Computation of capital gain u/s 50B in case undertaking have a negative Net worth

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Computation of capital gain u/s 50B in case undertaking have a negative Net worth

Section 50B is a special provision for computation of capital gain in case of sale of undertaking or unit which overrides the normal capital gain provisions. Its computation is a little tricky in various situations. One such situation is when the net worth of a unit is a negative figure.

In common parlance the expression ‘full value of consideration received or accruing’ 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’.

The principle which follows is that the full value of consideration for the purposes of s. 48 has to be considered as only the amount actually received or accruing as a result of the transfer of capital asset except where it has been substituted with fair market value or by any other mode. It is only in such specific cases that the actual amount received or accruing shall be replaced with the fair market value or such other mode as specified.

In the absence of any specific provision, the general meaning of the amount actually received or accruing is to be considered as the full value of consideration received or accruing as a result of transfer of capital asset.

It may be noted that nowhere in any provision, either s. 50B or s. 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.

The methodology for computing net worth has been given in Expln. 1 r/w Expln. 2 to s. 50B as per which the aggregate value of total asset (WDV in case of depreciable assets and book value in the case of other assets) is reduced by the value of liabilities of such undertaking. 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.

It is patent that the words “net worth” and “cost” have not been given any meaning for the purposes of s. 50B. At the same time it is 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.

Sec. 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”.

Here is one interesting judgment on the issue by Mumbai ITAT which discussed the mode of computation of capital gain in such cases:

DEPUTY COMMISSIONER OF INCOME TAX vs. SUMMIT SECURITIES LTD.

ITAT, MUMBAI BENCH ‘I’

  1. Manmohan, VP, R.S. Syal, A.M. & N.V. Vasudevan, J.M.

ITA No. 4977/Mum/2009

7th March, 2012

 (2012) 145 TTJ 0273 (SB) : (2012) 68 DTR 0201 (SB) : (2012) 135 ITD 0099 (SB) : (2012) 15 ITR 0001 (SB)

Legislation Referred to

Section 254(1); Income-tax (Appellate Tribunal) Rules, 1963, Rule 11

Case pertains to

Asst. year. 2006-07

Decision in favour of:

Revenue

ORDER

—R.S. SYAL, A.M. :

  1. This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 05.06.2009 in relation to the assessment year 2006-2007. The following two effective grounds have been raised in this appeal:-

“1. On The facts and in the circumstances of the case and in law, the learned CIT(A) erred in computing the sales consideration at Rs.143 crore as against the same being computed at Rs.300 crore by the A.O. on account of transfer of assessee’s power transmission business without appreciating the facts of the case.

  1. Whether on the facts and circumstances of the case, the CIT(A) was justified to hold that the negative figure of net worth has to be ignored for working out the capital gains in case of a slump sale.”
  2. Earlier this case came up for hearing before a division bench. Members of the bench were not satisfied with the correctness of certain decisions of the Tribunal relied on behalf of the assessee in support of its case, which had found favour with the learned CIT(A). A reference was made to the Hon’ble President for the constitution of Special Bench, who constituted the present Special Bench to consider and decide the following question and also dispose the appeal:-

“Whether in the facts and circumstances of the case, the Assessing Officer was right in adding the amount of liabilities being reflected in the negative net worth ascertained by the auditors of the assessee to the sale consideration for determining the capital gains on account of slump sale?”

