Whether negative figure of Net Worth is to be ignored for working out capital gains in a slump sale case - ITAT SB answer goes in favour of Revenue

 THE issues before the Special Bench are - Whether the negative figure of net worth has to be ignored for working out the capital gains in case of a slump sale and whether the liabilities being reflected in the negative net worth of the assessee has to be added to the sale consideration for determining the capital gains on account of slump sale. And the verdict goes in favour of the Revenue.

Facts of the case

The

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 "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.

On appeal by the assessee, the CIT(A) accepted the contention advanced on behalf of the assessee 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 - (2006-TIOL-259-ITAT-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.

Against the above order of CIT(A), the Revenue's objection before ITAT is two-fold. First, that the sale consideration ought to have been computed at Rs.300 crore and second, that the negative figure of net worth should not have been ignored.

On appeal by the Department, the special bench of the Tribunal held that,

++ the concept of '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 '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;

++ the full value of the consideration of the undertaking is the aggregate value of 'All assets minus All liabilities' of the undertaking. It has to be so because the capital asset itself is nothing but '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';

++ 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;

++ Full value of consideration received or accruing - 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'. 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;

++ Explanation 2 to section 2(42C) defining 'slump sale' 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;

++ 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'. It is noted that nowhere in any provision, either section 50B or section 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 A.O. has also observed that the sale consideration of Rs.143 crore is not at an arm's length and that is why he adopted the figure at Rs.300 crore by adding the negative net worth to the declared sale consideration. By expressing the opinion that the value of undertaking at Rs.143 crore as agreed to between the assessee and transferee is not appropriate, he has indirectly resorted to the substitution of 'fair market value' of the undertaking in place of the amount 'received or accruing';

++ notwithstanding the fact that there is no provision to substitute "fair market value" of the undertaking with the amount 'received or accruing' as the full value of consideration u/s 48, it is found that the A.O. has not even embarked upon determining "fair market value" of the undertaking as per law. Section 55A provides that with a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter, the AO may refer the valuation of capital asset to a Valuation Officer if, inter alia, he is of the opinion that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such percentage of the value of the asset as so claimed or by more than such 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 AO cannot suo moto determine the fair market value of a capital asset;

++ 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 it is manifest that the process of determining fair market value as adopted by the AO has no sanction of law despite the fact that there is no such provision for substituting the fair market value with the full value of consideration received or accruing as a result of transfer of an undertaking under a slump sale;

++ 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;

++ there is no merit in the contention of the 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. The full value of consideration of the undertaking cannot be anything in the facts of the present case is Rs.143 crore;

++ 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 – it can be seen from the calculation of the 'net worth' of the undertaking as determined by the assessee's auditor u/s 50B(2) that the written down value in respect of the depreciable assets is Rs.35.43 crore and the book value of all other assets is at Rs.1325.19 crore thereby giving aggregate value of total assets of the undertaking transferred at Rs.1360.62 crore. The value of liabilities relatable to the undertaking as appearing in the books of account transferred by the assessee is at Rs.1517.81 crore. This has resulted into the excess value of liabilities over the aggregate value of assets of the PTB transferred giving negative net worth of Rs.157.19 crore. The learned CIT(A) has inter alia held that the 'net worth' as defined u/s 50B cannot be a negative figure and in case it is so, then for the purposes of computing capital gain u/s 48 it should be considered as Nil. He thus directed to take the figure of net worth in the present case at Nil;

++ the methodology for computing net worth has been given in Explanation 1 read with Explanation 2 to section 50B as per which the aggregate value of total asset (written down value 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;

++ section 50B stipulates that the net worth of an undertaking is equal to the aggregate value of total assets of the undertaking as reduced by the value of liabilities. The aggregate value of the assets and the value of liabilities as per Expl. 2 is the w.d.v of the depreciable assets, book value of other assets and the book value of all the liabilities. To be more elaborate the 'aggregate value of total assets' shall require not only the inclusion of recorded but also unrecorded assets such as Goodwill and brand value, to which no specific cost can be attributed. So the net worth is nothing but the depreciated/book value of all the assets recorded in books of account and Nil in case of intangible/other unrecorded assets. Similarly the value of liabilities shall be that recorded as per books of account plus the value of contingent liability, if any. So in the instant case 'the value of liabilities' as per section 50B will be the book value of the liabilities of the undertaking.

++ it is patent that the words "net worth" and "cost" have not been given any meaning for the purposes of section 50B. At the same time it 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. Section 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". The contention on behalf of the assessee that cost of an asset cannot be in negative is though true in a general sense but fails in the context of the capital asset referred to in section 50B as 'Undertaking'. To contend that the cost or net worth can never be in negative, is too wide a proposition to be accepted in case of the capital asset in the nature of 'Undertaking';

++ the AR vehemently argued that the amount of capital gain can never be more than the full value of consideration received or accruing as a result of transfer of assets. It was stated that the amount of capital gain is always a part of the full value of consideration which is determined by reducing the cost of acquisition and cost of improvement there from. We are again unconvinced with this submission which is though correct in the case of transfer of an asset of a general nature but fails in the context of a capital asset in the nature of an undertaking. As the capital gain on transfer of undertaking (All assets minus All liabilities) is determined by reducing from the full value of consideration received or accruing of the undertaking (All assets minus All liabilities), the net worth i.e. cost of acquisition and cost of improvement 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;

++ 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 '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.. Thus the question referred to the Special Bench is answered in negative by holding that the AO 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. 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.

assessee transferred its "Power Transmission Business" (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 Bombay High Court. As per clause 1(7) of the 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. 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 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. The assessee company received sale consideration of Rs.143 crore by way of equity and preference shares.