TaxTMI 
TaxTMI 
2012 (3) TMI 176
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....ve 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?" 3. 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 appe....
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.... 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 assesseecompany 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 d....
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....s. 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]. 7. 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....
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....ital 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 acquisi....
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.... 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 'indexed cost of acquisition' to mean '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'. Ongoing 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.....
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....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) 10. 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 ....
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....t 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 tran....
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....rged 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 '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 m....
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....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 ....
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....ng 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 'aggregate value of total assets' by providing that in case of depreciable as....
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....tamp 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....
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....l 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 ....
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..... 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 2. Non-depreciable tangible assets as per Balance Sheet 5 108 105 3. Non-depreciable intangible assets 0 0 4. Other assets 2 A. Aggregate value of assets of the undertaking 10 108 105 1. Secured loans 2 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, nondepreciable 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 resultin....
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....bsp; '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 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 du....
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.... 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 memoran....
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....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 '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 ....
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.... has made it clear that the determination of the value of asset or liability for the purposes of payment of stamp duty etc. shall not be regarded as assignment of values to the individual assets or liabilities. It is, therefore, manifest that even if the assets of the undertaking, which is subject matter of transfer, include land or building or both, the stamp value shall be ignored insofar as the computation of full value of consideration of the undertaking as a whole is concerned. 16.2 It is pertinent to note that the expression 'fair market value' of a capital asset has been used in different provisions under the head 'Capital gains' for denoting in certain cases as the 'full value of consideration' and in certain others as the 'cost of acquisition'. For example, section 45(1A) provides that where any person receives at any time during the previous year any money or any other assets under an insurance from an insurer on account of damage to, or destruction of the any capital asset as a result of flood, typhoon or riot etc., then any profit or gain arising from the receipt of such money or other assets shall be chargeable to income-tax under the head&nb....
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.... of the asset as on 1st April, 1981, at the option of the assessee. Similarly section 55(3) provides that where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition' to the previous owner means the fair market value' on the date on which the capital asset became the property of the previous owner. 16.4. Thus it can be noticed that the concept of "fair market value" in relation to a capital asset, as defined in section 2(22B), has been used interchangeably in certain sections of this Chapter to represent the cost of acquisition' while in others as the full value of consideration received or accruing'. The principle which thus follows is that the full value of consideration for the purposes of section 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, ....
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....amount as may be prescribed in this behalf. It is well known that the process of determining the fair market value of an asset requires specific knowledge, qualification and skill, which cannot be decided by a person who is not so equipped. That is why the legislature has left the matter of determining the fair market value of a capital asset to a Valuation Officer. It is further relevant to note that in determining such fair market value, the Valuation Officer also obeys the mandate of relevant provisions of the Wealth-tax Act as have been referred to in section 55A itself. This indicates that the Assessing Officer cannot suo moto determine the fair market value of a capital asset. Coming back to the facts of the instant case it is observed that the A.O. had not made any reference to the Valuation Officer for determining the so called fair market value of the undertaking to substitute it with its full value of consideration received or accruing. He has simply added the amount of negative net worth to the consideration received for determining the so called fair market value' of the undertaking to substitute it with the full value of consideration received or accruing. Thus i....
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....the date of sale of undertaking is consistent at Rs. 5. That is how the agreed value of the undertaking (All assets minus All liabilities) is Rs. 100 ( Rs. 105 for Assets minus Rs. 5 for Liabilities). 16.9. The contention of the ld. DR was that since the liabilities have been taken over by the transferee then it would mean that the full value of consideration of the undertaking be taken as the amount actually received plus the liabilities which will be discharged by him. We do not find any merit in such contention. The full value of consideration of the undertaking in Table A at Rs. 100 indicates its two inbuilt components, that is, the value of all assets ( Rs. 105) and all liabilities ( Rs. 5), which have submerged into this value of consideration of the undertaking. It is wholly improper to argue that since the transferee after paying Rs. 100 will also discharge liabilities of Rs. 5, the full value of consideration of the undertaking should be considered as Rs. 105. If we add liabilities of Rs. 5 to the agreed consideration of the undertaking at Rs. 100, it would give us the agreed value of the assets alone at Rs. 10....
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....nts of the undertaking as capital asset will become incompatible with those of the full value of consideration of such undertaking. In that case the full value of consideration will show the figure of that of the undertaking plus part of such figure once again. As the figure of Rs. 143 crore has been reached by considering not only the value of all the assets but also all the liabilities of the undertaking, a part of such liabilities representing negative net worth cannot be again added to the sale consideration. In the case of George Henderson & Co. Ltd. (supra) it has been categorically held that "the consideration for the transfer of a capital asset is what the transferor receives in lieu of the asset he parts with, viz. money or money's worth ........". It follows that the expression "full value of consideration" in section 48 cannot be construed as anything other than the full value of the thing received by the transferor as a consideration for transfer of undertaking. This case is thus of no help to the Revenue. Similar is the position regarding the other judgment relied by the ld. DR in CIT Vs. Gillanders Arbuthnot & Co.[(1973) 87 ITR 407 (SC)] in which it has been hel....
