SWAN MILLS LTD, MUMBAI V. DCIT RG 7(2), MUMBAI

ITA 1471/MUM/2010

• Counselvise Citation: 147119914 RSA 2010
• Duration Of Justice: 2 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 17-04-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 23-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B JAYA KUMAR
• Keywords: Cost of acquisition; Revised return

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN( J.M) ITA NO. 1471/M/10(A.Y. 2006-07) SWAN MILLS LIMITED, 215, 2 ND FLOOR, FREE PRESS HOUSE, NARIMAN POINT, MUMBAI 400 021. PAN: AABCS 7890Q (APPELLANT) VS. THE DCIT, RANGE 7(2), 6 TH FLOOR, AAYKAR BHAVAN, MUMBAI - 20 (RESPONDENT) APPELLANT BY : SHRI J.P.BAIRAGRA RESPONDENT BY : SHRI B.JAYA KUMAR DATE OF HEARING : 17/04/2012 DATE OF PRONOUNCEMENT : 2 5/04/2012 ORDER PER N.V.VASUDEVAN, J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 11/11/2009 OF CIT(A) 13, MUMBAI RELATING TO ASSESSMENT YEAR 2006-07. THE ONLY ISSUE THAT IS IN DISPUTE IN THIS APPEAL IS THE COMPUTATIO N OF CAPITAL GAIN ON SLUMP SALE OF THE ASSESSEES MANUFACTURING UNIT AT BASANT I. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURE OF TEXTILES. DUE TO LABOUR, LEGAL AND OTHER FINANCIAL PROBLEMS T HE MANUFACTURING OPERATIONS OF THE MILL WERE CLOSED DOWN. THE ASSES SEE STARTED DOING BUSINESS OF TRADING IN CLOTH, PROCESSING JOB WORK A ND LETTING OUT PART OF THE MILL AREA AS WAREHOUSE. THE ASSESSEE SOLD ITS MANU FACTURING UNIT AT BASANTI BY WAY OF SLUMP SALE I.E. ON AN AS IS WHERE IS B ASIS. ALL ASSETS INCLUDING LAND, BUILDING, MACHINERY ETC. WERE TRANSFERRED. T HE ASSESSEE RECEIVED CONSIDERATION OF RS. 1.00 CRORE FROM THE TRANSFEREE . APART FROM THE ABOVE THE ITA NO. 1471/M/10(A.Y. 2006-07) 2 TRANSFERRE ALSO UNDERTOOK TO DISCHARGE THE LIABILI TIES OF THE BASANTI UNIT OF RS. 2,43,19,668/-. IN THE ORIGINAL RETURN OF INCOM E FILED ON 10/11/2006 THE ASSESSEE WORKED OUT THE LONG TERM CAPITAL GAIN (LTC G) ON SLUMP SALE OF BASANTI UNIT AS FOLLOWS: CAPITAL GAIN: LONG TERM CAPITAL GAIN U/S. 50B TOTAL CONSIDERATION RECEIVABLE FOR SALE OF BASANT UNIT (SLUMP SALE) 10,000,000 LESS: NET WORTH OF UNIT: OTHER CURRENT ASSETS 2,959,1 17 VALUE OF LAND 6,00 7,610 VALUE OF OTHER FIXED ASSETS 86,368 9,053,095 ( WDV PER IT) LESS: VALUE OF LIABILITY: PNB - LOAN 19,0 00,000 PNB LOAN(INTEREST) 5,530, 000 CURRENT LIABILITIES 8,842 ,763 33,372,763 (24,319,668) 34,319,668 THE ASSESSEE FILED A REVISED RETURN OF INCOME ON 2/ 11/2007 IN WHICH THE COMPUTATION OF CAPITAL GAIN ON SLUMP SALE OF THE BA SANTI UNIT WAS REVISED TO A SUM OF RS.1 CRORE. THE REVISED COMPUTATION OF I NCOME FILED BY THE ASSESSEE WAS AS FOLLOWS: CAPITAL GAIN: LONG TERM CAPITAL GAIN U/S. 50B TOTAL CONSIDERATION RECEIVABLE FOR SALE OF BASANT UNIT (SLUMP SALE) 10,000,000 LESS: NET WORTH OF UNIT: OTHER CURRENT ASSETS 2,959,1 17 VALUE OF LAND 6,00 7,610 VALUE OF OTHER FIXED ASSETS 86,368 9,053,095 ( WDV PER IT) LESS: VALUE OF LIABILITY: