9911796707
TMI Blog2022 (2) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the Revenue that the negative net worth cannot be ignored for working out the capital gains in case of a Slump Sale. Thus, we hold that negative net worth cannot be ignored for computing capital gain on slump sale. We thus, direct the Ld.AO to compute the capital gains in accordance with the principles laid down by Hon ble Special Bench in case of M/s. Summit Securities Ltd. (supra). Appeal filed by assessee stands dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation of total income, the assessee has reduced the same from the profit and gains of business income under the head 'Admissible' thereby, arriving at a 'nil' income from the slump sale. 5. During the course of the assessment, the Ld.AO called for the details of computation of the net worth for which the assessee submitted the below details. Particulars Amount in Rs Net Fixed Assets 1560,747 Goodwill 278,97,340 Current assets 76,28,641 Loan (10,12,07,345) Liabilities (1,05,79,983) Payalbles to Medybiz (33,37,753) Net Worth (7,80,38,353) The AO considering the provisions of the section 50B of the Income Tax Act (The Act) and relying on the decision of the Hon'ble Mumbai Special Bench in ITA No.4977/Mum/2009 in the case of M/s Summit Securities Ltd Vs DCIT (68 DTR 201) treated the negative net worth of Rs.7,80,38,353 as income from "Short Term Capital Gains" and added the same to the total income of the assessee 6. Before the CIT(A) the assessee submitted relying on the decision of Zuari Industries Ltd., Vs. ACIT 298 ITR (AT) 97 and Paperbase Co. Ltd., Vs. ACIT 19 SOT 163. 7. The CIT(A) summarized the observations of the Hon'ble Tribunal in the case of Zu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." 9. The Ld.CIT(A) therefore upheld the working of the AO while arriving at chargeable capital gains at the figure of Rs.7,80,38,453/-. 10. Before us, the Ld.AR brought out the proposition adopted by Mumbai and Delhi Tribunal in the case of Zuari Industries Ltd., (Supra) and Paperbase Co. Ltd (Supra) respectively wherein it was held that the net worth of the division was taken as nil and would be deemed to be the cost of acquisition for capital gains on the following grounds. a. Capital gains is always a portion of sale consideration and, therefore, portion can never be higher than the whole. b. Gain would arise only where sale consideration is more than the cost. By no stretch of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be reduced to "Nil". Consequently, where the liabilities are more, then the value of assets as computed u/s SOB, the net worth, in our opinion, would be considered as "Nil"." 11. The Ld.DR supported the order of the Ld. CIT(A) and placed reliance on the decision of Hon'ble Mumbai Special Bench in the case of M/s Summit Securities Ltd (Supra). 12. We have heard both the parties and gone through the facts of the case. The only issue raised by the assessee is relating to addition of negative net worth while computing short term capital gain. Assessee considered the net worth at zero on slump sale. The various aspects of computation of capital gains where the net worth of an assessee is negative has been discussed elaborately in the decision of the Hon'ble Special Bench of the ITAT Mumbai in the case of M/s Summit Securities Ltd (Supra). 13. The Hon'ble Special Bench discussed the provisions of section 50B which is the special provision for computation of capital gains in case of Slump Sale. As this is the essence of the issue under consideration the relevant extract from the order of the Hon'ble Special Bench is reproduced here SLUMP SALE 14.1 Failure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains arising from the transfer of short term capital assets. (2) In relation to capital assets being an undertaking or division transferred by way of such sale, 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 of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. (3) Every assessee, in the case of slump sale, shall furnish in the prescribed form 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period of owning and holding the undertaking as a whole and not individual assets of such undertaking. Suppose the undertaking was set up four years ago and some of the assets were purchased and held for a period of not more than 36 months, it is the entire undertaking which will be treated as long term capital asset for the purposes of computing capital gain on its transfer. The period of holding of separate assets of the undertaking has been delinked for computing capital gain on the transfer of undertaking. 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 aggr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2 to section 2(42C) that the determination of the value of asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. Value of an asset for the purposes of payment of stamp duty etc. ordinarily indicates its market value. By making such value of asset for the purposes of payment of stamp duty etc. as alien to the value of assets or liabilities, 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al assets represents the excess of amount received or accruing, normally representing their market value, over the book value or depreciated value of such assets, as the case may be. So if all the assets of the undertaking are separately transferred, the amount of capital gain will be equal to the Agreed/Market value of the all assets taken separately minus the w.d.v/book value of all the assets taken separately. Here it is paramount to note that the Act 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 noninterest bearing liabilities, say a sum of ₹ 2, the amount shown as payable will be the current liability of ₹ 2; and in a case of interest bearing liability of say ₹ 2, the amount of interest, if unpaid, say ₹ 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 bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esenting net value of agreed/market price of the assets over its liabilities. The result in both the cases will remain same, that is, it is in fact the computation of capital gain on the transfer of positive capital assets as one unit which are embedded in the undertaking. The illustrations taken above can be summarized in a tabular form as under :- Table A - 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 3 108 105 2 Non-depreciable tangible assets as per Balance Sheet 5 3 Non-depreciable intangible assets 0 4 Other assets 2 A Aggregate value of assets of the undertaking 10 108 105 1 Secured loans 2 5 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, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaking. It has to be so because the capital asset itself is nothing but `All assets minus All liabilities' of the undertaking. To match with the capital asset and the full value of consideration, the cost of acquisition and cost of improvement cannot be anything but the Book value/w.d.v of `All assets minus All liabilities' of the undertaking. This 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 14. The Hon'ble special Bench in para 17.3 and 17.4 which is reproduced in para 8 of this order, mentions that to find a correct amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation 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 ₹ 95(₹ 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 (₹ 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 (₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of undertaking comes to ₹ 95 [₹ 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 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 value of consideration. The values of its total assets and total liabilities are inbuilt in the consideration. When we refer to the amount of 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 and the spirit of section 50B read with section 45 and 48 is to provide a mechanism to make the computation of capital gain from the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for determining the capital gains on account of slump sale. The Hon'ble Special Bench however agreed with the contention of the Revenue that the negative net worth cannot be ignored for working out the capital gains in case of a Slump Sale. 16. From the decision of the Hon'ble Special Bench in the case of M/s Summit Securities Ltd (Supra), findings are summarized as under: (i) Slump sale involves transfer of "an undertaking or a division" as one capital asset consisting of all its assets and liabilities (ii) 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". (iii) The cost or net worth can never be in negative (iv) "Deducting" net worth from the full value of consideration for computing capital gain, automatically implies that whatever be the net worth, (that is positive or negative), will be taken care of accordingly. (v) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
