CYFAST ENTERPRISES P.LTD,MUMBAI vs. DCIT CIR 10(3), MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 06/01/2015 of the Ld. First Appellate Authority, Mumbai, confirming the addition of excess liabilities over assets of the division to sale consideration for the purpose of computation of long term capital gain on the sale of the division at Rs.65,58,16,402/- instead of Rs.45,02,94,597/- offered by the assessee in its computation of income.

2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order of the Special Bench for ready reference and analysis:-

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“This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 05.06.2009 in relation to the assessment year 2006-2007. The following two effective grounds have been raised in this appeal:- “1. On The facts and in the circumstances of the case and in law, the learned CIT(A) erred in computing the sales consideration at `143 crore as against the same being computed at `300 crore by the A.O. on account of transfer of assessee’s power transmission business without appreciating the facts of the case.

“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?”

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transfer of undertaking came into operation after closure of business hours of 31.03.2005. It was further observed that the assessee may claim slump sale issue in the next year. Consequently the assessee reflected long term capital loss brought forward at a sum of `281.41 crore in the current year. In the revised return, the long term capital loss was increased to `3267873707. Once again a revised computation of long term capital gain was filed showing long term capital loss at `3129443625. Factual matrix leading to the capital loss is as follows: A composite Scheme of arrangement between the assessee-company, KEC International Limited (formerly KEC Infrastructure Limited), Bespoke Finvest Limited (subsidiary of the company), KEC Holdings Limited and the respective shareholders u/s 391 of the Companies Act, 1956 was approved by the Hon’ble High Court of Judicature at Mumbai on 27.09.2005. The composite Scheme was for sale of “Investments” by the assessee-company to KEC Holdings Limited and sale of the “Power Transmission Business” (hereinafter called “PTB”) to KEC Infrastructure Limited (later on came to be known as KEC International Limited) and the merger of Bespoke Finvest Limited with KEC Holdings Limited. The Scheme was presented to the Hon’ble Bombay High Court on 28.06.2005 and it was approved on 27.09.2005 with effect from the closure of the business hours on 31.3.2005 or say with effect from 01.04.2005. 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 `143.00 crore. The assessee claimed this transaction as a slump sale u/s 50B of the Income- tax Act, 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 `157.19 crore. As such, the entire sale consideration of `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 `115 crore and claimed long term capital loss of `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 assessee- company received sale consideration of `143 crore by way of equity and preference shares. It received 3,76,35,858 equity shares of `10 each fully paid up at a total premium of `92.36 crore. The assessee also received 12,99,966 preference shares of `100 each. The receipt of these equity and preference shares constituted total sale consideration of `143 crore. The shares so received were distributed amongst the equity and preference shareholders of the assessee-company in the ratio of 1:1. On perusal of the report furnished by the auditor u/s 50B(3) and the

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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 `157,19,00,953, the A.O. came to hold vide para 4.2 of the assessment order : “that the total consideration ought to have been received of `300 crore (`143 crore + `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 `391 crore, even if finally the fair value was fixed at `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.

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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 acquisition in case of depreciable asset shall, for the purposes of sections 48 and 49, be considered as the written down value as defined u/s 43(6). It can be observed that for the purposes of computing capital gain on transfer of depreciable assets, the adjusted written down value of the block of assets is considered as the cost of acquisition. The logic behind considering the written down value and not the historical cost of the fixed asset as the cost of acquisition at the time of transfer is that during the period of user of such asset, the assessee is granted depreciation allowance in computing the total income for such years. Such amount of depreciation allowed reduces the cost of acquisition of the assets to that extent. If for the purposes of the computing capital gain at the time of transfer of such depreciable asset, the original cost at the time of purchase is adopted as the cost of acquisition, it would be like giving double benefit to the assessee, firstly, by allowing depreciation during the years of user of such asset and then again by adding such depreciation allowed to the written down value of asset. That is why the Act provides that to the extent of depreciation actually allowed in the earlier years, the cost of acquisition for the purposes of computing capital gains shall be taken as the written down value. To illustrate, if Plant and machinery was purchased for `5 and at the time of its transfer, its w.d.v.

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is `3 and it is transferred for a sum of `5, then the amount of capital gain shall be `2 (Full value of consideration received at `5 – w.d.v. of `3) (ii) Non-depreciable tangible assets

In contrast to the depreciable assets, where an assessee transfers non- depreciable capital assets, the capital gain is computed by deducting its cost of acquisition and cost of improvement from the full value of consideration received or accruing as a result of transfer. It is so for the reason that any increase in the value of asset when so realized vis-à-vis the cost at which such asset was acquired should be brought to tax as income chargeable under the head `Capital gains’. Here it is relevant to note that section 48 provides that where long term capital gain arises from the transfer of a long term capital asset, other than those specifically excluded, the cost of acquisition of the 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’. On going 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 `5 and it is transferred for a sum of `78, then the amount of capital gain shall be `73 (Full value of consideration received at `78 – original cost of acquisition of `5)

(iii) Non-depreciable intangible assets An assessee may be having certain intangible assets, such as Goodwill or a Trade mark or Brand name etc., either purchased from someone or self created over a period of time. If such assets are purchased and depreciation is also claimed, then at the time of their transfer, the capital gain shall be computed by taking resort to the provisions of section 50 read with section 50A. But if such intangible assets were not purchased but acquired over a period without identifying any specific cost, then also capital gain arises on their transfer. Certain courts had held that since such intangible assets do not have a definite cost of acquisition, except

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where these are purchased for a consideration, no capital gain can arise on their transfer. With a view to set to naught this legal position, the legislature came out with section 55(2)(a) providing that for the purposes of sections 48 and 49, the cost of acquisition of intangible assets in the nature of goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carrier permits or loom hours shall be taken to be Nil. Resultantly the capital gain on the transfer of such intangible assets is the full value of consideration itself. To illustrate if self created Goodwill or Trade mark of Brand name is transferred for a sum of `20, then the amount of capital gain shall be `20 (Full value of consideration received at `20 – Cost of acquisition and cost of improvement of ` 0).

(iv) Other assets A business enterprise, apart from the above three types of capital assets, may also hold other assets such as cash in hand, stock, bank balance and debtors etc. The realizable or market value of such assets as on a particular date is usually equal to the book value or insignificantly different. Suppose the book value of such assets is `2, its market value will also be in the close vicinity of Rs.2 and the sale price of such assets at any point of time shall be at `2. There can be no income or loss from the transfer of such assets as the their realizable value is usually equal to 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 `0 (Full value of consideration received at `2 – Cost of acquisition and cost of improvement of `2)

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under transfer, its(their) full value of consideration and also cost of acquisition and cost of improvement can be separately found out. Continuing with the above example, the cost of acquisition and cost of improvement of all the assets collectively (or separately) is `10 (`3 in case of Depreciable assets; `5 in case of Non-depreciable tangible assets ; `0 in case of Non-depreciable intangible assets; and `2 in case of Other assets) and the full value of consideration received or accruing as a result of transfer of all the assets collectively (or separately) is `105 (`5 in case of Depreciable assets ; `78 in case of Non-depreciable tangible assets; `20 in case of Non-depreciable intangible assets ; and `2 in case of Other assets).