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...., the State discharged the liability due by the assessee to it and paid over the remaining amount to the assessee. Since the full value of consideration was the amount of sale consideration at Rs. 5.62 lakh of the immovable property, it was held that the entire amount was to be considered as full value of consideration for the purpose of computing capital gain. In the instant case the capital asset transferred is the undertaking which comprises not only its positive assets but the liabilities as well. The assessee realized a sum of Rs. 143 crore as full value of consideration of the undertaking as a whole. This amount of Rs. 143 crore represents excess of the agreed/market value of all the assets of the undertaking as reduced by the liabilities undertaken to be discharged. In other words, the value of total liabilities including Rs. 157 crore is already included in Rs. 143 crore. The situation would have been different if the transferee company paying Rs. 143 crore to the assessee had also undertaken to discharge certain other liabilities of the assessee unrelated with the undertaking. In that case the full value of consideration of the undertaki....
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....of the Scheme including the sale consideration for the transfer of PTB, the Hon'ble High Court got satisfied with it. Once the sale consideration has been approved by the Hon'ble High court, it is wholly unrealistic on the part of the Revenue to contend that the consideration of Rs. 143 crore does not represent the full value of consideration of the undertaking. As such, we are not inclined to find any assistance to the Revenue's case from the judgment of the Hon'ble Gujarat High Court in so far as the question of the adequacy of the sale consideration is concerned. 16.13. In the light of the above discussion it is held that the full value of consideration of the undertaking for the purposes of computing the capital gain u/s 48 should be taken at Rs. 143 crore and not Rs. 300 crore. The Departmental contention in this regard is jettisoned. NET WORTH 17.1 The Rs. net worth' of the undertaking has been determined by the assessee's auditor u/s 50B(2) as under :- Free hold Land 4,85,107 Leasehold Land 15,37,83,274 Depreciable assets at w.d.v. 35,43,13,503 CWIP at book value 15,21,72,070 Current assets at book value 1294,54,....
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....d above that when we compute 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. 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. When we reduce the full value of the consideration from the net worth of the undertaking, what we in fact get is the capital gain on the transfer of bundle of assets of the undertaking by impliedly negating the effect of the value of liabilities from both the full value of consideration and the cost of acquisition at the same figure because the book value and current value of liabilities remains the same as discussed in para 14.4 above. 17.5 Section 50B stipulates that the net worth of an undertaking is equal to the ....
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....ransfer of the undertaking, we cannot include the book value of the part of the bundle of assets but all the liabilities in the amount of net worth. It has to be of all the assets and all the liabilities. If we consider agreed value for all the assets but reduce book value of only some of the assets or we consider full value of all the bundle of assets but cost of acquisition at more than book value of such assets, the computation will give absurd results. Similarly we cannot ignore part of the liabilities from the net worth because the full value of consideration is determined by considering the effect of all the liabilities. If only a part of the liabilities are included in the net worth, the computation 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 ....
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.... Book value of all the liabilities Rs. 1517 crore). As the capital asset is again an undertaking (All assets minus All liabilities), the full value of consideration also needs to be determined in the same manner of (All assets minus All liabilities). In the like manner net worth of the undertaking i.e. the cost of acquisition and cost of improvement also needs to be worked out of (All assets minus All liabilities). When we take the figures from Table B, the position which emerges is that the full value of consideration of the undertaking comes to Rs. 90 as against the net worth at a figure of Rs. (-)5. Whereas the case of the assessee is that negative net worth of Rs. (-)5 be ignored and capital gain be worked out at Rs. 90, the Revenue is contending that the net worth of Rs. (-)5 should be taken at a negative figure so that the capital gain on the transfer of undertaking comes to Rs. 95 [ Rs. 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 Rs. 105, but the full value of consideration of the undertaking in Table....
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....le should be computed at Rs. 95 by adding the amount of negative net worth of Rs. 5 to the full value of consideration of the undertaking at Rs. 90. The figures from Table B will reflect the calculation of capital gain as under : - Capital gain on transfer of Undertaking' (All assets minus All liabilities) is Rs. 95 ( Rs. 95 minus Rs. 0), that is Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking Rs. 90 ( Rs. 105 minus Rs. 15) - Rs. Net worth' or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking Rs. - 5 ( Rs. 10 minus Rs. 15) 17.10 Now we will take up various arguments put forth by the learned A.R. in support of his case that the figure of negative net worth be ignored and taken at nil value for the purpose of computing capital gain. The following broad submissions have been made in this regard which we will take up one by one for consideration. (i) Cost of acquisition cannot be in negative. 17.11.1 The ld. AR argued that since the net worth of the undertak....