  1. Initially when the Special bench took up hearing of the appeal, the assessee raised a preliminary objection against the very constitution of special bench. Such objection has since been rejected vide our separate order in DCIT VS. Summit Securities Ltd. reported at (2011) 132 ITD 1(Mum)(SB). That is how this appeal is now before us for disposal on merits.
  2. 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 Rs.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 Rs.281.41 crore in the current year. In the revised return, the long term capital loss was increased to Rs.3267873707. Once again a revised computation of long term capital gain was filed showing long term capital loss at Rs.3129443625. Factual matrix leading to the capital loss is as follows: A composite Scheme of arrangement between the assessee-company, KEC International Limited (formerly KEC Infrastructure Limited), Bespoke Finvest Limited (subsidiary of the company), KEC Holdings Limited and the respective shareholders u/s 391 of the Companies Act, 1956 was approved by the Hon’ble High Court of Judicature at Mumbai on 27.09.2005. The composite Scheme was for sale of “Investments” by the assessee-company to KEC Holdings Limited and sale of the “Power Transmission Business” (hereinafter called “PTB”) to KEC Infrastructure Limited (later on came to be known as KEC International Limited) and the merger of Bespoke Finvest Limited with KEC Holdings Limited. The Scheme was presented to the Hon’ble Bombay High Court on 28.06.2005 and it was approved on 27.09.2005 with effect from the closure of the business hours on 31.3.2005 or say with effect from 01.04.2005. Pursuant to the Scheme, the whole of the undertaking and properties including all the movable and immovable assets and all debts and liabilities of every kind of PTB were transferred to KEC International Limited for a total consideration of Rs.143.00 crore. The assessee claimed this transaction as a slump sale u/s 50B of the Income-tax Act, 1961 (hereinafter called “the Act”) and audit report u/s 50B(3) was filed along with the return of income. In the audit report the net worth of the undertaking was quantified at a negative sum of Rs.157.19 crore. As such, the entire sale consideration of Rs.143 crore was treated as long term capital gain by the assessee in its return of income. Pursuant to the Scheme, the assessee-company also transferred “Investments” to KEC Holdings Limited for a consideration of Rs.115 crore and claimed long term capital loss of Rs.455.94 crore thereon. In the present appeal we are concerned only with the issue of capital gain arising from the transfer of PTB and not with the long term capital loss from the transfer of “Investments”. Coming back to the transfer of PTB, the assessee- company received sale consideration of Rs.143 crore by way of equity and preference shares. It received 3,76,35,858 equity shares of Rs.10 each fully paid up at a total premium of Rs.92.36 crore. The assessee also received 12,99,966 preference shares of Rs.100 each. The receipt of these equity and preference shares constituted total sale consideration of Rs.143 crore. The shares so received were distributed amongst the equity and preference shareholders of the assessee-company in the ratio 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 Rs.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 Rs.300 crore (Rs.143 crore + Rs.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 Rs.Price earning multiple method’, the Valuer also determined the value of the undertaking at a sum of Rs.391 crore, even if finally the fair value was fixed at Rs.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 length price.
  3. The learned CIT(A) accepted the contention advanced on behalf of the assessee in para 3.11 of the impugned order that the Rs.Net worth’ as defined u/s 50B cannot be a negative figure and in case it is so, that is, where the liabilities are more than the value of assets as computed u/s 50B, then for the purposes of computing capital gain u/s 48, the net worth would be considered as Nil. In taking this view, he relied on Zuari Industries Ltd. Vs. ACIT [(2007) 105 ITD 569 (Mum.)] and Paper Base Co. Ltd. Vs. CIT [2008) 19 SOT 163 (Del)]. He thus overturned the assessment order on this score by holding that it was not permissible to compute sale consideration of Rs.300 crore as against the actual sale consideration of Rs.143 crore. As can be noticed from the two effective grounds reproduced above, the Revenue’s objection is two-fold. First, that the sale consideration ought to have been computed at Rs.300 crore and second, which appears to be alternative, that the negative figure of net worth should not have been ignored.
  4. The entire gamut of the controversy can be summed up as follows :- In the present case the sale consideration of the PTB is Rs.143 crore and there is negative `net worth’ of Rs.157 crore as per section 50B, that is, the value of liabilities (Rs.1517 crore) as per the books of accounts is in excess of the aggregate value of assets (Rs.1360 crore). Whereas the case of the assessee is that the capital gain should be computed at Rs.143 crore by adopting the figure of sale consideration at Rs.143 crore and that of net worth as per section 50B at Rs.Nil, the Revenue is pleading that the capital gain be computed at Rs.300 crore by either taking the sale consideration at Rs.300 crore (Rs.143 crore plus Rs.157 crore) [Ground no. 1] or by taking the amount of sale consideration at Rs.143 crore but adding to it the negative net worth of Rs.157 crore [Ground no. 2].
  5. We have heard the rival submissions at length and perused the relevant material on record in the light of precedents cited by both the sides. There is no dispute on the fact that the assessee transferred its PTB to KEC Infrastructure Limited (presently known as KEC International Limited) on the basis of Scheme u/s 391 to 394 of the Companies Act, 1956 duly approved by the Hon’ble Bombay High Court. A copy of the judgment of the Hon’ble Bombay High Court approving the Scheme is available in the paper book starting from page 121. As 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.
  6. Section 14 of the Act, with the heading Rs.Heads of income’, which resides in Chapter IV of the Act dealing with the Rs.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 total income, be classified under the five heads. Chapter IV-E containing sections 45 to 55A deals with the income chargeable under the head “Capital gains”. Section 45 is charging section for capital gains in general cases. Sub-section (1) of section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in certain sections allowing exemptions, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place. The mode of computation of the income chargeable under this head has been prescribed in section 48. This section provides that the income chargeable under the head `Capital gains’ shall be computed by deducting from full value of consideration received or accruing as a result of a transfer of the capital assets, the following amounts, namely, (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of any improvement thereto.
  7. Charge u/s 45 is attracted only if the asset transferred falls with in the definition of Rs.Capital assets’ as per section 2(14). Such capital assets in case of a business enterprise can be ordinarily classified into four broad categories, viz.,