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assigned by the parties to all assets of the undertaking as on the date of transfer as reduced by the value of liabilities.

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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 mean “the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales”. The word “undertaking” has been defined in Explanation 1 to section 2(42C) to have the same meaning as assigned to it under Explanation 1 to section 2(19AA). Explanation 1, in turn provides that : “For the purposes of this clause, `undertaking’ shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity”. Thus it can be noticed 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.

14.2 At this stage it will be apt to note the prescription of section 50B which runs as under:-

“50B. Special provision for computation of capital gains in case of slump sale.--(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months

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immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given 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 (i) of sub-clause (c) of clause (6) of section 43 ; and

(b) in the case of other assets, the book value of such assets.”

14.3 Following are the salient features of this provision:- (a) In the case of a slump sale, that is where one or more undertakings is or are transferred for a lump sum consideration without separate values being assigned to assets and liabilities, any profit or gain is chargeable to income-tax as capital gain arising from the transfer of long term capital assets. What is relevant to attract the provisions of this section is the transfer of one or more undertakings. Thus where an

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undertaking or a unit or a division of an undertaking is transferred as a going concern as a whole, profits or gains arising from such slump same is chargeable to tax as capital gains arising from the transfer of long term capital assets. Here it is pertinent to note that in common parlance a capital asset connotes a property, right or advantage. Section 2(14) also defines a `capital asset’ to mean `property of any kind held by an assessee…..’ It also refers to some positive possession. Further the word used `held’ in the definition of `capital asset’ pre-supposes some benefit or advantage in the positive sense in contrast to some liability, which is always `incurred’ and not `held’. But in the context of section 50B, the capital asset is of unique nature, as it not only encompasses all the assets but also all the liabilities of the undertaking. In other words, the undertaking as a capital asset means `All assets minus All liabilities’ of the undertaking.

(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 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 whole 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 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 assets it shall be the written down value of block of assets determined as

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per section 43(6) and in case of other assets, their book value. Special care has been taken to ensure that it is the book value or the depreciated value of the assets, as the case may be, which is considered as the cost of acquisition. In order to reflect true and fair value of the assets, the assessee might have revalued its assets in books of account in past. For example a piece of land purchased 10 or 15 years ago will definitely have much more market value than the cost at which it was acquired. In such a case an assessee may think of revaluing such a piece of land by bringing it to its market value and correspondingly creating revaluation reserve in the balance sheet. Since the revalued figure of the assets cannot be construed as the cost of acquisition, the legislature has inserted proviso to Explanation 1 to section 50B which provides : “that any change in the value of asset on account of revaluation of assets shall be ignored for the purposes of computing the net worth”. Thus it can be seen that the “net worth” is deemed to be the cost of acquisition and the cost of improvement of the undertaking transferred. In nutshell, the process of calculating `net worth’, being the cost of acquisition and cost of improvement of the undertaking, involves basically two steps. First, find the written down value of the depreciable assets and book value of all other assets to find out `the aggregate value of total assets’ of the undertaking. Second, find the `value of liabilities’ of the undertaking as per books of account. When the figure as determined as per second step is reduced from the figure as per the first step, it gives us the amount of `net worth’ or in other words the cost of acquisition and cost of improvement of the undertaking. In other words, net worth of an undertaking under transfer is nothing but the cost of acquisition and cost of improvement of `All assets minus All liabilities of the undertaking’.

(d) It has been clarified by Explanation 2 to section 2(42C) that the determination of the value of asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. Value of an asset for the purposes of payment of stamp 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

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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 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 of 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 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 u/s 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 thought it to curtail the benefit of indexation to the cost of acquisition and cost of improvement.

14.4 On an overview of the provisions for the computation of capital gain in the case of slump sale of the undertaking on one hand and on the transfer of individual assets, whether depreciable or otherwise, we find that the basic intent is same and that is to charge tax on the transfer of capital assets. Only different modes have been provided to make such computation of capital gain workable. It can be noticed that the amount of profit or gain chargeable under the head `Capital gains’ from individual assets represents the excess of amount received or accruing, normally representing their market value, over the book value or depreciated value of such assets, as the case may be. So if all the assets of the undertaking are separately transferred, the amount of capital gain will be equal to the Agreed/Market value of the all assets taken

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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 `2, the amount shown as payable will be the current liability of `2; and in a case of interest bearing liability of say `2, the amount of interest, if unpaid, say `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 contingent liability, the liabilities appearing in the books of account represent the amount actually payable by the undertaking. So, if the assessee wants to close the undertaking after the transfer of all its assets individually, it may realize the amount from the transfer of assets separately and discharge the liabilities of the undertaking at the book value from the consideration so received. In such a situation the amount of total capital gain chargeable to tax will be the Agreed/Market value of all the assets separately transferred minus Book value and w.d.v. of all the assets, as the case may be. The payment of liabilities from the amount realized towards the sale of assets shall have no impact over the computation of capital gain for two reasons. Firstly, the book value of the liabilities and the amount actually payable shall be the same figures. Secondly, the law does not contemplate any profit or gain from the transfer of liabilities as chargeable under the Act.

14.5 Slump sale involves transfer of an undertaking or a division as one capital asset consisting of all its assets and liabilities. If in a case of sale of separate assets of the undertaking, the transferor discharges the liabilities himself out of the sale consideration so realized, then the full value of consideration liable to be considered for computing capital gain on transfer of such separate assets will the amount received on account of transfer of such assets at gross level, that is, before reducing the amount of liabilities later on discharged by the transferor. If however, along with the transfer of all the assets, the transferor also transfers all the liabilities of the undertaking in the shape of a slump sale, then the consideration to be received will be net, that is agreed/market value of all the assets as reduced by the amount of liabilities to be discharged. And when we compute capital gain on the transfer of undertaking, the book value/w.d.v. of all the assets of the undertaking as reduced by the

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amount of liabilities appearing the balance sheet shall be reduced from the full value of consideration representing net value of agreed/market price of the assets over its liabilities. The result in both the cases will remain same, that is, it is in fact the computation of capital gain on the transfer of positive capital assets as one unit which are embedded in the undertaking. The illustrations taken above can be summarized in a tabular form as under :-