PNB - LOAN 19,0 00,000 PNB LOAN(INTEREST) 5,530, 000 CURRENT LIABILITIES 8,842 ,763 33,372,763 NIL 10,000,000 (24,319,668) (7,534,616) ITA NO. 1471/M/10(A.Y. 2006-07) 3 3. THE COMPUTATION OF CAPITAL GAIN ON SLUM SALE IS LAID DOWN IN SEC.50-B OF THE INCOME TAX ACT, 1961 (THE ACT). THE SAID PROVI SIONS PROVIDE THAT ANY PROFITS OR GAINS ARISING FROM THE SLUMP SALE EFFECT ED IN THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME-TAX AS CAPITAL GAINS. SUCH CAPITAL GAIN SHALL BE CALCULATED BY ADOPTING THE 'NET WORTH' OF THE UN DERTAKING 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. FOR THE PURPOSES OF THIS SECTION, NET WORTH SHALL BE TH E 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 BO OKS OF ACCOUNT . ANY CHANGE IN THE VALUE OF ASSETS ON ACCOUNT OF REVALUA TION OF ASSETS SHALL BE IGNORED FOR THE PURPOSES OF COMPUTING THE NET WORTH . 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 P ROVISIONS 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. 4. AS CAN BE SEEN FROM THE COMPUTATION OF CAPITAL GAIN, THE VALUE OF THE LIABILITIES AS PER THE BOOKS OF ACCOUNTS WHICH WERE TAKEN OVER ON SLUMP SALE WAS MORE THAN THE VALUE OF THE ASSETS TAKEN OVER BY RS.2,43,19,668/-. THE STAND OF THE ASSESSEE FOR FILING THE REVISED COMPUT ATION OF CAPITAL GAIN AS ABOVE WAS THAT WHILE WORKING OUT THE LONG TERM CAPI TAL GAIN, THE ASSESSEE HAS WORKED OUT NEGATIVE NET WORTH OF UNITS SOLD (BA SANTI UNITS) AT RS.2,43,19,668/- AND TO THIS CONSIDERATION RECEIVED IN CASH OF RS.1 CRORES WAS ADDED AND THUS ARRIVED AT L.T.C.G OF RS.3,43,19 ,668/- AS STATED ABOVE. IN THIS COMPUTATION, THE ASSESSEE HAS CONSIDERED TH E LIABILITY OF BANK WHICH HAS BEEN TAKEN OVER BY THE ACQUIRER AS PART OF THE CONSIDERATION FOR THE SALE ITA NO. 1471/M/10(A.Y. 2006-07) 4 OF UNITS. HOWEVER, IN THE REVISED COMPUTATION ASSES SEE HAS WORKED OUT THE LTCG AT RS.1 CRORES WHICH IS CONSIDERATION RECEIVED IN CASH AND IGNORING THE NEGATIVE CAPITAL OF RS. 2,43,19,668/- ARRIVED AT ON ACCOUNT OF VARIOUS LIABILITIES TAKEN OVER BY THE ACQUIRER WHICH INCLUD ES BANK LIABILITIES OF RS.2,45,30,000/-. IN SUPPORT OF THIS ASSESSEE RELIE D UPON IN THE CASE OF M/S. ZAUARI INDUSTRIES LTD. VS. ACIT. 108 TTJ (MUM). IN THIS CASE, THE TRIBUNAL HELD THAT WHEN THE NET WORTH OF THE COMPANY WAS WOR KED OUT AT NEGATIVE FIGURE, THE SAME WAS HAD TO BE IGNORED AND CONSIDER ATION RECEIVED IS ONLY TO BE TAKEN AS CONSIDERATION FOR THE SAME AND NET WORT H IS TO BE TAKEN AT ZERO. 5. THE AO REJECTED THE CLAIM OF THE ASSESSEE FOR T HE FOLLOWING REASONS: IT IS SEEN FROM THE AGREEMENT BETWEEN ASSESSEES C O AND M/S. ARAVALI ENCLAVE PRIVATE PVT. LTD. AS ACQUIRER OF THE UNIT B ASANTI THAT ACQUIRER IS BOUND TO PAY RS.1 CR IN ADDITION TO SETTLING OF WORKERS DUES, BANKS DUES AND STATUTORY LIABIT4TIES OF MUNICIPAL TAX AND ALSO ELECTRICITY DUES. SINCE THIS PERSONAL LIABILITIES OF ASSESSEE C OMPANY ARE BEING DISCHARGED BY THE ACQUIRER