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....ame Act, which is enacted for different object. In JCIT v. Saheli Leasing and Industries Ltd. [(2010) 324 ITR 170 (SC)] Their Lordships have held in para 34(vi) that : "one word occurring in different sections of the Act can have different meaning, if the object of the two sections are different and when both operate in different fields". The Hon'ble Supreme Court in the case of CGT v. N.S.Getti Chettiar [(1971) 82 ITR 599 (SC)] noted that the dictionary gives various meanings to the words but those meanings do not help. It has been specifically observed : "We have to understand the meaning of those words in the context in which they are used. Words in the section of a statue are not to be interpreted by having those words in one hand and the dictionary in the order. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve." In the case of CIT v. Anand Theaters etc. [(2000) 244 ITR 192 (SC)] it has been held by Their Lordships that dictionary meaning of a word should not be adopted where the context conveys a different meaning. It has been laid down : "In our opi....
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....e in negative, in our considered opinion, is too wide a proposition to be accepted in case of the capital asset in the nature of Undertaking'. We, therefore, reject this contention. (ii) Why only negative net worth and not entire liabilities added ? 17.12. 1 Taking a dig at the Departmental stand on adding the negative net worth, the ld AR argued in that view of the matter this logic should have then been extended to the entire liabilities of the undertaking worth Rs. 1517 crore undertaken by the transferee and not only the negative net worth of Rs. 157 crore which is a fraction of total liabilities. 17.12.2 This contention of the learned AR defies the very rationale behind the computation of capital gain in case of slump sale. It has been noticed above that the value of assets fluctuates over the period vis-à-vis their book value/w.d.v. but the amount of liabilities appearing in the balance sheet as on a particular date normally coincides with the current value of such liabilities on a given date. In that view of the matter the figure of net worth is the result of consideration of current value of liabilities which also happens to be their book va....
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....deration, it will be against the language of the section. It was argued that if the intention of the legislature had been to add the amount of negative net worth then it should have been expressly provided by using the words deducting from or adding to' in place of only deducting from'. He stated that in the absence of any words "adding to" in section 48, the presumption is that the negative figure of the net worth has to be reduced to zero. 17.13.2 This contention is again devoid of merits. The reason is obvious for using the words "deducting from" in section 48 and not "deducting from or adding to" to the full value of consideration received or accruing as a result of transfer of the capital asset. When we talk of "deducting" net worth from the full value of consideration for computing capital gain u/s 48, it automatically implies that whatever way the net worth be, that is positive or negative, it will be taken care of accordingly. If the net worth is positive, "deducting from" the full value of consideration shall mean that the positive figure as supplied by section 50B in absolute terms shall be deducted. However, if it is negative then deducting a negative figu....
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....nt has also to be of the undertaking (All assets minus All liabilities). In a case where the book value of liabilities is less than the book value / written down value of the assets of the undertaking, the amount of capital gain will be less than the full value of consideration of the undertaking. But if the book value of liabilities is more than the book value / written down value of assets, as is the case under consideration, then the inherent element of full value of assets in the total full value of consideration of the undertaking, though not separately indicated, will be depressed accordingly. 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 the capital gain on the transfer of undertaking will be more than the full value of consideration because of the reason that the value of liabilities undertaken by the transferee stands embedded in and has the effect of reducing the full value of consideration accordingly. As such we are not inclined to accept this contention raised on behalf of the assessee. (v) The words as reduced by' pre-suppose that preceding figure is higher than the succeeding 1....
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....t that the aggregate value of the total assets of the undertaking is Rs. 1360 crore with the value of liabilities at Rs. 1517 crore. The figure of the value of liabilities' is in fact more than the figure of aggregate value of total assets' of the undertaking. When the net worth in the present case is negative at Rs. 157 crore it automatically implies that the liabilities are more than the total assets. The contention that the liabilities cannot be more than the aggregate value of assets, therefore, fails at the very outset. The further argument that if the value of liabilities is more than the aggregate value of total assets then the "net worth" should be restricted to zero, runs contrary to the main argument that the words as reduced by' can never mean that the value of liabilities will be more than the aggregate value of the assets. 17.15.3 Insofar as the reliance of the learned AR on clause 315 of the Direct Tax Code Bill, 2010 is concerned, we find that the same does not advance his case any further. The said clause reads as under:- "315. In this Code, unless otherwise stated, - (a) a reference to any income, or to the result of any....