Table A - Position as on the date of slump date Sl. Particulars Book Market Agreed No. value value value 1. WDV of depreciable assets as per Balance Sheet 3 2. Non-depreciable tangible 5 108 105 assets as per Balance Sheet 3. Non-depreciable intangible assets 0 4. Other assets 0 2 A. Aggregate value of assets of 10 108 105 the undertaking 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, non-depreciable intangible assets and other assets collectively as one unit without assigning value of individual assets comes to `105. As against that, the cost of acquisition and cost of improvement of all the assets collectively comes to `10 resulting into the capital gain on transfer of all the assets collectively at `95. Now suppose that instead of purchasing all the assets collectively as one unit, the transferee also undertakes to pay the liabilities of the undertaking worth `5, he will pay only a sum of `100 to the transferor (`105 as the agreed value of all the assets without values being assigned to individual assets minus `5 as the liabilities to be paid by him directly). Whether the liabilities are also taken over or not by the transferee, it is in fact the profit from the transfer of the assets of the undertaking as one unit which constitutes capital gain chargeable to tax in the hands of the transferor. Such amount in the above example remains at `95 irrespective of the fact whether the liabilities are discharged directly by the transferor or have been undertaken to be discharged by the transferee. It is so for the reason that when the liabilities are also

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transferred the sale consideration of the undertaking shall stand reduced to `100, but where the liabilities of `5 are not transferred, the sale consideration of all these assets taken together as one unit without reference to the values assigned to individual assets shall remain at `105. It therefore, boils down that 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. In other words, 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 can not be any thing 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 dual reflected through two grounds. First that the sale consideration of the undertaking ought to have been taken at `300 crore and the second, which appears to be alternative is that the learned CIT(A) was not justified in ignoring the negative figure of net worth for computing capital gain on the sale of PTB.

15.2 The Special Bench has been constituted to determine as to whether the A.O. was right in adding the amount of liability reflected in the negative net worth to the sale consideration for determining the capital gain on account of slump sale. The learned Departmental Representative, apart from emphasizing that the sale consideration should be taken at `300 crore has also assailed the finding of the ld. first appellate authority by urging in alternative that the figure

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of net worth at a negative of `157 crore should not be ignored, but treated as a minus figure for the purposes of computing the capital gain. In that case when from the sale consideration of `143 crore, the negative net worth of `157 crore is to be subtracted as per section 48, it would automatically result into the addition thereby making the amount of capital gain at `300 crore. His alternative contention can be simply depicted as follows :- Full value of consideration of the undertaking (`143 crore) as reduced by the net worth of the undertaking (-`157 crore) giving capital gain of `300 crore [`143 minus (- )`157 crore or in other words `143 crore plus {as minus into minus is equal to plus} `157 crore].

15.3. Initially the learned A.R. confined his arguments only to the exclusion of negative net worth from the full value of consideration for computing the capital gains, being the question referred to the special bench. However when it was pointed out to him that the Special Bench has been constituted not only to answer the question posted but also to dispose the entire appeal of the Revenue, which is against the computation of capital gain by the CIT(A) at `143 crore instead of `300 crore determined by the A.O., he advanced his arguments supporting the impugned order to the extent of adopting zero as cost of acquisition and cost of improvement of the asset instead of negative figure of net worth.

15.4 The learned A.R. was hesitant in conceding that the question of 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 memorandum of appeal or taken by leave of the Tribunal under this rule”. This rule empowers the appellant, which is Revenue in the instant case, to urge any ground not set forth in the memorandum of appeal provided the Tribunal gives sanction to it. That apart, the second limb of rule 11 empowers the Tribunal suo motu in not confining itself to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal provided the affected party has been given opportunity of being heard on that ground. We are confronted with a situation in which the Revenue has not only specifically challenged the finding of the CIT(A) for ignoring the negative figure of net worth but the learned Departmental Representative also

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made submissions on this point. The Tribunal not only allowed him to argue on other aspects but also invited the learned Senior A.R. to address on the question of negative net worth held by the ld. CIT(A) to be taken as zero. Thus the prescription of Rule 11 is fully satisfied. The Hon’ble Supreme Court in the case of CIT Vs. Mahalakshmi Textile Mills Ltd. [(1967) 66 ITR 710 (SC)] has held that if the assessee’s contention is rejected on one ground, the Tribunal is empowered to allow relief if it is available on other ground so long as the subject matter of appeal remains the same. The same analogy applies with full force to the denial of relief by the AO wrongly under one provision, which ought to be have been done under the other correct provision. There can be no embargo on the power of the tribunal to consider such correct provision, if such relief is, in fact, not available as per law under the correct provision. The Hon’ble Jurisdictional High Court in Ahmedabad Electricity Co. Ltd. Vs. CIT [(1993) 199 ITR 351 (Bom.) (FB)] has held that Rules 11 and 29 of the Income-tax Appellate Tribunal Rules indicate that the scope of enquiry before the Tribunal can be wider than the points which are raised before the Tribunal. The Tribunal, therefore, would ordinarily have the power to allow additional points to be raised before it so long as they arise from the subject matter of proceedings and not necessarily only the subject matter raised in the memorandum of appeal. In the present case it is not as if the ld. DR has taken leave to argue any additional ground. Ground no.2 of the Revenue’s appeal specifically challenges the finding of the ld. CIT(A) to 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 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. For example

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section 50C provides that where the consideration received or accruing as a result of the transfer of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. It is worth noting that for the purposes of section 50C, the ambit of the expression `full value of consideration’ has observed departure from its general meaning of the amount actually received or accruing. In case of transfer of capital asset in the nature of land or building or both, this expression shall mean not the consideration received or accruing but the stamp value, where the former is less than the latter. In such a situation, the amount actually received or accruing to the assessee as a result of the transfer of land or building or both shall lose its significance for the purposes of computing capital gain u/s 48. The stamp value shall be substituted with the actual amount received or accruing to the assessee which shall constitute full value of consideration received or accruing for the purposes of section 48. It is pertinent to note that section 50C is not applicable to all the capital assets but only to a capital asset which is land or building or both. 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. 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 `Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the `fair market value’ of other assets on the date of such receipt `shall be deemed to be full value of the consideration received or accruing’ as a result of the transfer of such capital asset. Similarly section 45(2) dealing with the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him provides that the capital gain shall be chargeable to income-tax as income of the previous year in which such stock-in-trade is sold or

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transferred by him and for the purposes of section 48, the `fair market value’ of the asset on the date of such conversion or treatment `shall be deemed to be the full value of consideration received or accruing’ as a result of transfer. In the like manner section 45(4) dealing with the transfer of capital asset by way of distribution of capital assets on the dissolution of a firm etc. provides that the capital gain shall be chargeable to tax as the income of the firm etc. of the previous year in which the said transfer takes place and for the purposes of section 48, the `fair market value’ of the asset on the date of such transfer `shall be deemed to be the full value of consideration received or accruing’ as a result of such transfer. There are certain other provisions as well which deem the `fair market value’ of the asset `as full value of consideration received or accruing’ as a result of transfer of such capital asset.

