NELCO LTD.,MUMBAI vs. A.C.I.T. RG. 15(2)(1), MUMBAI

This appeal is filed by Nelco Limited (Assessee / Appellant) for A.Y. 2011-12, against the appellate order passed by The Commissioner of Income-tax (Appeals)- 24, Mumbai, [The ld. CIT (A)] dated 29th March, 2019, wherein the appeal filed by the assessee against the assessment order passed under Section 143(3) of The

Assessee is aggrieved with that and has preferred this appeal raising following grounds of appeal.

Brief facts of the case shows that assessee is a domestic company engaged in the business of manufacturing and marketing of electrical products and real estate development.

Assessee filed its return of income on 30 September 2011, at a total income of ₹ 28,75,61,880/- as long-term capital gain taxed at the rate of 20%. Assessee has also shown book profit under Section 115JB of the Act at ₹35,49,82,410/-. It was revised on 1 September 2012, where the book profit income was offered higher. The return was picked up for scrutiny by issue of notice under Section 143(2) of the Act dated 31 July 2012.

Assessment order was passed on 143(3) of the Act, wherein total income of the assessee was computed at ₹ 52,44,73,900/-. The main dispute in this appeal is with respect to computation of capital gain on sale of three business undertaking by the assessee on slump basis to Crompton Greaves Limited as per the BUSINESS TRANSFER AGREEMENT [ BTA ] dated 29th April, 2010. The assessee computed the capital gain chargeable under Section 50B of the Act at ₹ 51,03,42,064/-. The learned Assessing Officer in its computation of total income computed the capital gain chargeable under Section 50B

Assessee preferred the appeal before the learned CIT (A) against the computation of capital gain under Section 50B of the Act, wherein the computation made by the learned Assessing Officer on slump sale is upheld.

Therefore, the only issue in this appeal is with respect to the computation of capital gain under Section 50B of the Act. While computing the net worth of the undertaking sold, the learned Assessing Officer has reduced net worth by ₹15 crores of the bank liability. Further, the learned Assessing Officer also reduced the net worth of the undertaking sold by the Sundry Creditors amounting to ₹1,30,41,920/-, other liabilities of ₹1,94,17,656/- and the differential amount for payment of gratuity and leave encashment of ₹69,98,167/-. Thus, the dispute in this appeal is with respect to the computation of net worth of the industrial undertaking for computation of capital gain under Section 50B of the Act, which is the cost of acquisition to be reduced from sale consideration.

During the year, assessee has sold its business concern of [1] Traction Electronics, [2] SCADA and [3] Industrial Drives divisions on slump sale basis to Crompton Greaves Limited as per Business Transfer Agreement dated 29 April 2010. The assessee computed the net worth of the undertaking transferred at ₹24,26,88,429/-. The sale consideration was undisputed at ₹81 crores. Assessee also claimed expenditure of ₹5,69,69,507/- incurred for transfer of the business for computation of capital gain, the above two amounts were claimed as deduction under

The learned Assessing Officer found that the enterprise value of the undertaking was arrived at ₹82 crores, however, it was also provided that if the assessee was unable to transfer bank liability of ₹15 crores, the enterprise value stand reduced to ₹89 crores. It was further provided that the consideration of the enterprise shall be reduced by above ₹15 crores and further, ₹11 crores, if some financial targets are not met by the assessee. As the assessee could not transfer the bank debt of ₹15 crores and could not reach at the financial target, the assessee received total consideration of only ₹81 crores. Therefore, assessee considered of ₹81 crores as consideration received because of slump sale for computation of capital gain under Section 50B of the Act. The ld AO did not dispute this.

The learned Assessing Officer further noted that while computing the net worth of the undertaking transferred value of fixed assets as per Written-down value as per income-tax Act, was considered at ₹1,58,18,035/- and value of other assets as per book of accounts was considered at Rs.41,64,86,734/-. Therefore, the total value of assets was considered at ₹43,23,04,769/-. The liabilities of the transferred business was derived at ₹18,96,16,340/- and thus, net worth was shown at ₹24,26,88,429/-.