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....refers to the loss' as well. What is true for the "income" in both positive and negative terms is equally true for other items as well. Most importantly it is relevant to note the positioning of Clause 315 in the Direct Tax Code Bills, 2010. It has been incorporated under Chapter XVI with the heading "Interpretations and Constructions". It is not as if it has been made a part of provisions under Chapter III - II - D dealing with Capital gains' covered under Clauses 46 to 55 of the DTC Bill, 2010. It, therefore, transpires that nothing new has been brought in to the Code by way of insertion of Clause 315 providing that the income or aggregation of two or more items shall include both positive and negative amounts. What was earlier implied has now been sought to be expressed. We, therefore, find this contention as bereft of any force. 17.15.5 It is relevant to note that the cost of acquisition and cost of improvement of an undertaking or its net worth has been incorporated in section 50B(2) by way of a deeming provision. It has been made clear in sub-section (2) that : "the net worth' of the undertaking or the division, as the case may be, shall be deemed ....
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....behalf of the assessee. 17.15.6 To fortify his view that the negative figure of net worth should be ignored, the learned AR has heavily relied on the judgment of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. Vs. DCIT [(2004) 266 ITR 521 (SC)] in which case it has been held that the deduction u/s 80HHC(3)(c) can be allowed only if there is a positive profit on the exports of both self-manufactured goods as well as trading goods and if there is a loss in either of the two then the loss has to be taken into account for the purpose of computing profits. The facts of that case are that there was a loss of Rs. 6.86 crore from the export of trading goods and profit of Rs. 3.78 crore from export of self-manufactured goods. The assessee claimed deduction u/s 80HHC on a sum of Rs. 3.78 crore by ignoring the loss of Rs. 6.86 crore from the export of trading goods. The Assessing Officer did not allow any deduction u/s 80HHC for the reason that there was a net loss from export of goods and hence deduction was not permissible. The Hon'ble Supreme Court eventually upheld the Assessing Officer's stand by holding that the negative figure of loss of R....
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....duction under this Chapter. Basically there are deductions either based on certain payments or in respect of certain incomes. The overall amount of all the deductions can in no case exceed the gross total income. However deductions in respect of incomes have to result from the qualifying income. In case there is positive qualifying income, the amount of deduction shall be computed and allowed. But if there no qualifying income, there will be nil deduction. Further the law does not say that in case there is a loss instead of the eligible income then any addition should be made to the total income. Thus in respect of ncome based deductions', there has to be some positive qualifying income so as to avail the benefit of deduction. And no deduction is available when there is either no eligible income at all or a loss. In both such cases the amount of deduction will be Nil. Section 80HHC falls in Chapter VI-A - C. "Deductions in respect of certain incomes". Unless there is an income from exports included in the gross total income, there cannot be any deduction in respect of section 80HHC. The existence of a positive income is a requisite condition to claim deduction under the relev....
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....yable in case of an amalgamation u/s 394 of the Companies Act. There was transfer of a company as a going concern on the basis of compromise on which the Hon'ble Bombay High Court held that stamp duty would be payable by the party. It was further observed that under the amalgamation scheme, what is transferred is a going concern and not assets and liabilities separately. As a going concern what is the value of the properties is to be taken into consideration. The learned Advocate General in that case contended that the stamp duty should be recovered on the market value of shares of the transferee company allotted to the shareholders of the transferor company plus the liabilities of the transferor company transferred to the transferee company. The Hon'ble Bombay High Court found this contention to be "contrary" to the meaning of the word "conveyance" as provided u/s 2(g)(iv) of the Bombay Stamp Act, 1958. It is on the basis of this finding of the Hon'ble jurisdictional High Court rendered in the context of Bombay Stamp Act, 1958 that the learned A.R. canvassed the view that for the purpose of computing capital gain only the full value of consideration should be taken and the net wor....
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....the question of determination of full value of consideration of the undertaking is of no use. In view of the foregoing reasons we are of the considered opinion that in computing net worth of the undertaking the value of liabilities' can be more than the aggregate value of assets of the undertaking' within the meaning of section 50B. 18. The learned AR pressed into service the judgment of the Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. v. ITO & Anr. [(2003)264 ITR 193(Bom.)]. That assessee-company was engaged in the business of manufacture and sale of cars. It entered into a joint venture agreement with a foreign company to establish a joint venture company. The assessee sold one of its business undertakings as a whole to the joint venture company for a lump sum consideration. The Assessing Officer took it as a case of sale of itemized assets and allocated sale value to building, plant and machinery and paint shop. After deducting written down value there from, he calculated short term capital gain. The Hon'ble Bombay High Court held that it was an entire business undertaking which was sold as a going concern and not any distinct asset suc....
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....l 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 ....