WHEN THE UNIT IS TAKEN O VER, THE AMOUNT INVOLVED IN THIS LIABILITIES ARE NOTHING BUT DISCH ARGE OF THE ASSESEES PERSONAL LIABILITIES AND HENCE ITS IS FORM PART AND PARTIAL SATE CONSIDERATION. THEREFORE, SUCH PERSONAL LIABILITIES DISCHARGED BY THE ACQUIRER FORM PART OF SATE CONSIDERATION. ACCORDING LY, THIS AMOUNT INVOLVED WILL HAVE TO BE ADDED TO THE CONSIDERATION RECEIVED IN CASH OF RS.1 CR. SUCH TOTAL LIABILITIES HAVE BEEN WORKED O UT BY THE ASSESSEE IN ITS ORIGINAL COMPUTATION AT RS.3,33,72,763/- WHICH HAS BEEN ADJUSTED WITH THE ASSETS TAKEN OVER AND THEREBY ARRIVED AT G AIN OF RS.243,19,668/- (NET AMOUNT PAID OR PAYABLE BY THE ACQUIRER FOR DISCHARGE OF THE LIABILITIES OF THE ASSESSEE REFERR ED TO ABOVE). IN A CASE, WHERE A PERSON IS SUPPOSED TO DISCHARGE THE LIABILITY WHICH HAVE NOT BEEN TAKEN OVER BY AN ACQUIRER, SUCH PERSO N WILL HAVE TO PAY TOWARDS THE LIABILITIES FROM HIS OWN POCKET IN THAT EVENT SUCH PAYMENT WILT NOT BE ALLOWED AS ALLOWABLE EXPENDITURE AND AT THE SAME TIME IT IS CAPITAL IN NATURE. IN THIS CASE THE LIABILITIES WHI CH HAVE BEEN PERSONALLY DISCHARGED BY THE ASSESSEE HAVE BEEN TAK EN OVER AND DISCHARGED BY THE ACQUIRER. THEREFORE, SUCH LIABILI TY WILL DEFINITELY FORM PART OF PARTIAL CONSIDERATION OF STUMP SATE U/S.50B . ITA NO. 1471/M/10(A.Y. 2006-07) 5 THE AO ACCORDINGLY WORKED OUT LONG TERM CAPITAL GAI NS AT RS. 3,43,19,668/-. 6. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED T HE ORDER OF THE AO. 7. AT THE TIME OF HEARING OF THIS APPEAL IT WAS AGR EED BY THE PARTIES BEFORE US THAT THE ISSUE RAISED BY THE ASSESSEE IN THIS APPEAL NAMELY WHETHER THE NEGATIVE NET WORTH HAS TO BE IGNORED WH ILE COMPUTING CAPITAL GAIN ON SLUMP SALE AS ALREADY DECIDED BY THE SPECIA L BENCH OF ITAT IN THE CASE OF DCIT VS. M/S. SUMIT SECURITIES LTD. (2012) TIOL 145 (IAT) (MUM)(SB). THE SPECIAL BENCH HAS HELD THAT FOR THE PURPOSE OF SEC.50B OF THE ACT, IN A SLUMP SALE, LIABILITIES REFLECTED IN NEGATIVE NE T WORTH CANNOT BE TREATED AS CONSIDERATION BUT THE RESULTANT NEGATIVE NET WOR TH HAS TO BE ADDED TO THE CONSIDERATION WHILE WORKING OUT CAPITAL GAIN ON T RANSFER BY WAY OF SLUMP SALE. THE FACTS IN THE AFORESAID CASE WERE THAT PU RSUANT TO A SCHEME OF ARRANGEMENT U/S 391 & 394 OF THE COMPANIES ACT, THE ASSESSEE TRANSFERRED ITS POWER TRANSMISSION BUSINESS TO KEC INTERNATIO NAL LTD FOR A TOTAL CONSIDERATION OF RS. 143 CRORES. THE ASSESSEE CLAIM ED THIS TRANSACTION TO BE A SLUMP SALE U/S 50B. THE NET WORTH OF THE UNDER TAKING WAS COMPUTED AT A NEGATIVE FIGURE OF RS.157.19 CRORES, BEING THE EX CESS OF LIABILITIES OVER ASSETS. THE ASSESSEE TREATED THE NET WORTH AS NIL A ND OFFERED THE ENTIRE SALE CONSIDERATION OF RS. 143 CRORE AS LTCG. THE AO HELD THAT AS THE PURCHASER HAD TAKEN OVER LIABILITIES OF RS. 157.19 CRORES, TH E SAME HAD TO BE ADDED TO THE CONSIDERATION OF RS. 143 CRORES TO ARRIVE AT TH E FULL VALUE OF CONSIDERATION OF RS. 300 CRORES. THE