation 2 to section 50B as per which the aggregate value of total asset (written down value in case of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain can either be excess of sale consideration over the cost or "Nil" if sale consideration is equal to cost. Where the cost is more than sale consideration, it would be a case of loss. No other situation can be visualized. Therefore, capital gain can never be more than the sale. c. The legislature has used the expression "net worth" which by deeming fiction is to be considered as cost of acquisition and cost of Improvement for the purpose of computing capital gain u/s 48. Section 48 of the Act provides for deduction or cost of acquisition/improvement from the full value of consideration received or accruing as a result of transfer of capital asset. The cost of a property, as per dictionary meaning, means the price paid by a buyer to the seller. Therefore, it must be a positive figure. That is why the legislature has provided for deduction of cost from sale consideration. d. Similarly, the word "worth, as per dictionary meaning, also means value of goods or asset or property, which also suggests positivity. No person would buy any property which is worthless. Further, the word; "worth" is qualified by the word "net" which would mean the net value of the property which is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 `hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciable 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 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 underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent the amount actually payable by the undertaking. So, if the assessee 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly a sum of Rs. 100 to the transferor (Rs. 105 as the agreed value of all the assets without values being assigned to individual assets minus Rs. 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 the above example remains at Rs. 95 irrespective of the fact whether the liabilities are discharged directly by the transferor or have been undertaken to be discharged by the transferee. It is so for the reason that when the liabilities are also transferred the sale consideration of the undertaking shall stand reduced to Rs. 100, but where the liabilities of Rs. 5 are not transferred, the sale consideration of all these assets taken together as one unit without reference to the values assigned to individual assets shall remain at Rs. 105. It therefore, boils down 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net worth is a negative figure 17.6 Continuing with the example given in Table A above, it can be seen that the net worth is at a positive figure of Rs. 5 (Rs. 10 towards assets minus Rs. 5 towards liabilities). The calculation of capital gain on the undertaking does not create any difficulty which is Rs. 95 (Rs. 100 minus Rs. 5) determined by reducing the net worth of the undertaking from the full value of consideration of the undertaking. In this exercise, the value of liabilities has been reduced both from the agreed value of the bundle of assets and also 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 Rs. 105 and the w.d.v/book value of all the assets is Rs. 10 leaving the figure of capital gain at Rs. 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 underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciated. Table B - Position as on the date of slump date Sl. No. Particulars Book value Market value Agreed value 1 WDV of depreciable assets as per Balance Sheet 108 105 2 Non-depreciable tangible assets as per Balance Sheet 3 Non-depreciable intangible assets 4 Other assets A Aggregate value of assets of the undertaking 10 108 105 1 Secured loans 6 5 5 2 Unsecured loans and other Liabilities 9 B Total liabilities 15 15 15 A - B Net (-)5 93 90 17.9 From the above table it can be seen that the full value of consideration received or accruing to the assessee from the transfer of undertaking (All assets minus All liabilities) is Rs. 90. Further the net worth in this case is at a negative figure of Rs. 5 (Book value etc. of all the assets Rs. 10 - Book value of all the liabilities Rs. 15). It is of utmost importance to note that the case under consideration is also that of the negative net worth of Rs. 157 crore (Book value etc. of all the assets Rs. 1360 crore - Book value of all the liabilities Rs. 1517 crore). As the capital asset is again an undertaking (All assets minus All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct a capital gain from the transfer of assets of the undertaking as one unit, it can be seen from the above Table B that aggregate value of all assets have been fixed at Rs. 105 as against the book value of Rs. 10. This gives the figure of capital gain at Rs. 95 (Rs. 105 - 10). If we accept the contention of the assessee that the figure of negative net worth should be taken as nil, the capital gain comes to Rs. 90 and if we go by the departmental contention, the amount of capital gain comes at Rs. 95. If we view the figure of capital gain from the transfer of bundle of assets of the undertaking at Rs. 95 which is nothing but the figure of capital gain from the transfer of undertaking as well, it becomes manifest that the assessee's calculation goes wrong and that of the Revenue gives the desired result of capital gain of Rs. 95. In that view of the matter we have absolutely no doubt in our mind that the amount of capital gain in the above example should be computed at Rs. 95 by adding the amount of negative net worth of Rs. 5 to the full value of consideration of the undertaking at Rs. 90. The figures from Table B will reflect the calculation of capital gain as under : - Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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