On examination of the business transfer agreement, the learned Assessing Officer found that as per clause no.1.3, the assumed liabilities were defined as the liabilities of

Further, as per the audit report of Deloitte Haskin and Sells for examination of net working capital on 29 July 2010, in connection with the business transfer agreement, provision for gratuity and accumulated leave of employees pertaining to the transferred division was not to be transferred. Similarly, certain liabilities of statutory nature were also not taken by the buyer. However, the assessee did not consider the liabilities amounting to ₹302,87,856/- for computing the net worth of transfer division. Further, certain sundry credit balances amounting to ₹1,30,41,920/- of the transferred division were also not considered.

Therefore, assessee was issued notice to explain the above. Assessee explained that the bank liability and other above stated liabilities, which are not taken by the buyer, have not been considered for negotiating the sale consideration and therefore, these items could not be taken for reducing the computation of net worth of transfer industrial divisions.

The learned Assessing Officer referred to the definition of „Net worth‟ and relying upon the definition as well as

He further held that liabilities of ₹1,94,17,656/- pertaining to the transferred undertaking were not considered and therefore, to that extent the net worth of the undertaking deserves to be reduced. Similarly, sundry creditors balances pertaining to the transfer division of ₹1,30,41,920/- as well as differential amount of provision for gratuity and leave encashment of ₹69,98,167/- was also required to be reduced from net worth of the undertaking. He therefore held that total non transferred liability of ₹18,85,57,743/- should be included in liabilities of the undertaking and consequently reduced from the net worth computed by the assessee.

Accordingly, the learned Assessing Officer computed the capital gain on slump sale under Section 50B of the Act, where full value of consideration received undisputedly is ₹81 crores, the net worth of the undertaking was determined at ₹ 5,32,30,686/-. The expenses incurred for the transfer of undertaking was also distributed by excluding the provision for doubtful debts amounting to ₹1,20,69,875/-. Thus, such expenses were considered at ₹4,22,15,682/-. Accordingly, the long-term capital gain computed under Section 50B of the Act was determined at ₹71,45,53,632/-.

In nutshell, the net worth of the undertaking transferred as computed by the assessee is ₹24,26,88,429/-, which is computed by the learned Assessing Officer at ₹5,32,30,686/- and expenses incurred towards transfer

The learned CIT (A) held that the bank liability was the liability of the undertaking and therefore, all the assets and liabilities pertaining to the undertaking of the business transferred are to be considered while computing the net worth. With respect to the reduction of sundry creditors of ₹1,30,41,920/-, other liabilities of ₹1,94,17,656/- and gratuity and leave encashment of ₹69,98,167/-, he rejected assessee‟s contention that these liabilities which have not been taken over, which required to be reduced from the net worth. Accordingly, on these issues, he dismissed the appeal of the assessee. Thus, assessee is aggrieved and in appeal before us.

The learned Authorized Representative submitted that assessee is only aggrieved against the computation of net worth of the transferred industrial undertaking for computation of capital gain under Section 50B of the Act, where the net worth is decreased by ₹15 crores on account of bank liability and further other three expenditure and items. He referred to paper book containing 177 pages wherein at page no.3 to 91 is Business Transfer Agreement between the assessee and Crompton Greaves Limited dated 29 July 2010, was referred to the details of undertaking transferred and the assumed liabilities at clause no.1.3 of the agreement. He also referred to Schedule VII of the assumed liabilities at

Coming to ground no.2 with respect to the Sundry Creditors after referring to the facts of the issue, he referred to the decision of Hon'ble Bombay High Court in case of Premier Automobiles Limited Vs. ITO at page no. 233 of the decision. In end, he submitted that the adjustment made by the learned Assessing Officer to the computation of net worth of the industrial undertaking and confirmed by the learned CIT (A) are not correct. In nutshell, he submitted that the net worth of the industrial undertaking cannot be reduced by the bank debt of ₹15 crores as it has not been taken by the buyer as well as various other liabilities. He therefore submitted that the order of the learned Assessing Officer and learned CIT (A) are not sustainable.

The learned Departmental Representative referred to the provisions of Section 50B of the Act to show that the computation is required to be made of capital gain by reducing the sale consideration by net worth of the undertaking being cost of acquisition. He submitted that

The conclusion of the hearing, Bench asked that the provisions of Section 50B (3) of the Act requires report of the accountant which has not been produced, Assessee was directed to submit. Assessee was also directed to submit the computation of the capital gain working along with the computation of the total income. Vide separate letter assessee submitted the computation of income along with working of the income under the head capital gain. Assessee also submitted from no 3CA issued by the accountant M/s Subramanian Swami and Associates dated 21 September 2011.

