WOCKHARDT HOSPITALS LTD,MUMBAI vs. ADDL CIT RG 10(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद"य लेखा लेखा सद"य सद"य, राजे"" सद"य राजे"" राजे"" केकेकेके अनुसार राजे"" अनुसार अनुसार/ PER Rajendra A.M.- अनुसार Challenging the order dated 25/09/2013 of the CIT (A)-21,Mumbai the assessee and the Assessing Officer(AO)have filed cross appeals for the above-mentioned assessment year. Assessee-company,engaged in the business of running hospitals,filed its return of income on 15/10/2010.A revised return was filed on 01/03/2012,declaring income at Rs. 8.19 crores.The AO completed the assessment,u/s.143 (3) of the Act,on 28/03/2013, determining its income at Rs.325.89 crores. ITA/7454/Mum/2013: 2.First ground of appeal,raised by the assessee,is about addition to the extent of Rs. 252.61 crores on account of negative net worth of the undertaking under slump sale while computing capital gains u/s.50B of the Act.During the assessment proceedings,the AO found that assessee had to divisions-one division was owning hospitals and the other was running the leased the hospitals taken from various entities,that it had sold its own hospitals to Fortis Hospitals Ltd.(FHL),as per the business agreement,dated 24/08/209,that FHL acquired all the assets and liabilities of the assessee and purchased in form of slump sale, that the amount to be paid to the assessee was as per clause 3 of the agreement. He observed that computation of cost of acquisition and cost of improvement for slump sale was governed by section 50B of the Act,that as per the provisions of the said section net worth was being to be the cost of acquisition and cost of improvement, that the networks was to be computed on the basis of reducing the aggregate liabilities from the aggregate assets,that in the case under considera - 7454/M/13 & 7021/M/13 Wockhardt Hospitals Ltd.

tion the net worth of the assessee was negative,that the liabilities were more than the assets owned by the assessee.He relied upon the case of the Summit Securities Ltd.(ITA/4977/ Mum/2009,dated 07/03/2012)of the special bench of the Tribunal and held that if the negative net worth was there same was to be added to the full value of consideration for computing the capital gains.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA),who upheld the order of the AO. 3.During the course of hearing before us,the Authorised Representative (AR)fairly considered that issue stands covered against the assessee by the above referred order of the Summit Securities Ltd.(supra).We are reproducing the relevant portion of the order and it reads as under: "(ii) That the Assessing Officer had observed that the sale consideration of Rs.143 crores was not at arm's length and that was why he adopted the figure at Rs.300 crores adding the negative net worth to the declared sale consideration. By expressing the opinion that the value of undertaking at Rs.143 crores as agreed to between the assessee and transferee was not appropriate, he had indirectly resorted to the substitution of "fair market value" of the undertaking in place of the amount" received or accruing". The Assessing Officer had not even embarked upon determining 'fair market value" of the undertaking in accordance with law. The Assessing Officer had not made a 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 had 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 the process of determining fair market value as adopted by the Assessing Officer had no sanction of law. The amount "received or accruing" to the assessee was only Rs.143 crores as full value of consideration for transfer of the power transmission business. "Undertaking" means "all assets minus all liabilities" of the undertaking and further the full value of consideration means the consideration for "all assets minus all liabilities of the undertaking. As the figure of Rs. 143 crores had 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 could not be again added to the sale consideration. Once the sale consideration had been approved by the High Court, the Department was not entitled to contend that the consideration of Rs. 143 crores did not represent the full value of consideration of the undertaking. The full value of consideration of the undertaking for the purposes of computing the capital gains under section 48 should be taken at Rs.143 crores and not Rs.300 crores. The Assessing Officer 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. (iii)That the aggregate value of the total assets of the undertaking was Rs.1360 era res with the value of liabilities at Rs.1517 crores. When the net worth was negative at Rs.157 crores it automatically implied that the liabilities are more than the total assets. The contention that the liabilities could not be more than the aggregate value of assets, therefore, failed. 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, ran contrary to the 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. (iv) That the Commissioner (Appeals) was not correct in coming to the conclusion that the negative figure of the net worth of Rs.157 crores should be ignored for working out the capital gains in case of a slump sale. The "net worth" would be a negative figure of Rs.157 crores and not zero. Resultantly the amount of capital gains chargeable to tax would be Rs.300 crores and not Rs.143 crores as declared by the assessee. "

7454/M/13 & 7021/M/13 Wockhardt Hospitals Ltd. Respectfully,following the above,first ground of appeal is decided against the assessee.

