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S. 50B – Amount of liabilities being reflected in the negative net worth cannot be added to sale consideration for determining the capital gains on account of slump sale

DCIT Vs. Summit Securities Ltd. 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 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.

DCIT Vs. Summit Securities Ltd (ITAT Mumbai Special Bench)

It was held by special bench that negative figure of net worth of the undertaking should not be ignored for working out capital gains in case of a slump sale under Section 50B of the Income-tax Act, 1961. This is a very important ruling by the Special Bench, which has reversed the law laid down by the Mumbai Tribunal in case of Zuari Industries Ltd. [2007] 105 ITD 569 (MUM), wherein it was held that if the net worth of the undertaking is negative, the same should be considered as zero, for the purposes of computing capital gains under Section 50B of the Act.

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. 28 1.41 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. 3 129443625. 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 `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.

The learned CIT(A) accepted the contention advanced on behalf of the assessee in para 3.11 of the impugned order that the `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.

Special bench on Appeal held as follows:-

Capital gain on transfer of `Undertaking’ (All assets minus All liabilities) of the undertaking is equal to Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of undertaking (-) Net worth or the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking. Contents of all the three components viz. Capital gain, Full value of consideration and Net worth are common, that is, `All assets minus All liabilities’ of the undertaking. It has to be so because we are computing capital gain on the transfer of the undertaking which is again nothing but `All assets minus All liabilities’. If we accept the contention of the assessee and adopt the figure of Full value of consideration at Rs. 143 crore which is for `All assets minus All liabilities’ of the undertaking and take the figure of Net worth at Rs. 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 Rs. 1360 crore towards Part of all liabilities{total liabilities are Rs. 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’.

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 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. However, we allow ground no.2 raised by the Revenue in its appeal by holding that the CIT(A) was not correct in coming to the conclusion that the negative figure of the net worth of Rs. 157 crore should be ignored for working out the capital gains in case of a slump sale. The summary of our conclusion is that the amount of `Net worth’ will be a negative figure of Rs. 157 crore and not Zero. Resultantly the amount of capital gain chargeable to tax will be Rs. 300 crore and not Rs. 143 crore as declared by the assessee.

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