We have carefully considered rival contentions and perused the orders of the lower authorities. Undisputedly claim of the assessee is that assessee has sold three undertaking to Crompton Greaves limited on slum sale basis as per Business Transfer undertaking. Therefore, the capital gain is required to be computed u/s 50 B of

Further assessee submits that it has continued to show the liabilities in the books of accounts of the assessee and further while disclosing the net effect of discontinued business, this liability is shown in continuing operation. We find that as the liability has not been taken by the buyer does not change the net worth of the assessee for computing capital gain u/s 50 B of the Act. As the liability has not been taken by the buyer it cannot be transferred to the buyer's accounts naturally, therefore it continued as liability in the books of the assessee and as part of continuing operation of the assessee. Therefore, it does not affect the computation of capital gain u/s 50 B of the Act.

On appeal before ld CIT (A) , he decided the issue as under :-

Ld AR has relied up on the decision of coordinate bench in case of PVR Ltd [2021] 124 taxmann.com 593 (Hyderabad - Trib.)[04-01-2021] where in the facts are as under :-

Comparing the facts of the present case with the facts of the case cited before us, we find that those are distinguishable. In this case, bank liabilities have not at all been discharged by neither the buyer nor the seller. In

Assessee has further placed reliance up on decision of Honourable Delhi high court in case of Triune projects Limited [2017] 77 taxmann.com 40 (Delhi) where in the issue was whether slump sale was a sham transaction to reduce tax liability or not where some of the assets of the undertaking are not transferred. Honorable High court held that same is not sham. In the case of the assessee, issue is of computation of net worth, which was not the issue before high court. In case of assessee revenue authorities have accepted that the transaction is slump sale and also accepted the computation of such capital gain to be made u/s 50 B of the Act. Here the issue is only of the computation of net worth as cost of acquisition of Transferred undertaking. Therefore, that decision does not render any assistance in the issue before us.

Revenue has relied on the decision of the coordinate bench in case of Universal Dairy Products (P.) Ltd [2013] 36 taxmann.com 586 (Delhi - Trib.) where in it has

We have also perused from No 3CEA dated 21/09/2011 issued by the Accountant , we have also perused annexure 3 of the certificate where book values of liabilities of transferred business was mentioned. On perusal of Note, it was stated that on mutual understanding of the parties certain liabilities are not included. It is not at all mentioned that how these does not for part of liabilities recoded in the books of account of the assessee pertaining to transferred undertaking. There is no question of taking any mutual understanding in to account for computation of cost of acquisistion transferred undertaking, it has to be strictly in accordance of the law which provides that all the liabilities recorded in the books of account of such transferred undertaking should be considered , irrespective whether taken over by the buyer or not.

Hence we do not find any infirmity in the orders of the lower authorities in reducing the net worth of the transferred undertaking by bank liability of Rs 15 crores being the liability of the undertaking for computation of capital gain u/s 50 B of the Act. Accordingly, Ground no 1 and 3 of the appeal is dismissed.

Ground No 2 of the appeal is against considering certain liabilities though not taken by the buyer, reduced by the ld AO from the net worth. He claim of the assessee is Sundry Creditors amounting to Rs. 1,30,41,920/- were

The ld CIT (A) has deal with this issue as under :-

On perusal of letter dated 21/03/2014 submitted before ld AO, It is not the case of assessee that all these liabilities are not pertaining to the undertakings transferred, only claim that these liabilities could not be transferred because of some commercial reasons, such as in case of old creditors some litigations were going on, statutory liabilities are to be paid by the assessee and it was not possible to transfer. These are not the consideration permitted by law for considering the net worth of the undertaking as cost of acquisition.

With respect to Gratuity and leave encashment are pertaining to units transferred but though employees are transferred to buyer, same was to be considered as expenses on transfer, therefore same is required to be considered as expenditure incurred for transfer of unit. These expenses are not with respect to transfer but arising as liabilities shared by the buyer and seller. Thus it is not the expenditure on transfer but liabilities taken on its own by the assessee.

Assessee relied on decision of Honourable Bombay high court in Premier Automobiles limited 264 ITR 193 referring to page no 233 was that whether the sale of kalian business was a slump sale or not. The court held yes. In this case it is not the issue as everyone agrees that it is slump sale.

In view of above facts we do not find any infirmity in the orders of lower authorities in not considering the Rs

In the result, appeal of assessee is dismissed.