4.Ground number two deals with levy of interest u/s. 234B of the Act and same is consequential in nature. ITA/7021/Mum/2013: 5.Ground 1.a.,raised by the AO,is about deleting the disallowance,amounting to Rs.18.43 crores.During the assessment proceedings,the AO found that the assessee had claimed expenditure of Rs.18,43,30,378/- under the head expenses incurred in connection with slump- sale.He held that section 50B of the Act was a code in itself and did not make provision for deduction of expenses incurred in relation to slump sale. 5.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and argued that genuineness of the expenses incurred by it were not doubted by the AO,that expenses were incurred for slump sale only,that as per the agreement the purchaser and the seller had to be of the expenses incurred in relation to slump sale equally,that the provisions of section 50 B of the Act were subject to the provisions of section 45 and section 48, that there was nothing in the section about the expenses incurred with regard to slump said, that the section dealt with cost of acquisition and improvement only.The assessee referred to the Case of Summit Securities Ltd (supra) in its support.After considering the submission of the assessee and the assessment order, the FAA held that the assessee had incurred expenditure of Rs. 18.43 crores for transfer of hospital, that the provisions of section 50 B did not deal with the expenditure to be allowed, that for competition of capital gains had to be considered, that the provisions of section 50B provided for competition of net worth.Referring to the case of the Summit Securities, he allowed the appeal. 5.2.Before us,the Departmental Representative (DR)stated that matter could be decided on merits.The AR relied upon the order of the FAA.We find that in the case of Summit Securities Ltd.(supra)the Tribunal has dealt the issue as under: "(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 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 or division, being its net worth along with the decision as to whether the undertaking is a long term or short term capital asset is decided and forwarded to section 48, the computation provision in the later section is activated for determining the income chargeable under the head "capital gains" in accordance with the mode of such computation as prescribed therein. The modus operandi to compute capital gain from the transfer undertaking thus provides for reducing the cost of acquisition and cost of improvement of the capital asset from the full value of consideration received or accruing as a result of the 3 7454/M/13 & 7021/M/13 Wockhardt Hospitals Ltd. transfer of capital asset. Coming back to the nature of capital asset being undertaking, which comprises of "all assets minus all liabilities" of the undertaking, the amount of capital gain means reducing the net worth, being cost of acquisition. and cost of improvement of "all assets minus all liabilities" of the undertaking from the full value of consideration of "all assets minus all liabilities" of the undertaking. (f) In computing the net worth of the undertaking or the division, as the case may be, the benefit of indexation as provided in the second proviso to section 48 has been withheld. The possible reason may be quid pro quo. By extending the benefit of lower rate of taxation on long term capital gain as provided under section 112 to the undertaking as a whole notwithstanding the fact that there may be several assets held by the assessee for a period of not more than 36 months, the Legislature though it to curtain the benefit of indexation to the cost of acquisition and cost of improvement.” Respectfully,following the above order of the Tribunal,we decide ground 1.a against the AO.

6.Ground 1.b(i) deals with deleting the enhancement of slump sale consideration from Rs. 143.21 crores to Rs.186.58 crores.During the assessment proceedings, the AO found that in the agreement entered between the assessee and FHL consideration agreed for purpose of the slump sale was governed by clause 3 of the agreement,that from the agreement it transpired that Rs. 186.58 crores was the negotiated value for which further adjustment had to be done in case of the liability of undertaking exceeded Rs.599.61 crores and also escrow account had to be open for two years for amount of Rs.15 crores between the two parties from the amount and if any further claimed were there same were to be adjusted from the above amount.The AO did not allow the deduction which occurred during the course of transaction,stating that it amounted to double deduction of liabilities that incurred during the transaction and that the assessee was not eligible for deduction. 6.1.During the appellate proceedings before the FAA,the assessee made elaborate submiss- ions.After considering the assessment order and the arguments of the assessee,he referred to clause 3 of the agreement and held that though lump-sum consideration was decided at Rs. 186.58 crores the same was to be further adjusted to any further liability,that during the process of transaction total liabilities exceeded Rs. 599.69 crores,that the excess liability came across during the transition was of Rs. 43.36 crores,that FHL did not pay the said amount to the assessee but same was adjusted from 186.58 crores,that the AO had wrongly added the disputed amount in the asset site and also in the liability side,that the amount in question was liability which was to be accounted in the liability decide and had to be deducted from the lump-sum consideration,that the amount was not received by the assessee nor had it accrued to him,that same had to be deducted from the lump-sum consideration received by the assessee.Finally, he held that the amount was to be allowed as the assessee had not received it.