16.3 On the other hand there are some sections in which `fair market value’ of the asset is deemed as `cost of acquisition’. Section 49(2AA) provides that where capital gain arises from the transfer of specified security or sweat equity shares referred to in section 17(2)(vi), the `cost of acquisition’ of such security or shares shall be the `fair market value’ which has been taken into account for the purpose of the said sub-clause. Section 55(2)(b) provides in relation to any other capital asset which became the property of the assessee before 01.04.1981, the `cost of acquisition’ shall mean the cost of acquisition of the asset or the `fair market value’ 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, the general meaning of the amount actually received or accruing is to be considered as the full value of consideration received or accruing as a result of transfer of capital asset. Coming back to the legal position under consideration, it is noted that nowhere in

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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. 16.5 The Assessing Officer has discussed the report of RSM & Co. which valued PTB. Copy of such report is available on page 215 onwards of the paper book. The A.O. has enhanced the full value of consideration to `300 crore by considering the value of business determined under `Profit earning multiple method’ by RSM & Co. at `391 crore. In other words, the A.O. has taken into consideration, though not precisely relied, the report of valuation which obviously gives the valuation of all the assets and liabilities of the undertaking as on the date of transfer of PTB. The A.O. has also observed that the sale consideration of `143 crore is not at an arm’s length and that is why he adopted the figure at `300 crore by adding the negative net worth to the declared sale consideration. By expressing the opinion that the value of undertaking at `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’.

16.6 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, we find 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 Assessing Officer 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 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

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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 Assessing Officer 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.

16.7 We have noted in para 14.5 above that 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.

16.8. From the above Table A it can be seen that the full value of consideration received or accruing to the assessee (All assets minus All liabilities) is `100. As the capital asset is an undertaking (All assets minus All liabilities), the full value of consideration also needs to be determined in the same manner by reducing the value of liabilities of the undertaking from the agreed value of all the assets of the undertaking. It is relevant to note that in the above Table A, the prescription of section 2(42C) is fully satisfied inasmuch as there is no itemized value of the assets and the liabilities as agreed to between the parties and instead there is one lump sum value of the undertaking though determined by reducing the value of all the liabilities taken together as one unit from the value of the bundle of assets of the undertaking as one unit. From the above Table A it can be seen that the total assets of the undertaking having book value of `10 have the market value of `108 but due to mutual negotiations, such price has been agreed at `105 and further the book value as well as the market value of liabilities as on the date of sale of undertaking is consistent at `5. That is how the agreed value of the undertaking (All assets minus All liabilities) is `100 (`105 for Assets minus `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

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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 `100 indicates its two inbuilt components, that is, the value of all assets (`105) and all liabilities (`5), which have submerged into this value of consideration of the undertaking. It is wholly improper to argue that since the transferee after paying `100 will also discharge liabilities of `5, the full value of consideration of the undertaking should be considered as `105. If we add liabilities of `5 to the agreed consideration of the undertaking at `100, it would give us the agreed value of the assets alone at `105, whereas the question is about the determination of the full consideration of the undertaking remaining after the reduction of the value of liabilities from those of assets. In our considered opinion the full value of consideration of the undertaking cannot be anything other than `100, which in the facts of the present case is Rs.143 crore.

16.10. The learned Departmental Representative has relied on the judgment of the Hon’ble Supreme Court in the case of CIT & Anr. Vs. George Henderson & Co. Ltd. [(1967) 66 ITR 622 (SC)] to contend that the full value of consideration be considered at `300 crore which includes the negative value of net worth at `157 crore. He submitted that when the transferee paid `143 crore to the assessee and also undertook to discharge the excess liabilities to the tune of `157 crore, which represent the negative net worth, the same amount should also be considered as part of the sale consideration. It was put forth that the full value of consideration should not mean only the money but also the money’s worth received by the assessee. As per his contention the sum of `157 crore represents the value of money’s worth, which was rightly added by the AO to the declared sale consideration of `143 crore. We are unable to accept this contention for the reason that the amount `received or accruing’ to the assessee is only `143 crore as full value of consideration for transfer of PTB. It never received `157 crore being the negative net worth which the ld. DR claims to be constituting part of the full value of consideration. As the expression “full value of consideration” is qualified by the word “received or accruing”, it has to be restricted only to the actual amount received or accruing to the assessee and not what the transferee has undertaken to pay to the creditors of the PTB, which, in fact, is nothing but part of the consideration. We have noticed above that the capital asset `Undertaking’ means `All assets minus All liabilities’ of the undertaking and further the full value of consideration means the consideration that of `All assets minus All liabilities’ of the undertaking. If we add the negative net worth of `157 crore to the full value of `All assets minus All liabilities’ at `143 crore, the components of the undertaking as capital asset will become incompatible with those of the full value of consideration of such undertaking. In that case the

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full value of consideration will show the figure of that of the undertaking plus part of such figure once again. As the figure of `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 held that where the first proviso to section 12B(2) is not attracted, full value means, sale price actually received. These two cases support the proposition that in the absence of substitution of full value of consideration of the capital asset with the fair market value of the asset, it is impermissible to deviate from the sale price actually received.

16.11. Now we espouse the other judgment of the Hon’ble Supreme court in CIT Vs.Attili N.Rao [(2001) 252 ITR 880 (SC)] which has been claimed as trump card of the Revenue’s case on this issue. In that case the assessee carried on abkari business. In the course of financial year 1970-71 the assessee mortgaged to the Excise Department of the State of Andhra Pradesh the immovable property belonging to him at Waltair. He did so to provide security for the amount of “kist” which were due by him to the State. The State sold the immovable property by public auction to utilize its dues. A sum of `5,62,980 was realized at the auction. After deducting the amount due to it towards “kist” of `1,29,020, the remaining amount was paid to the assessee. It was contended that the amount of `1,29,020 due by the assessee to the State on account of “kist” should be deducted from the amount of gross sale consideration of `5,62,980 realized at the auction for the purposes of computing capital gain. Repelling this contention, the Hon’ble Supreme Court held that what was sold by the State at the auction was the immovable property that belonged to the assessee and the price that was realized therefore belonged to the assessee. That is why it was laid down that the entire sum of `5,62,980 realized would be considered as full value of consideration for the purposes of computing capital gain in the hands of the assessee. The learned Departmental Representative has drawn an analogy from this judgment to drive home the point that the negative net worth representing the liabilities of the assessee taken over by the transferee as a part of PTB should be added to the sale

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consideration actually received. This analogy ignores the point that in Attili N.Rao (supra), the amount of `5,62,980 was realized at the auction towards the immovable property. The capital asset in that case was immovable property having full value of consideration at `5.62 lakh. Out of such sale price realized, 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 `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 `143 crore as full value of consideration of the undertaking as a whole. This amount of `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 `157 crore is already included in `143 crore. The situation would have been different if the transferee company paying `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 undertaking would have been `143 crore plus the value of such outside liabilities agreed to be paid by the transferee, having no relation with the undertaking. As it is an undisputed position that the sum of `157 crore represents excess of liabilities over the book value/w.d.v. of the assets of the undertaking itself, such an amount cannot be considered as part of the sale consideration. In this view of the position, we are of the considered opinion that the judgment in the case of Attili N.Rao (supra) is not applicable to the facts of the instant case.