(i) Depreciable assets

(ii) Non-depreciable tangible assets

(iii) Non-depreciable intangible assets

(iv) Other assets

Let us see how capital gain is computed when these assets are separately transferred.

(i) Depreciable assets

Section 50 contains special provision for computation of capital gains in case of depreciable assets. When this section is read in conjunction with section 50A providing special provision for cost of acquisition in case of depreciable assets, it emerges that the capital gains in the case of depreciable assets is computed by reducing from the full value of consideration received or accruing as a result of transfer of the asset, the expenditure incurred wholly and exclusively in connection with such transfer and the written down value of the block of assets at the beginning of the year as increased by the actual cost of any asset falling within the block of assets acquired during the year, where such block of assets ceases to exist as such. Section 50A provides that the cost of acquisition in case of depreciable asset shall, for the purposes of sections 48 and 49, be considered as the written down 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 actually allowed in the earlier years, the cost of acquisition for the purposes of computing capital gains shall be taken as the written down value. To illustrate, if Plant and machinery was purchased for Rs.5 and at the time of its transfer, its w.d.v. is Rs.3 and it is transferred for a sum of Rs.5, then the amount of capital gain shall be Rs.2 (Full value of consideration received at Rs.5 – w.d.v. of Rs.3)

(ii)Non-depreciable tangible assets

In contrast to the depreciable assets, where an assessee transfers non-depreciable capital assets, the capital gain is computed by deducting its cost of acquisition and cost of improvement from the full value of consideration received or accruing as a result of transfer. It is so for the reason that any increase in the value of asset when so realized vis-à-vis the cost at which such asset was acquired should be brought to tax as income chargeable under the head Rs.Capital gains’. Here it is relevant to note that section 48 provides that where long term capital gain arises from the transfer of a long term capital asset, other than those specifically excluded, the cost of acquisition of the asset and the cost of any improvement thereto shall be substituted with the indexed cost of acquisition and the indexed cost of any improvement. Further Explanation to section 48 defines the meaning of Rs.indexed cost of acquisition’ to mean Rs.an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later’.

On going through section 48 along with other relevant sections, it can be noticed that where a long term capital asset is transferred, the cost of acquisition and cost of improvement attain a higher value by the reason of application of Cost Inflation Index. Apart from that, section 112 provides tax on long term capital gains at rates lower than the maximum marginal rate. For the sake of simplicity, we are restricting ourselves to the transfer of a short term non-depreciable asset. To illustrate if Land was purchased for Rs.5 and it is transferred for a sum of Rs.78, then the amount of capital gain shall be Rs.73 (Full value of consideration received at Rs.78 – original cost of acquisition of Rs.5)

(iii) Non-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 process any article or thing or right to carry on any business, tenancy rights, stage carrier permits or loom hours shall be taken to be Nil. Resultantly the capital gain on the transfer of such intangible assets is the full value of consideration itself. To illustrate if self created Goodwill or Trade mark of Brand name is transferred for a sum of Rs.20, then the amount of capital gain shall be Rs.20 (Full value of consideration received at Rs.20 – Cost of acquisition and cost of improvement of Rs. 0).

