2022 (2) TMI 1335 - AT - Income Tax

Tribunal affirms inclusion of negative net worth in capital gain calculation in slump sale case

The Tribunal upheld the computation of short-term capital gain by including negative net worth in a slump sale case. It emphasized that net worth, whether ... Short term capital gain - Slump sale - negative net worth - Assessee considered the net worth at zero on slump sale - computation of capital gains where the net worth of an assessee is negative - Whether DCIT and CIT(A) erred in computing the short term capital gain by adding the negative net-worth instead of restricting the same to NIL as deeded cost, since cost cannot be a negative value - appellant had transferred 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 - HELD THAT:- As decided in M/S. SUMMIT SECURITIES LIMITED [2012 (3) TMI 176 - ITAT MUMBAI] held that that the Assessing Officer was not right in adding the amount of liabilities being reflected in the negative net worth to the sale consideration 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. 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. Issues Involved:1. Computation of short-term capital gain by adding negative net worth.2. Determination of capital gain exceeding the total consideration.Issue-wise Detailed Analysis:1. Computation of Short-Term Capital Gain by Adding Negative Net Worth:The primary issue in this case revolves around the computation of short-term capital gain on a slump sale. The assessee contended that the net worth should be restricted to NIL since the cost cannot be a negative value. The Assessing Officer (AO) computed the short-term capital gain by considering the negative net worth of Rs. 7,80,38,353/- as income from 'Short Term Capital Gains' and added it to the total income of the assessee.The CIT(A) upheld the AO's computation, relying on the decision of the Hon’ble Mumbai Special Bench in the case of M/s Summit Securities Ltd Vs DCIT, which treated the negative net worth as part of the capital gains computation. The CIT(A) noted that the net worth, as per section 50B of the Income Tax Act, involves the aggregate value of total assets reduced by the value of liabilities.The Tribunal examined the provisions of section 50B, which deals with the computation of capital gains in the case of a slump sale. It was highlighted that the net worth of an undertaking includes all assets minus all liabilities. The Special Bench in M/s Summit Securities Ltd. held that the negative net worth should not be ignored and must be considered in the computation of capital gains. The Tribunal agreed with this interpretation, emphasizing that the computation must include all assets and liabilities to determine the correct capital gain.2. Determination of Capital Gain Exceeding the Total Consideration:The assessee argued that the capital gain on the transfer could never be more than the total consideration received, which was Rs. 100 in this case. The Tribunal referred to the principles laid down in the case of Zuari Industries Ltd., where it was held that the net worth should be taken as NIL if liabilities exceed assets. However, the Special Bench in M/s Summit Securities Ltd. provided a detailed analysis, explaining that the capital gain computation should consider the net worth, whether positive or negative.The Tribunal noted that the full value of consideration received or accruing as a result of the transfer of the undertaking should be reduced by the net worth of the undertaking. The Special Bench's decision clarified that if the net worth is negative, it should be added to the full value of consideration to determine the capital gain. This approach ensures that the computation aligns with the statutory provisions and the intent of section 50B.The Tribunal concluded that the negative net worth cannot be ignored for computing capital gain on a slump sale. The AO was directed to compute the capital gains in accordance with the principles laid down by the Hon’ble Special Bench in the case of M/s Summit Securities Ltd.Conclusion:The Tribunal dismissed the appeal filed by the assessee, upholding the computation of short-term capital gain by adding the negative net worth. The decision was pronounced in court on 15th February 2022.