16.12. It was argued by the ld. DR that the full value of consideration declared by the assessee at `143 crore is highly inadequate and is incapable of acceptance. Relying on the judgment in the case of Vodafone Essar Gujarat Ltd., in Re (2011) 239 CTR (Guj) 229 he argued that the Hon’ble Bombay High Court cannot be held to have considered and decided the question of full value of consideration of PTB under the Scheme framed by the assessee along with its group concerns. On going through the facts of the case before the Hon’ble Gujarat High Court it can be noticed that the petitioner company therein sought the sanction of the Court to a scheme of arrangement u/ss 391 to 394 of the Companies Act, 1956 which contemplated transfer of passive infrastructure assets of the petitioner and other group company without any consideration and thereafter amalgamation/merger of the transferee company with ITL. The transfer was shown as a gift. The Hon’ble High Court

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came to hold that it was a scheme aimed at avoidance of tax as the transferor companies would be writing off the entire value of their assets spread over a period of time thereby depressing their taxable income while the transferee company would be claiming depreciation on the same block of assts, which would result in double deduction. Considering the above facts, the Hon’ble High Court held the scheme to be unreasonable, unfair and unjust and refused to sanction it. From the facts of this case, it is obvious that it has no relevance in so far as the present case is concerned. Ours is not a case in which the Hon’ble Bombay High Court refused to sanction the Scheme. The arrangement so proposed by the assessee and all other interested parties got the approval of the Hon’ble Court, which shows that on the due consideration of all the aspects 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 `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 `143 crore and not `300 crore. The Departmental contention in this regard is jettisoned.

NET WORTH 17.1 The `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 1294,54,52,830 Total assets 1360,62,06,784 Less : Liabilities 1517,81,07,737 Net worth (-) 157,19,00,953

17.2 It can be seen from the above calculation that the written down value in respect of the depreciable assets is `35.43 crore and the book value of all other assets is at `1325.19 crore thereby giving aggregate

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value of total assets of the undertaking transferred at `1360.62 crore. The value of liabilities relatable to the undertaking as appearing in the books of account transferred by the assessee is at `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 `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.

17.3. Having held in the para 16 that the full value of consideration has to be considered of `All assets minus All liabilities’ of the undertaking as one unit, now let us examine the question of determination of the cost of acquisition and cost of improvement or `net worth’ of the undertaking u/s 50B. 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.

17.4 It has been noticed 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.

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17.5 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. Our attention has not been drawn towards any contingent liability also having been transferred by the assessee. The order of the ld. CIT(A) also does not refer to any such contingent liability. So in the instant case `the value of liabilities’ as per section 50B will be the book value of the liabilities of the undertaking.

17.6 Continuing with the example given in Table A above, it can be seen that the net worth is at a positive figure of `5 (`10 towards assets minus `5 towards liabilities). The calculation of capital gain on the undertaking does not create any difficulty which is `95 (`100 minus `5) determined by reducing the net worth of the undertaking from the full value of consideration of the undertaking. In this exercise, the value of liabilities has been reduced both from the agreed value of the bundle of assets and also from the book value of assets so that the ingredients of both the components match with each other. As discussed above that even in slump sale what we in fact calculate is the capital gain on the transfer of all the bundle of assets of the undertaking but as a one unit and not separately. From Table A it can be seen that the composite agreed value of all the assets of the undertaking is `105 and the w.d.v/book value of all the assets is `10 leaving the figure of capital gain at `95. Such figure of capital gain of transfer of all assets as one unit matches with the figure of capital gain on the transfer of undertaking. Thus it is clear that while computing the capital gain from the transfer 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

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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 as under : - Capital gain on transfer of `Undertaking’ (All assets minus All liabilities) is `95 (`95 minus `0) , that is Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking `100 (`105 minus `5) - `Net worth’ or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking `5 (`10 minus `5)

17.8 Above discussed is a case of a positive net worth, that is where the aggregate value of the assets is more than the value of liabilities. It is quite possible that the net worth of an undertaking may be negative i.e. where the aggregate value of the assets of the undertaking is less than the value of liabilities. The following example in Table B will show a case of negative net worth. It is worth mentioning that the figures of all the assets, both w.d.v./book value and agreed value have been retained as such from Table A. Only the amount of total liabilities has been increased from `5 to `15 so that the position of negative net worth could be appreciated.

Table B - Position as on the date of slump date Sl. Particulars Agreed No. value 1. WDV of depreciable assets as per Balance Sheet 2. Non-depreciable tangible assets as per Balance Sheet 105 3. Non-depreciable intangible assets 4. Other assets A. Aggregate value of assets of 10 108 105 the undertaking 1. Secured loans 6 15

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2 Unsecured loans and other liabilities 9 B. Total liabilities 15 15 15 A-B Net (-)5 93 90 17.9 From the above table it can be seen that the full value of consideration received or accruing to the assessee from the transfer of undertaking (All assets minus All liabilities) is `90. Further the net worth in this case is at a negative figure of `5 (Book value etc. of all the assets `10 – Book value of all the liabilities `15). It is of utmost importance to note that the case under consideration is also that of the negative net worth of `157 crore (Book value etc. of all the assets `1360 crore – Book value of all the liabilities `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 `90 as against the net worth at a figure of `(-)5. Whereas the case of the assessee is that negative net worth of `(-)5 be ignored and capital gain be worked out at `90, the Revenue is contending that the net worth of `(-)5 should be taken at a negative figure so that the capital gain on the transfer of undertaking comes to `95 [`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 `105, but the full value of consideration of the undertaking in Table A has come to `100 because of the value of liabilities at `5 and in Table B it has come to `90 because of the value of liabilities at `15. The value of assets being equal, higher the value of liabilities lower the value of consideration of the undertaking and vice versa. Further it is relevant to note that in case of slump sale what is transferred is not only the assets but also all the liabilities of the undertaking for the full value of consideration. The values of its total assets and total liabilities are inbuilt in the consideration. When we refer to the amount of 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 and the spirit of section 50B read with section 45 and 48 is to provide a mechanism to make the computation of capital gain from the transfer of the assets of the undertaking possible, though in fact it is a case of transfer of both the assets and liabilities in a slump sale. It is so because there cannot any gain or loss from the transfer of liabilities. It is unrealistic to argue that when capital gain is computed in the above fashion, it is only the assets which are deemed to be transferred and not the liabilities. With this background when we compute the capital gain

