Revenue appeal allowed: Capital gains in slump sale computed accurately. Full consideration value included.

The Deputy Commissioner of Income-tax Versus M/s. Summit Securities Limited

The Deputy Commissioner of Income-tax Versus M/s. Summit Securities Limited - [2012] 15 ITR 01 Issues Involved:
1. Computation of sales consideration for capital gains.
2. Treatment of negative net worth in slump sale for capital gains.

Issue-wise Detailed Analysis:

1. Computation of Sales Consideration for Capital Gains:
The Revenue contested that the sales consideration for the transfer of the assessee's power transmission business (PTB) should be Rs. 300 crore instead of Rs. 143 crore as determined by the Commissioner of Income-tax (Appeals) [CIT(A)]. The Assessing Officer (A.O.) had added the negative net worth of Rs. 157 crore to the declared sales consideration of Rs. 143 crore, arguing that the total consideration should reflect the liabilities transferred along with the assets.

The Tribunal noted that the sale consideration of Rs. 143 crore was approved by the Hon'ble Bombay High Court as part of a composite scheme of arrangement under sections 391 to 394 of the Companies Act, 1956. The Tribunal emphasized that the full value of consideration should be the amount actually received or accruing as a result of the transfer, not the fair market value or any other substituted value unless specifically provided by the statute. The Tribunal held that the full value of consideration for the PTB should be Rs. 143 crore as per the approved scheme and not Rs. 300 crore.

2. Treatment of Negative Net Worth in Slump Sale for Capital Gains:
The CIT(A) had held that the negative net worth should be ignored for computing capital gains, effectively treating it as nil. The Revenue argued that the negative net worth should be considered in the computation, which would result in a higher capital gain.

The Tribunal examined the provisions of section 50B of the Income-tax Act, 1961, which deals with the computation of capital gains in case of a slump sale. Section 50B provides that the net worth of the undertaking (aggregate value of total assets minus liabilities) should be deemed as the cost of acquisition and improvement. The Tribunal noted that the net worth could be negative if the liabilities exceed the value of assets. In such cases, the negative net worth should be added to the sale consideration to compute the capital gain.

The Tribunal rejected the contention that the cost of acquisition (net worth) cannot be negative, emphasizing that the statutory provision must be followed. The Tribunal also dismissed the argument that capital gain cannot exceed the full value of consideration, explaining that in the context of an undertaking, the capital gain could indeed be more due to the inclusion of liabilities.

The Tribunal concluded that the negative net worth of Rs. 157 crore should not be ignored but should be added to the sale consideration of Rs. 143 crore, resulting in a capital gain of Rs. 300 crore. This approach aligns with the statutory provisions and ensures a consistent computation of capital gains.

Conclusion:
The appeal by the Revenue was allowed. The Tribunal held that the full value of consideration for the PTB should be Rs. 143 crore, and the negative net worth of Rs. 157 crore should be added to this amount, resulting in a capital gain of Rs. 300 crore. The CIT(A)'s decision to ignore the negative net worth was overturned. The Tribunal emphasized adherence to statutory provisions for accurate computation of capital gains in slump sales.