7454/M/13 & 7021/M/13 Wockhardt Hospitals Ltd. 6.2.Before us,the DR stated that matter could be decided on merits. The AR supported the order of the FAA.We find that the assessee and FHL had entered into a business agreement, that as per the agreement excess liabilities arising during the transition period had to be adjusted from the lump-sum amount of Rs.186.58 crores,that during the process of transact - tion liability of Rs. 43.36 crores arose.In these circumstances,the FAA had rightly held that lump-sum consideration received by the assessee had to be taken at Rs. 143.1 crores [Rs.1 86.58 crores(-) Rs. 43. 36 crores].We are of the opinion that the order of the FAA does not suffer from any factual or legal infirmity.Therefore, upholding the same we decide ground 1.b(i) against the AO.

7.Ground 1.c is about allowing deduction of Rs. 2.79 crores from lump-sum consideration received by the assessee. During the assessment proceedings, the AO found that the assessee had claimed some of Rs. 2.79 crores in the computation of income.He held that the amount in question was lying in escrow account,that by claiming the deduction the assessee had claimed double deduction as it had already been deducted from the liability side,that it had not made any claim in that regard in the original return, that in the revised return it made the claim about the disputed amount. 7.1.Before the FAA,the assessee made submissions referring to the closes 3.3 to 3.6 of the agreement and referred to certain case laws.After considering the submissions of the assessee and the assessment order,he held that in agreement for slump sale consideration paid to the assessee was governed by clause 3 of the agreement, that as per the agreement escrow account was to be opened, that Rs. 15 crores from the amount of lump sum consideration were to be deposited in that account, that as per the terms of the agreement future claims were to be settled from the account,that during the process of slump-sale the claim of Rs. 2.79 arose and the amount was paid from the escrow account,that assessee was not entitled to receive the escrow account amount till the end of the prescribed time i.e. two years, that during the year claim of Rs. 2.79 crores was settled,that the assessee had revised its return and had made a claim about the disputed amount,that the sum was reduced by FHL while paying back the escrow account.He held that it was eligible to claim the deduction as it had not received the said amount in pursuance of the agreement entered into with FHL. 7.2.The DR left the issue to the discretion of the bench and the AR relied upon the order of the FAA. 7.3.We have heard the rival submissions and perused the material before us.We find that in pursuance of the agreement,entered into by the assessee,with FHL Escrow Account was 7454/M/13 & 7021/M/13 Wockhardt Hospitals Ltd. opened,that Rs.15 crores was kept in the said account for settling the future liabilities,that the assessee was to receive the amount from the Escrow a/c.after a period of 2 years,that a liability amounting to Rs.2.79 crores arose and was settled during the year,that the assessee had filed a revised return and made the claim about it, that there is no doubt about the incurring of the expenditure.The assessee had produced necessary evidences in that regard and same were found to be genuine by the FAA.In these circumstances,we are of the opinion that there is no need to interfere with the order of the FAA.Confirming the same,we dismiss Ground No.1.c .