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from the transfer of an undertaking, which is in effect a capital gain from the transfer of assets of the undertaking as one unit, it can be seen from the above Table B that aggregate value of all assets have been fixed at `105 as against the book value of `10. This gives the figure of capital gain at `95 (`105 – 10). If we accept the contention of the assessee that the figure of negative net worth should be taken as nil, the capital gain comes to `90 and if we go by the departmental contention, the amount of capital gain comes at `95. If we view the figure of capital gain from the transfer of bundle of assets of the undertaking at `95 which is nothing but the figure of capital gain from the transfer of undertaking as well, it becomes manifest that the assessee’s calculation goes wrong and that of the Revenue gives the desired result of capital gain of `95. In that view of the matter we have absolutely no doubt in our mind that the amount of capital gain in the above example should be computed at `95 by adding the amount of negative net worth of `5 to the full value of consideration of the undertaking at `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 `95 (`95 minus `0), that is Full value of consideration received or accruing (All assets minus All liabilities) as a result of the transfer of the undertaking `90 (`105 minus `15) - `Net worth’ or in other words the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking `- 5 (`10 minus `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 undertaking represents cost of acquisition and cost of improvement of the undertaking, such cost can never be in negative. In other words it cannot be contemplated that a person purchases an asset without paying anything but rather taking something more from the seller. He contended that the Act has not ascribed any meaning to the words `cost’, `worth’, `net worth’ in the context of section 50B and hence their dictionary meaning should be adopted for this purpose. He referred to the Oxford English Dictionary, Webster’s Third New International Dictionary, The Random House Dictionary and Black’s Law Dictionary to emphasize that the word `cost’ has been defined in such dictionaries to mean “the amount paid or charged

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for something; price or expenditure”; the word “worth” to mean “having a value of, or equal in value to, as in money”; and the words “net worth” to mean “net assets” or to mean “the excess of value of resources over liabilities to creditors”. Taking clue from these meanings the learned AR came back to Explanation 1 to section 50B which defines “net worth” and contended that it cannot be considered at a negative figure.

17.11.2 We are not inclined to accept this submission. 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’.

17.11.3 The context of a provision cannot be ignored while finding out the meaning of particular word not defined in the provision or elsewhere in the Act. It has been observed by the Hon’ble Supreme Court in several cases that a particular word occurring in one section of the Act, having a particular object cannot carry same meaning when used in different section of the same 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 opinion dictionary meanings, however helpful in understanding the general sense of the words, cannot control where the scheme of the statute

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or the instrument considered as a whole clearly conveys a somewhat different shade of meaning. It is not always a safe way to construe a statute or a contract by dividing it by a process of etymological dissection and after separating words from their context to give each word some particular definition given by lexicographers and then to reconstruct the instrument upon the basis of those definitions. What particular meaning should be attached to words and phrases in a given instrument is usually to be gathered from the context, the nature of the subject-matter, the purpose or the intention of the author and the effect of giving to them one or the other permissible meaning on the object to be achieved. Words are after all used merely as a vehicle to convey the idea of the speaker or the writer and the words have naturally, therefore, to be so construed as to fit in with the idea which emerges on a consideration of the entire context.” 17.11.4 When we consider the nature of capital asset being undertaking as comprising not only positive assets but also the liabilities thereof, in our considered opinion, the usual dictionary meanings of the words “cost” and “net worth” can have no application in this context. It is pertinent to note that “net worth” has been defined in section 50B itself as difference between the aggregate value of all assets and value of liabilities. It can be both ways, that is, in some case the aggregate value of all assets may be more than the value of all liabilities and in others it may be value of liabilities exceeding the aggregate value of all assets. In the former case it will be positive net worth and in the latter it will be negative net worth. Negative net worth is not something unknown in the business world. SA570 (AAS16) dealing with “Going concern” is a standard of auditing brought out with a purpose to establish standard on the Auditor’s responsibilities in the audit of financial statements regarding the appropriateness of the going concern assumption as a basis for the preparation of the financial statement. Various financial indications have been given in it and the first one is “Negative net worth or negative working capital”. Therefore to contend that the cost or net worth can never be 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 `1517 crore undertaken by the transferee and not only the negative net worth of `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

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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 value vis-à-vis the only written down value / book value of the assets. If the amount of all liabilities is added to the full value of consideration of the undertaking, it will mean that current/book value of liabilities to the extent it equalizes book value/w.d.v. of the assets has been considered twice in the computation of capital gain on the sale of undertaking, which will be irrational. It can be seen from Table B above that the actual profit from the transfer of bundle of assets of the undertaking is `95 (Agreed value of all the assets at `105 – Book value/w.d.vof all the assets at `10). If we add the figure of negative net worth of `5 to the full value of consideration of the undertaking of `90, the capital gain from transfer of undertaking comes to `95 which is eventually the same figure as the capital gain from the transfer of bundle of assets as one unit. If however we go by the contention of the ld. AR that the entire amount of liabilities should have been added, and add the figure of total liabilities of `15 to the full value of undertaking of `90, the figure of Rs.105 will emerge. It can be seen that Rs.105 is the agreed value of the bundle of assets of the undertaking and not the amount of capital gain. Since the amount of capital gain from transfer of assets is `95, that would finally turn out to be the figure of capital gain from the transfer of undertaking as well, it can be possible only by adding the amount of negative net worth to the full value of consideration and not the value of all liabilities. That is why the legislature has mandated to consider the figure of net worth supplied by section 50B and not the total liabilities for the purposes of computing capital gain u/s 48.

(iii) Section 48 uses the words `deducting from’ and not `adding to’ 17.13.1. The next leg of the ld. AR’s submission was that section 48 clearly provides that the capital gain shall be computed ‘by deducting from’ the full value of the consideration received or accruing as a result of transfer of a capital asset inter alia the cost of acquisition of the asset and the cost of any improvement thereto, which in the present case is the amount of net worth as per section 50B. He contended that in such a case if the negative net worth is added to the full value of consideration, 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.

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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 figure will ultimately mean adding to the full value of consideration for determining the income chargeable under the head “Capital gains”. If the legislature had used the expression “deducting from or adding to”, as contended by the ld. AR, in between the `full value of consideration’ and `net worth’, then the ridiculous results would have followed. Talking of the net worth in negative and considering it in juxtaposition to “adding to” the full value of consideration, would have had the effect of again reducing it because of the simultaneous use of words “negative” and “adding to” in the provision. The legislature has very rightly used the words “deducting from” only to make its intention clear that for determining the income chargeable under the head “Capital gains” if the amount of net worth is positive, that should be reduced from and if it is negative then it should be added to the full value of consideration.

(iv) Capital gain cannot be more than full value of consideration 17.14.1 The ld. 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. He illustrated his submission by explaining that if a particular asset is sold for `100, the capital gain cannot be more than `100 in any case. It has to be `100 itself in case there is no cost of acquisition or less than that to the extent of the positive cost of acquisition. On the basis of this submission he argued that when the sale consideration of the undertaking is `143 crore, then the computation of capital gain at any figure more than `143 crore is not possible.