(iv) Other assets

A business enterprise, apart from the above three types of capital assets, may also hold other assets such as cash in hand, stock, bank balance and debtors etc. The realizable or market value of such assets as on a particular date is usually equal to the book value or insignificantly different. Suppose the book value of such assets is Rs.2, its market value will also be in the close vicinity of Rs.2 and the sale price of such assets at any point of time shall be at Rs.2. There can be no income or loss from the transfer of such assets as the their realizable value is usually equal to the book value. It is notwithstanding the fact that stock is not a capital asset as per section 2(14) of the Act. In other words, the amount of capital gain will be Rs.0 (Full value of consideration received at Rs.2 – Cost of acquisition and cost of improvement of Rs.2)

  1. From the above discussion it is manifest that for the purposes of computing capital gain on the transfer of capital assets their cost of acquisition may undergo change vis-à-vis the cost at which these were actually acquired. It can be elevation to a higher level in case long term capital assets due to indexation; reduction to written down value in case of depreciable assets; and consistent in case of other short term capital assets. There arises no difficulty in computing capital gain when the full value of consideration received or accruing to the assessee as a result of transfer of such capital assets along with their cost of acquisition and the cost of any improvement are ascertainable. As can be seen from the examples given in para 9 above that the amount of capital gain on the transfer of all the capital assets collectively (or individually) is Rs.95 (from Depreciable assets at Rs.2; from Non- depreciable tangible assets at Rs.73; from Non-depreciable intangible assets at Rs.20; and from Other assets at Rs. 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 Rs.10 (Rs.3 in case of Depreciable assets; Rs.5 in case of Non-depreciable tangible assets ; Rs.0 in case of Non-depreciable intangible assets; and Rs.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 Rs.105 (Rs.5 in case of Depreciable assets ; Rs.78 in case of Non-depreciable tangible assets; Rs.20 in case of Non-depreciable intangible assets ; and Rs.2 in case of Other assets).
  2. Thus it can be noticed that there arises no difficulty in computing capital gain when all or any of the capital assets are distinctly transferred. Apart from the assets appearing in balance sheet, other assets such as goodwill and brand value are also transferred when the undertaking is sold because the purchaser not only acquires the tangible assets but also the intangible assets of the undertaking. In the facts of the instant case it is observed that the transferee buyer has assigned value of Rs.240 crore to Brand and Rs.4 crore to the Goodwill in its books of account. Not only such value has been assigned to these intangible assets, but the transferee also claimed deprecation on such assets, which has been eventually allowed by the tribunal. Copy of the tribunal order passed in the case of transferee has been placed on record. In case of sale of all the assets of the undertaking- tangible or intangible, movable or immovable, those recorded or unrecorded in the books – as one unit, a lump sum amount of consideration is determined without reference to any specific assets. Despite the fact that no reference is made to the value of individual assets in case of full value of consideration of all the assets taken together, but it is in fact the current value of all such assets that is taken into consideration by both the sides to arrive at a composite value. In such a case, the computation of capital gain poses difficulty because full value of consideration cannot be attributed to distinct assets and for computing capital gain not only the full value of consideration but also the cost of acquisition and cost of improvement of such asset is separately required. It is quite possible that some of the assets in such a bundle of assets transferred may be depreciable and others short term or long term. In this scenario, the cost of acquisition and cost of improvement may be different from the book value depending upon the time when the long term capital assets were acquired. The problem worsens and the difficulty in computing the capital gain is compounded when the entire undertaking is transferred as a whole not only with all its assets but also liabilities (both existing and contingent). The computation of capital gain in such cases becomes a tedious task because the full value of consideration of the undertaking will be the value assigned by the parties to all assets of the undertaking as on the date of transfer as reduced by the value of liabilities.
  3. Some courts held that when business 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.
  4. In the case of PNB Finance Ltd. Vs. CIT [(2008) 307 ITR 75 (SC)], Punjab National Bank Limited vested in Punjab National Bank on nationalization in 1969.