CIT (A), RELY ING ON ZUARI INDUSTRIES 105 ITD 569 (MUM) & PAPER BASE CO 19 SOT 163 (DEL), HEL D THAT THE NET WORTH IN S. 50B COULD NOT BE A NEGATIVE FIGURE AND IF IT WAS SO BECAUSE OF THE LIABILITIES EXCEEDING THE ASSETS, THE NET WORTH HAD TO TAKEN AT NIL. THE SPECIAL BENCH HAD TO CONSIDER TWO ISSUES (I) WHETHER THE EX CESS OF LIABILITIES OVER ASSETS COULD BE TREATED AS CONSIDERATION IN THE H ANDS OF THE ASSESSEE & (II) ITA NO. 1471/M/10(A.Y. 2006-07) 6 WHETHER THE RESULTANT NEGATIVE NET WORTH COULD BE TREATED AS NIL OR HAD TO BE ADDED TO THE CONSIDERATION? THE SPECIAL BENCH HELD (I) ON THE ISSUE AS TO THE FULL VALUE OF CONSIDERA TION, THE DEPARTMENTS ARGUMENT THAT SINCE THE TRANSFERORS LIABILITIES HA VE BEEN TAKEN OVER BY THE TRANSFEREE, IT WOULD HAVE TO BE TREATED AS CONSIDER ATION RECEIVED BY THE TRANSFEROR IS NOT ACCEPTABLE. IN THE CASE OF A SLUM P SALE, ONE LUMP SUM VALUE OF THE UNDERTAKING DERIVED BY ADDING ALL ASSETS AND REDUCING ALL THE LIABILITIES IS ARRIVED AT. THIS IS THE FULL VALUE OF THE CONSIDERATION. IF ONE ADDS THE LIABILITIES TO THIS VALUE, ONE IS ARRIVING AT THE CONSIDERATION FOR THE ASSETS BUT NOT THE CONSIDERATION FOR THE UNDERTAKING . ALSO, ONCE THE SALE CONSIDERATION HAS BEEN APPROVED BY THE HIGH COURT, IT IS UNREALISTIC FOR THE REVENUE TO CONTEND THAT THE CONSIDERATION OF RS. 14 3 CRORE DOES NOT REPRESENT THE FULL VALUE OF CONSIDERATION OF THE UN DERTAKING. ACCORDINGLY, THE CONSIDERATION IS RS. 143 CRORES AND NOT RS. 300 C RORES AS CALCULATED BY THE AO ( GEORGE HENDERSON 66 ITR 622 (SC), GILLANDERS ARBUTH NOT 87 ITR 407 (SC) & ATTILI N. RAO 252 ITR 880 (SC) DISTINGUISHED ); (II) ON THE ISSUE AS TO THE NET WORTH OF THE UNDE RTAKING, THE ASSESSEES ARGUMENT THAT IF THE NET WORTH IS NEGATIVE (EXCESS OF LIABILITIES OVER ASSETS), IT SHOULD BE TAKEN AT NIL IS NOT ACCEPTABLE. THOUGH, I N ORDINARY PARLANCE, THE TERMS COST & NET WORTH MAY NOT HAVE A NEGATIVE VALUE, IN THE CONTEXT OF S. 50B, IF THE LIABILITIES EXCEED THE ASSETS, THERE WO ULD BE A NEGATIVE NET WORTH. THE SAID NEGATIVE NET WORTH HAS TO BE DEDUCTED FROM (I.E. ADDED TO ) THE FULL VALUE OF CONSIDERATION . CONSEQUENTLY, THE CHARGEABLE CAPITAL GAIN IS RS. 300 CRORES (RS. 143 CRORES + RS. 157 CRORES) (ZUARI INDUSTRIES 105 ITD 569 (MUM) & PAPER BASE CO 19 SOT 163 (DEL) REVERSED) 8. IN VIEW OF THE AFORESAID DECISION OF THE SPECIAL BENCH WE ARE OF THE VIEW THAT THE NEGATIVE NET WORTH HAS TO BE ADDED TO THE SUM OF RS. 1.00 CRORE RECEIVED AS CASH CONSIDERATION BY THE ASSESSEE AND CAPITAL GAIN DETERMINED ITA NO. 1471/M/10(A.Y. 2006-07) 7 ACCORDINGLY. WE, THEREFORE, CONFIRM THE ORDER OF T HE CIT(A) AND DISMISS THE APPEAL BY THE ASSESSEE. 9. IN THE RESULT, APPEAL BY THE ASSESSEE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 25 TH DAY OF APRIL 2012 SD/- SD/- (P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 25 TH APRIL 2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.