8.Ground 2 is about treating the short term capital gains(STCG) as long term capital gains (LTCG).During the assessment proceedings,the AO found that the assessee owned 12 hospitals and 2 Nursing schools,that out of the 12 hospitals four were owned over a period of 3 years and rest of the hospitals were owned for a period less that 3 years,that it had claimed LTCG arising out of the slump sale for transferring the hospitals and nursing schools to FHL. The AO treated the entire gain on slump sale as STCG,instead of LTCG as claimed by the assessee. 8.1.During the appellate proceedings,before the FAA,the assessee stated that the AO had wrongly considered the period of holding of each hospital individually rather than considering the period of holding of the entire undertaking,as envisaged by the provisions of section 50B of the Act.It referred to various clauses of the transfer agreement as well as the provisions of section 2(42C)of the Act.After considering the available material,the FAA held that as per the provisions of 50B holding period of the assets sold on a lump sum basis had to be considered as a whole unit,that holding period of each asset was to be ignored.He referred to proviso (1) of section 50B of the Act and held that if assets were to be assessed under the head STCG all should have existed below 36 months,that even if one of the assets existed for a period more than three years same has to be treated as Long term asset.He referred to the order of the Summit Securities Ltd.(supra)of the Tribunal and held that in the case under consideration four assets of the assessee were existing for a period of more than 3 years,that the capital gain received by it had to be assessed under the head LTCG. 8.2.Before us,the DR relied upon the order of the AO and the AR referred to the order of the FAA.We find that while deciding the appeal of Summit Securities Ltd.,the Tribunal had decided the identical issue as under: "(b) Where an, industrial undertaking is transferred under slump sale which was owned and held by the assessee for not more than 36 months immediately preceding the date of its transfer, the profit or gains arising from such transfer is deemed to be capital gain arising from the transfer of 7454/M/13 & 7021/M/13 Wockhardt Hospitals Ltd. short term capital assets. The relevant criteria for considering whether the undertaking is a short-term or long term is the period of owning and holding the undertaking as a while and not individual assets of such undertaking. Suppose the undertaking was set up four years ago and some of the assets were purchased and held for a period of not more than 36 months, it is the entire undertaking which will be treated as long-term capital asset for the purposes of computing capital gain on its transfer. The period of holding of separate 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.” Respectfully,following the above,we hold that there is no need to interfere with the order of the FAA,as four hospitals of the assessee were owned by it for a period of more than 36 months and that it is a case of slump sale.Upholding his order,we dismiss Gr.No.2. 9.Last GOA is about disallowance of Rs.48.71 lakhs made u/s.14A r.w.r. 8D of the Income- Tax Rules(1962)Rules.During the assessment proceedings,the AO found that the assessee had made investment for purchasing the shares of Kanishk Housing Development Co.Pvt. Ltd.(Kanishka),that Kanishk was a subsidiary company of the assessee.The AO held that though no exempt income was earned by the assessee the investment made by it were capable of earning exempt income in the future.Invoking the provisions of Rule 8D(2)of the Rules, he made a disallowance of Rs.48,71,169/-. 9.1.Before the FAA,the assessee argued that it had not earned any exempt income during the year under consideration,that it had not claimed any expenditure, that it had made strategic investment by purchasing shares of sister concern. 9.2.Referring to the case of EIH Associated Hotels Ltd.(ITA/1503/Mds./2012)of the Tribunal,the FAA allowed the appeal of the assessee . 9.3.Before us,the DR stated that matter could be decided on merits. The AR supported the order of the FAA.We find that assessee had not earned any exempt income during the year, nor had it claimed any expenditure against any tax free income.Thus,the twin pre-condition for invoking the provisions of section 14A r.w.r.8D of the Rules i.e.,earning of exempt income and claiming expenditure to earn the same,are missing.Therefore,confirming order of the FAA we decide the last ground of appeal against the AO. As a result,appeals filed by the AO and the assessee stand dismissed. फलतः िनधा"रती अिधकारी और िनधा"रती "ारा दािखल क" गई अपील" नामंजूर क" जाती ह". Order pronounced in the open court on 06th January,2017. आदेश क" घोषणा खुले "यायालय म" "दनांक 6 जनवरी,2017 को क" गई । (अमरजीत "सह / Amarjit Singh ) (राजे"" / Rajendra) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा सद"य सद"य / ACCOUNTANT MEMBER लेखा लेखा सद"य सद"य मुंबई Mumbai; "दनांकDated : 06 .01.2017. Jv.Sr.PS.