On that account it received compensation of Rs.10.20 crore during the previous year relevant to the assessment year 1970-71. The assessee claimed capital loss. The Assessing Officer held that since the assessee had submitted its own computation of the fair market value of the undertaking as on 01.01.1954, the only question which was required to be considered was the correctness of the figure of capital loss submitted by the assessee. The AAC held that it was not feasible to allocate the full value of consideration received amounting to Rs.10.20 crore between various assets of the undertaking and consequently it was not possible to determine the cost of acquisition and cost of improvement under the provisions of section 48 of the Income-tax Act, 1961. In this view of the matter it was laid down that the provisions of section 45 would not be attracted. When the matter finally reached the Hon’ble Supreme court, it came to be held that no capital gains could be charged to tax u/s 45 as the compensation received by the assessee on nationalization of its banking undertaking which included intangible assets tenancy rights etc. was not allocable item-wise. In para no.5 of this judgment, the Hon’ble Supreme Court noted that by an amendment to section 50B inserted by the Finance Act, 1999 with effect from 1st April, 2000, the cost of acquisition is now notionally fixed in case of Rs.slump sale’ and the assessee is required to draw up his balance sheet as on the date of transfer for its undertaking and net worth of that date is now required to be taken into account. It has been observed by Their Lordships that “it is only after 1st April, 2000 that computation machinery came to be inserted in s. 48 which deals with mode of computation.”

SLUMP SALE

14.1 Failure to compute the capital gain in case of transfer of undertaking due to reasons discussed above propelled the Finance Act, 1999 to give birth to section 50B and section 2(42C) along with other relevant provisions with effect from 1.4.2000 to facilitate the computation of capital gain in case of the transfer of undertaking as a whole. Section 2(42C) of the Act defines “slump sale” to mean “the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the 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, Rs.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 Rs.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 Rs.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 At this stage it will be apt to note the prescription of section 50B which runs as under:-

“50B. Special provision for computation of capital gains in case of slump sale.–(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital 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 any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

Explanation 2.–For computing the net worth, the aggregate value of total assets shall be,—

(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43 ; and

(b) in the case of other assets, the book value of such assets.”

14.3 Following are the 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 Rs.capital asset’ to mean Rs.property of any kind held by an assessee…’ It also refers to some positive possession. Further the word used Rs.held’ in the definition of Rs.capital asset’ pre-supposes some benefit or advantage in the positive sense in contrast to some liability, which is always `incurred’ and not Rs.held’. But in the context of section 50B, the capital asset is of unique nature, as it not only encompasses all the assets but also all the liabilities of the undertaking. In other words, the undertaking as a capital asset means Rs.All assets minus All liabilities’ of the undertaking.

(b) Where an industrial undertaking is transferred under slump sale which was owned and held by the assessee for not more than 36 months immediately preceding the date of its transfer, the profit or gains arising from such transfer is deemed to be capital gain arising from the transfer of short term capital assets. The relevant criteria for considering whether the undertaking is a short term or long term is the 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 aggregate value of the total assets of the undertaking or the division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account. Explanation 2, as is applicable to the year in question, further elaborates the ambit of Rs.aggregate value of total assets’ by providing that in case of depreciable assets it shall be the written down value of block of assets determined as per section 43(6) and in case of other assets, their book value. Special care has been taken to 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 Rs.net worth’, being the cost of acquisition and cost of improvement of the undertaking, involves basically two steps. First, find the written down value of the depreciable assets and book value of all other assets to find out Rs.the aggregate value of total assets’ of the undertaking. Second, find the Rs.value of liabilities’ of the undertaking as per books of account. When the figure as determined as per second step is reduced from the figure as per the first step, it gives us the amount of `net worth’ or in other words the cost of acquisition and cost of improvement of the undertaking. In other words, net worth of an undertaking under transfer is nothing but the cost of acquisition and cost of improvement of Rs.All assets minus All liabilities of the undertaking’.