17.14.2 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

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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.

(v) The words `as reduced by’ pre-suppose that preceding figure is higher than the succeeding 17.15.1 The ld. AR contended that Explanation 1 to section 50B provides that the 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 as appearing in the books of account’. He emphasized on dictionary meaning of the word “reduced” as referring to “diminish in size, amount, extent or number : make smaller”. As the word `reduce’ refers “to bring down”, the learned AR contended that “the value of liabilities” can only bring down the “aggregate value of the total asset” as per Explanation 1 to section 50B. In his opinion unless the “value of liabilities” is less than “the aggregate value of total asset”, the computation of the net worth will not be possible. The sum and substance of his submissions was that in case the “value of liabilities” is more than “the aggregate value of the total asset” then such value of liabilities should be restricted to the aggregate value of total assets thereby giving the amount of net worth at ` Nil. He also took us through Clause no. 315 of the Direct Tax Code Bill, 2010 which provides that any direction for aggregation of two or more items shall be construed also to include a direction for aggregation of negative and positive amounts in all their combinations. It was suggested that since the Income-tax Act, 1961 does not contain any provision similar to that of clause 315 of Direct Tax Code Bill, 2010, the words `reduced by’ should be understood as having Nil value where the value of liabilities is in excess of the aggregate value of the assets of the undertaking.

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17.15.2 We are unable to accept this contention put forth by the learned AR that the words “as reduced by” employed in Explanation 1 should always be understood to mean that the aggregate value of total assets will be more than the value of liabilities. The dictionary meaning of the word “reduced” is of no relevance in the computation of capital gain from the transfer of slump sale for the reasons discussed above. The context of a provision is relevant for understanding the meaning of a word which has not been defined in the statute. To contend that the words “as reduced by” used in Explanation 1 can never have the effect of the value of liabilities more than the aggregate value of the total assets of the undertaking is completely unfounded. It is a fact that the aggregate value of the total assets of the undertaking is `1360 crore with the value of liabilities at `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 `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 computation, shall be construed as a reference to both the negative and positive variation of the income or the result, as the case may be; (b) any direction for aggregation of two or more items, which are expressed as amounts, shall be construed also to include a direction for aggregation of negative and positive amounts in all their combinations; (c) the value of any variable in a formula shall be deemed to be nil, if the value of such variable is indeterminable or unascertainable.” 17.15.4 The first component of this clause is that the income can be both negative and positive. The second sub-clause is about aggregation of two or more items which may give the negative and also positive amounts. It is beyond our comprehension as to how this clause can be read as making any departure from the existing position under the Act. It has been laid down by the Hon’ble Supreme Court on several

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occasions that the income also includes loss. In the case of CIT v. Harprasad And Co. Pvt. Ltd. [(1975) 99 ITR 118 (SC)], Their Lordships have categorically held that the income includes loss also. Similar proposition has been reiterated in CIT v. P.Doraiswamy Chetty [(1990) 183 ITR 559 (SC)]. Section 28 dealing with the computation of income under Chapter IV-D states that the income shall be chargeable to income-tax under the head “Profits and gains of business or profession”. Even though the reference has been made only to the “Profits and gains of business or profession”, but it is quite clear that there can be income as well as loss under the head. Can anyone imagine that if there is a loss under the head “Profits and gains of business or profession” then that should be ignored because the reference is only to “profits and gains” and “income”. It is obvious that the words `income’ and `profits’ can be both positive as well as negative. Similarly section 45 provides that “profits or gains” arising from the transfer of capital asset shall be chargeable to income-tax under the head “Capital gains”. There can be both income as well as loss under this head. Has anyone ever contended that since the words used are `profits’ or `gains’ which imply a positive income, there can be no loss under this head. The answer to all these questions is simple and plain that a reference to an `income’ under the provisions of Income-tax Act, 1961 automatically 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 to be the cost of acquisition and the cost or improvement for the purposes of sections 48 and 49”. It is trite that a deeming provision or a legal fiction presumes a hypothetical state of affairs and mandates to substitute it with the real. Such an artificial meaning is enacted with a specific purpose which is confined to that provision alone. In this way, the deeming provision tends to ignore the characteristics normally attaching

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to a particular connotation. In such a situation the commonly understood meaning of a word or phrase or expression is given a go-by and in its place the artificial meaning so given is substituted. As the very object of inserting a deeming provision is to observe a departure from the meaning and scope of the word, phrase or expression to which it is attached, it is but natural that such artificial meaning must have full application in that regard. To put it simply a deeming provision has to be brought to a logical conclusion. Coming back to section 50B(2) it is observed that by this deeming provision the “net worth” of the undertaking has been explained to mean “the aggregate value of 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”. Because of this deeming provision the cost of acquisition and cost of improvement of the undertaking is required to be strictly calculated in the manner prescribed and the result may be positive or negative. In other words, if the aggregate value of total asset is more than the value of liabilities the net worth shall be positive and in the otherwise case it shall be negative. When the legislature in its wisdom has prescribed the scope of “net worth” in unambiguous terms by way of a deeming provision, we cannot suo motu change it in case it is negative and accept it when it is positive. It has to be invariably accepted in both the situations whether it is positive or negative. If we accept this contention of the learned AR that the amount of negative net worth determined u/s 50B should be taken as zero, then it would mean creating one more legal fiction by ourselves within the existing legal fiction which the legislature has not prescribed. Such a course of action can never have sanction of law. In view of the foregoing reasons we are not inclined to accept this part of the arguments advanced on 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 `6.86 crore from the export of trading goods and profit of `3.78 crore from export of self- manufactured goods. The assessee claimed deduction u/s 80HHC on a sum of `3.78 crore by ignoring the loss of `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

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eventually upheld the Assessing Officer’s stand by holding that the negative figure of loss of `6.86 crore cannot be ignored for computing the income eligible for deduction u/s 80HHC. It is on this strength of this judgment that the learned AR contended that the figure of negative net worth computed u/s 50B be also ignored and taken as nil as has been done by the Hon’ble Supreme Court in this case.