(d) It has been clarified by Explanation 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 section 50B is to simply determine and supply the figure of cost of acquisition and cost of improvement of the undertaking to section 48 which eventually computes the amount of capital gain u/s 45. Once the cost of acquisition and cost of improvement of the undertaking or division, being its net worth along with the decision as to whether the undertaking is a long term or short term capital asset is decided and forwarded to section 48, the computation provision in the later section is activated for determining the income chargeable under the head Rs.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 Rs.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 Rs.All assets minus All liabilities’ of the undertaking from the full value of consideration of Rs.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 to the undertaking as a whole notwithstanding the fact that there may be several assets held by the assessee for a period of not more than 36 months, the legislature thought it to curtail the benefit of indexation to the cost of acquisition and cost of improvement.

14.4 On an overview of the provisions for the computation of capital gain in the case of slump sale of the undertaking on one hand and on the transfer of individual assets, whether depreciable or otherwise, we find that the basic intent is same and that is to charge tax on the transfer of capital assets. Only different modes have been provided to make such computation of capital gain workable. It can be noticed that the amount of profit or gain chargeable under the head Rs.Capital gains’ from individual 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 non-interest bearing liabilities, say a sum of Rs.2, the amount shown as payable will be the current liability of Rs.2; and in a case of interest bearing liability of say Rs.2, the amount of interest, if unpaid, say Rs.1, shall automatically be included in the value of liability in the books at Rs.3. In that case also the amount shown as payable in the books will be the value of current liability. There may be a possibility of a contingent liability not appearing in the books of account, which may or may not get eventually converted into real liability at a later point of time. Unless there is a positive reference to any contingent liability, the liabilities appearing in the books of account represent the amount actually payable by the undertaking. So, if the assessee wants to close the 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 computing capital gain on transfer of such separate assets will the amount received on account of transfer of such assets at gross level, that is, before reducing the amount of liabilities later on discharged by the transferor. If however, along with the transfer of all the assets, the transferor also transfers all the liabilities of the undertaking in the shape of a slump sale, then the consideration to be received will be net, that is agreed/market value of all the assets as reduced by the amount of liabilities to be discharged. And when we compute capital gain on the transfer of undertaking, the book value/w.d.v. of all the assets of the undertaking as reduced by the amount of liabilities appearing the balance sheet shall be reduced from the full value of consideration representing 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

 

5

 

 

0

 

0

 

 

2

 

 

 

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 2

3

5
2 Unsecured loans and other liabilities
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 Rs.105. As against that, the cost of acquisition and cost of improvement of all the assets collectively comes to Rs.10 resulting into the capital gain on transfer of all the assets collectively at Rs.95. Now suppose that instead of purchasing all the assets collectively as one unit, the transferee also undertakes to pay the liabilities of the undertaking worth Rs.5, he will pay only a sum of Rs.100 to the transferor (`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 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 account, is inherent in the full value of consideration of the undertaking though not distinctly specified. If we increase the book value of liabilities to the total sale consideration of the undertaking as a whole, what comes is the agreed value of all the assets of the undertaking as one unit. In other words, the full value of the consideration of the undertaking is the aggregate value of Rs.All assets minus All liabilities’ of the undertaking. It has to be so because the capital asset itself is nothing but Rs.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 can not be any thing but the Book value/w.d.v of Rs.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 Rs.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 Rs.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

– Rs.Net worth’ or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking

SCOPE OF APPEAL – WHETHER RESTRICTED ONLY TO PRECISE QUESTION BEFORE SB OR OVER THE SUBJECT MATTER

15.1 It has been noted above that the grievance of the Revenue is dual reflected through two grounds. First that the sale consideration of the undertaking ought to have been taken at Rs.300 crore and the second, which appears to be alternative is that the learned CIT(A) was not justified in ignoring the negative figure of net worth for computing 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 Rs.300 crore has also assailed the finding of the ld. first appellate authority by urging in alternative that the figure of net worth at a negative of Rs.157 crore should not be ignored, but treated as a minus figure for the purposes of computing the capital gain. In that case when from the sale consideration of Rs.143 crore, the negative net worth of Rs.157 crore is to be subtracted as per section 48, it would automatically result into the addition thereby making the amount of capital gain at Rs.300 crore. His alternative contention can be simply depicted as follows :- Full value of consideration of the undertaking (Rs.143 crore) as reduced by the net worth of the undertaking (-Rs.157 crore) giving capital gain of Rs.300 crore [Rs.143 minus (-)Rs.157 crore or in other words Rs.143 crore plus {as minus into minus is equal to plus} Rs.157 crore].

15.3. Initially the learned A.R. confined his arguments only to the exclusion of negative net worth from the full value of consideration for computing the capital gains, being the question referred to the special bench. However when it was pointed out to him that the Special Bench has been constituted not only to answer the question posted but also to dispose the entire appeal of the Revenue, which is against the computation of capital gain by the CIT(A) at Rs.143 crore instead of Rs.300 crore determined by the A.O., he advanced his arguments supporting the impugned order to the extent of adopting zero as cost of acquisition and cost of improvement of the asset instead of negative figure of net worth.

15.4 The learned A.R. was hesitant in conceding that the question of adopting zero in place of the negative worth for the purposes of computing capital gain may also be looked into by this special bench. It is manifest that notwithstanding the fact that the question posted for consideration before the special bench is confined to the determination of full value of consideration, but the subject matter of the appeal before us is the computation of capital gain. This special bench has not only to answer the specific question but also dispose the entire appeal. Obviously there can be no fetters on the power of the Tribunal to consider the point of negative net worth also as the ultimate question for determination before us is the computation of capital gain. Such computation involves not only ascertaining the full value of consideration but also all other aspects which are germane to such computation. It may be relevant to note Rule 11 of Income Tax Appellate Tribunal Rules, 1963 specifically provides that : “The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule”. This rule empowers the appellant, which is Revenue in the instant case, to urge any ground not set forth in the memorandum of appeal provided the Tribunal gives sanction to it. That apart, the second limb of rule 11 empowers the 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 other aspects but also invited the learned Senior A.R. to address on the question of negative net worth held by the ld. CIT(A) to be taken as zero. Thus the prescription of Rule 11 is fully satisfied. The Hon’ble Supreme Court in the case of CIT Vs. Mahalakshmi Textile Mills Ltd. [(1967) 66 ITR 710 (SC)] has held that if the assessee’s contention is rejected on one ground, the Tribunal is empowered to allow relief if it is available on other ground so long as the subject matter of appeal remains the same. The same analogy applies with full force to the denial of relief by the AO wrongly under one provision, which ought to be have been done under the other correct provision. There can be no embargo on the power of the tribunal to consider such correct provision, if such relief is, in fact, not available as per law under the correct provision. The Hon’ble Jurisdictional High Court in Ahmedabad Electricity Co. Ltd. Vs. CIT [(1993) 199 ITR 351 (Bom.) (FB)] has held that Rules 11 and 29 of the Income-tax Appellate Tribunal Rules indicate that the scope of enquiry before the Tribunal can be wider than the points which are raised before the Tribunal. The Tribunal, therefore, would ordinarily have the power to allow additional points to be raised before it so long as they arise from the subject matter of proceedings and not necessarily only the subject matter raised in the memorandum of appeal. In the present case it is not as if the ld. DR has taken leave to argue any additional ground. Ground no.2 of the Revenue’s appeal specifically challenges the finding of the ld. CIT(A) to the extent of directing that the negative figure of net worth be ignored. Further it is worth noting that no fresh investigation of facts is required in deciding this question. In view of the above discussion we are of the considered opinion that it is not only within the power of the tribunal but also our duty to determine the point as to whether the figure of negative net worth should be taken as zero or in negative, which has a direct bearing on the overall question of computation of capital gain in case of slump sale, which is subject matter of appeal before us.

FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING

16.1 Having noted supra the unique nature of the capital asset being the `undertaking’ as defined u/s 2(42C) read with Explanation 1 to section 2(19AA) as including not only the positive assets but also the liabilities attached to it, we shall now delve on the determination of Rs.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 Rs.actually received or accruing’ and not what Rs.ought to have been received’ or the Rs.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 provisions. For example section 50C provides that where the consideration received or accruing as a result of the transfer of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. It is worth noting that for the purposes of section 50C, the ambit of the expression Rs.full value of consideration’ has observed departure from its general meaning of the amount actually received or accruing. In case o

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