17.15.7 There is no merit what so ever in this contention. The ratio decidendi in the case of IPCA Laboratory Ltd.(supra) operates in an altogether different field, being the eligibility or otherwise of deduction u/s 80HHC in case there is loss from one set of exports and profit from the other. This judgment has been rendered by considering the specific provision of sub-section (3) along with sub-section (1) of section 80HHC. It is more than obvious that the question of granting deduction u/s 80HHC on exports can arise only when there is a positive profit from such exports. The Hon’ble Supreme Court observed that in arriving at a figure of positive profit both the profit and loss will have to be considered, and if the net figure is positive then the assessee will be entitled to deduction, but if the net figure is a loss then the assessee will not be entitled to deduction. At this juncture it will be relevant to note that section 80AB clearly provides that the deductions are to be made with reference to the income included in the gross total income. This section states that where any deduction is required to be made or allowed under any section included in this Chapter under the heading “C. – Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Further sub- section (2) of section 80A provides that the aggregate amount of the deductions under this Chapter shall not in any case exceed the gross total income of the assessee and the “gross total income” has been defined u/s 80B(5) to mean the total income computed in accordance with the provisions of this Act before making any deduction 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

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should be made to the total income. Thus in respect of `income 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 relevant section falling within this sub-Chapter. Reverting to the case of IPCA Laboratory Ltd. it can be seen that there was a loss from export of trading goods at `6.86 crore and income from export of self- manufactured goods at `3.78 crore thereby giving the net loss of `3.08 crore from the export of goods. As section 80HHC provides for deduction in respect of `income’ from export of goods, naturally there could not have been any question of granting deduction. On the contrary we are dealing with section 45 read with sections 48 and 50B providing for the computation of capital gain on the transfer of capital asset. Section 45 recognizes not only the positive income chargeable to tax as capital gain but also loss from the transfer of capital assets which is available for set off and carry forward in the same or subsequent years as per the provisions of Chapter `Set off, or carry forward and set off’ consisting of sections 70 to 80. Unlike section 80HHC which provides for deduction only in respect of some positive eligible income and for no deduction in case of qualifying income is either nil or negative, section 45 contemplates both income as well as loss. Whereas the income so determined is charged to tax under the head “capital gains” but the loss is either set off against the other incomes of the same year and in case of insufficiency of such other income can be carried forward to subsequent years for set off, subject to the specific provisions. Thus it is abundantly clear that the reliance of the learned AR on the case of IPCA Laboratory Ltd. for contending that the negative figure of net worth be ignored, is clearly misconceived. We, therefore, reject the contention that the words `as reduced by’ in section 50B pre-suppose that the aggregate value of all the assets must be invariably more than the total liabilities and in case it is not so, then the resultant negative figure should be taken as zero.

17.15.8. In support of the contention that the negative net worth cannot be added to the full value of consideration for the purposes of computing capital gain, the learned AR relied on the judgment of the Hon’ble Bombay High Court in the case of Li Taka Pharmaceuticals Limited v. State of Maharashtra [(1998) 91 Company Cases 871 (Bom.)]. In that case the petitioner initially contended that no stamp duty was at all payable in case of an amalgamation u/s 394 of the

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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 worth representing excess of liabilities over the book value of assets should be ignored.

17.15.9. Stamp duty is always charged on the sale consideration. In that case the Hon’ble High Court held that the stamp duty was payable on the sale consideration of the undertaking as one unit without increasing it with the amount of liabilities transferred. In fact it supports the contention of the ld. AR, which has been accepted by us above, that for the purposes of calculating full value of consideration for the transfer of undertaking there cannot be any addition towards the value of liabilities transferred to the agreed consideration of the undertaking. Continuing with the above example given in Table A where the agreed value of assets transferred is `105 and the liabilities worth `5 have been taken over by the transferee, the amount of the sale price of the undertaking has been held to be `100 which amount as per the facts of the case is `143 crore and not `105 akin to `300 crore as per facts prevailing before us. Besides that, this judgment does not support the point that negative net worth should also be ignored for calculating the capital gain. Here it is pertinent to note that presently we are not concerned with only the determination of sale consideration of the undertaking but also the capital gain on its transfer, which obviously on a macro level refers to the sale price minus cost. While sustaining the figure of sale consideration at `143 crore, we have held that the cost price be taken at a minus figure of net worth at `157 crore, so that the amount of capital gain becomes `300 crore. As this judgment is related to the determination of the sale price relevant for imposing stamp duty, it can have no application on the other aspects of the computation of capital gain. The situation could have some resemblance if the stamp

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duty had been payable on the profit from the transfer of undertaking and not the sale consideration. Moreover this is basically a case under the Bombay Stamp Act and that too in the context of amalgamation under section 394 of the Companies Act, 1956, whereas we are not confronted with the question of determination of any stamp value much less in the amalgamation. We, therefore, hold that the reliance of the ld. AR on this judgment in any context other than 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.

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amount of capital gain of `95 from the transfer of the undertaking as one capital asset and not any separate capital gain arising from the transfer of individual assets. Both the assets and liabilities have been considered as one composite unit and the eventually full value of consideration is for the undertaking as a whole and not towards any separate assets or liabilities. It can be noticed that in that case the computation of capital gain was remitted to the file of Assessing Officer to be determined as per the prescription of sections 45 and 50B. However, in the instant case the Assessing Officer has computed the capital gain by taking resort to these provisions only. This judgment, therefore, does not assist the learned AR in any manner.

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sale. However, we allow ground no.2 raised by the Revenue in its appeal by holding that the CIT(A) was not correct in coming to the conclusion that the negative figure of the net worth of `.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 `157 crore and not Zero. Resultantly the amount of capital gain chargeable to tax will be `300 crore and not `143 crore as declared by the assessee. 21. Before parting with this appeal, we record our deep appreciation for enlightening arguments put forth on behalf of the Revenue and the assessee on the issue in appeal. Further we want to make it abundantly clear that the ratio decidendi of all the decisions relied on by both the sides has been duly taken into consideration while passing this order. However, we have desisted from specifically referring to certain cases relied on by both the sides in the present order either due to their irrelevance or of the repetitive nature. 22. In the result, the appeal of the Revenue is allowed.”

2.2. We find that to adjudicate the issue in hand the Special Bench of the Tribunal was constituted to determine whether the Assessing Officer was right in adding the amount of liability reflected in the negative net worth to the sale consideration for determining the capital gain on account of slump sale. The Revenue not only specifically challenged the finding of the Ld. Commissioner of Income Tax (Appeal) for ignoring the negative figure of net worth but also submissions were made on the issue. The Tribunal duly considered the decision the case of Ahmedabad Electricity Company Ltd. vs CIT (1992) 106 CTR (Bom.) (FB) 78; (1993) 199 ITR 351 (Bom.)(FB) and CIT vs Mahalaxmi Textiles Mills Ltd. (1967) 66 ITR 710 (SC) and then reached to a conclusion by holding that the Assessing Officer was right pin adding the amount of

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liability reflected in the negative net worth of the assessee to sale consideration for determining the capital gain on account of slump sale. Respectfully following the order of the Special Bench and the factual matrix that neither any contrary decision nor the plea that the facts are different were brought to our notice by the assessee, therefore, the appeal of the assessee is dismissed.

Finally, the appeal of the assessee is dismissed.

This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 22/11/2016.

Sd/- Sd/- (N.K. Pradhan) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 22/11/2016 f{x~{tÜ? P.S /�नजी स�चव आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai,