M/s. Medi Assist Insurance TPA Pvt Ltd, Bangalore V. Deputy Commissioner of Income Tax, Circle-12(1), Bangalore

ITA 1933/BANG/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8858 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 03-06-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: SUDHIR PRABHU
• Keywords: Capital asset; Business income; Cost of acquisition; Wholly owned subsidiary; Capital Gains
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 2(14); 142(1); 43; 48; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI B R BASKARAN ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.1933/Bang/2018 Assessment year : 2011-12 M/s. Medi Assist Insurance TPA Pvt. Ltd., Tower ‘D’, 4 th Floor, IBC Knowledge Park, 4/1 Bannerghatta Main Road, Bengaluru-560 029. PAN –AACCM 8044 P Vs. The Dy. Commissioner of Income-tax, Circle - 4(1)(2), Bengaluru. APPELLANT RESPONDENT Assessee by : Shri Sudhir Prabhu, C.A Revenue by : Shri Sumeer Singh Meena, CIT(DR) Date of hearing : 10.01.2022 Date of Pronouncement : 15.02.2022 O R D E R Per Beena Pillai, Judicial Member This appeal by the assessee is directed against the order of the CIT(A)- 4, Bangalore dated 22/3/2018 for the asst. year 2011-12 for computing the short term capital gain at Rs.7,80,38,353/-. 2. The assessee raised the following grounds before us “(i) On the facts and circumstances of the case and in law the learned DCIT and CIT(A) erred in computing the short term capital gain at Rs.7,80,38,353/- by adding the negative net-worth instead of restricting the same to NIL as deeded cost, since cost cannot be a negative value ITA No.1933/Bang/2018 Page 2 of 19 (ii) On facts and circumstances of the case and in law the learned DICT and CIT(A) erred in not appreciating the fact that, gain can never be greater than total consideration. The appellant had transferred the pharma undertaking for a consideration of Rs.100 in view of the negative net-worth and capital gain on such transfer can never be more than Rs.100 (iii) The appellant submits that the above grounds are independent and without prejudice to one another. The appellant leave to add or to alter, by deletion substitution, amendment or otherwise, the above grounds of appeal at any time before, or during the hearing of the appeal.” 3. Brief facts of the case 3.1. The assessee is a private limited company engaged in the business as Third party Administrator (TPA) of insurance companies. The assessee company derives income as TPA fees from insurance companies as a percentage of premium paid by policy holders to the insurance companies. The assessee company had filed the return of income on 29/9/2011 declaring a total income of Rs.12,47,60,240/-. The assessee’s case was taken up for scrutiny and notice u/s 142(1) was issued. During the course of asst. proceedings, the AO made following disallowances: 1) Disallowance of claims disallowed by insurance company – Rs. 4,68,655/- 2) Short term capital gain on slump sale – Rs.7,80,38,453/- 3) Software expenses – Rs. 16,42,976/- 3.2 Aggrieved by the order of the AO, the assessee filed appeal before the CIT(A). The CIT(A) partially allowed the appeal in favour of the assessee and upheld the computation of short term capital gain on slump sale computed by the AO at Rs.7,80,38,453/-. ITA No.1933/Bang/2018 Page 3 of 19 3.3. The assessee is before us against the order of the CIT(A) challenging the computation of short term capital gain by adding negative net worth of the assessee instead of restricting the net worth at NIL. 4. The brief facts of the issue under appeal before us is that the assessee company Medi Assist Insurance TPA Pvt. Ltd., had taken over pharma undertaking of Medybiz Pvt. Ltd., (MPL) in a scheme of arrangement from 01/4/2008. The assessee company on 16/6/2010 has sold the entire pharma undertaking to its wholly owned subsidiary Medybiz Pharma Pvt. Ltd., through slump sale. The assessee has offered the income from slump sale of pharma division at Rs.7,80,38,453/- under the head ‘income from other sources’ in the profit and loss account. In the computation of total income, the assessee has reduced the same from the profit and gains of business income under the head ‘Admissible’ thereby, arriving at a ‘nil’ income from the slump sale. 5. During the course of the assessment, the Ld.AO called for the details of computation of the net worth for which the assessee submitted the below details. The AO considering the provisions of the section 50B of the Income Tax Act (The Act) and relying on the decision of the Hon’ble Mumbai Special Bench in ITA No.4977/Mum/2009 in the case of M/s Summit Securities Ltd Vs DCIT (68 DTR 201) treated the negative net worth of Rs.7,80,38,353 as income from ITA No.1933/Bang/2018 Page 4 of 19 “Short Term Capital Gains” and added the same to the total income of the assessee 6. Before the CIT(A) the assessee submitted relying on the decision of Zuari Industries Ltd., Vs. ACIT 298 ITR (AT) 97 and Paperbase Co. Ltd., Vs. ACIT 19 SOT 163. 7. The CIT(A) summarized the observations of the Hon’ble Tribunal in the case of Zuari Industries Ltd., (Supra) highlighted as under - The if liabilities exceeded assets the net worth ought to be taken as Nil - That the capital computed should not exceed sale consideration in the normal course. - The net worth itself benefits a positive figure and as such cannot be negative at best this can be taken at nil - If labiality has to be added to the sale consideration, the same had then to be simultaneously reduced from the working of net worth. 8. The CIT(A) in his order relied on the decision of the Special Bench of the ITAT Mumbai, in the case of M/s Summit Securities Ltd., (Supra) where the Hon’ble Spl. Bench specifically considered and distinguishes the reasoning adduced in the case of Zuari Industries Ltd., (Surpa). The observations made by the Mumbai Spl. Bench in the case of M/s Summit Securities Ltd., (Supra) as under:- "17.3. Having held in the para 16 that the full value of consideration had 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 had 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 rational 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 ITA No.1933/Bang/2018 Page 5 of 19 minus All liabilities' of undertaking, which is a capital asset of typical kind. Consequently capital gain is computed 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 had 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." 9. The Ld.CIT(A) therefore upheld the working of the AO while arriving at chargeable capital gains at the figure of Rs.7,80,38,453/-. 10. Before us, the Ld.AR brought out the proposition adopted by Mumbai and Delhi Tribunal in the case of Zuari Industries Ltd., (Supra) and Paperbase Co. Ltd (Supra) respectively wherein it was held that the net worth of the division was taken as nil and would be deemed to be the cost of acquisition for capital gains on the following grounds. a. Capital gains is always a portion of sale consideration and, therefore, portion can never be higher than the whole. b. Gain would arise only where sale consideration is more than the cost. By no stretch of imagination, it can be said that capital gain would be more than the sale consideration. No man of prudence can ever think of capital gain higher than the sale consideration. Capital gain can either be excess of sale consideration over the cost or "Nil" if sale consideration is equal to cost. Where the cost is more than sale consideration, it would be a case of loss. No other situation can be visualized. Therefore, capital gain can never be more than the sale. ITA No.1933/Bang/2018 Page 6 of 19 c. The legislature has used the expression "net worth" which by deeming fiction is to be considered as cost of acquisition and cost of Improvement for the purpose of computing capital gain u/s 48. Section 48 of the Act provides for deduction or cost of acquisition/improvement from the full value of consideration received or accruing as a result of transfer of capital asset. The cost of a property, as per dictionary meaning, means the price paid by a buyer to the seller. Therefore, it must be a positive figure. That is why the legislature has provided for deduction of cost from sale consideration. d. Similarly, the word "worth, as per dictionary meaning, also means value of goods or asset or property, which also suggests positivity. No person would buy any property which is worthless. Further, the word; "worth" is qualified by the word "net" which would mean the net value of the property which is being sold or purchased. At best, value of the; property can be "Nil" but in our opinion, there is no concept of negativity with reference to the expressions "net worth" or "cost of acquisition", had the legislature also intended negative cost of acquisition, it would have used the words "by deducting from or adding to as the case may be" in Section 48 of the Act instead of the words "by deducting from" actually used by it. The language used by legislature in Section 48, thus, itself shows that it never intended negative cost of acquisition. e. Since "net worth" in Section 50B is deemed to be the cost of acquisition as per Sub-section (2) thereof, it must also have been intended by the legislature in positive. Therefore, the expression "reduced by" used by the legislature in Explanation-1 to Section 50B, has been used in the sense that net worth should be arrived at positive figure or at best be reduced to "Nil". Consequently, where the liabilities are more, then the value of assets as computed u/s SOB, the net worth, in our opinion, would be considered as "Nil".” 11. The Ld.DR supported the order of the Ld. CIT(A) and placed reliance on the decision of Hon’ble Mumbai Special Bench in the case of M/s Summit Securities Ltd (Supra). 12. We have heard both the parties and gone through the facts of the case. The only issue raised by the assessee is relating to addition of negative net worth while computing short term capital gain. Assessee considered the net worth at zero on slump sale. The various aspects of computation of capital gains where the net worth of an assessee is negative has been discussed ITA No.1933/Bang/2018 Page 7 of 19 elaborately in the decision of the Hon’ble Special Bench of the ITAT Mumbai in the case of M/s Summit Securities Ltd (Supra). 13. The Hon’ble Special Bench discussed the provisions of section 50B which is the special provision for computation of capital gains in case of Slump Sale. As this is the essence of the issue under consideration the relevant extract from the order of the Hon’ble Special Bench is reproduced here 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 : ITA No.1933/Bang/2018 Page 8 of 19 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 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 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 ITA No.1933/Bang/2018 Page 9 of 19 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. Therelevant 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 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 ITA No.1933/Bang/2018 Page 10 of 19 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 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 ITA No.1933/Bang/2018 Page 11 of 19 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 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 ITA No.1933/Bang/2018 Page 12 of 19 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 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. No. Particulars Book value Market value Agreed value 1 WDV of depreciable assets as per Balance Sheet 3 108 105 2 Non-depreciable tangible assets as per Balance Sheet 5 3 Non-depreciable intangible assets 0 4 Other assets 2 A Aggregate value of assets of the 10 108 105 ITA No.1933/Bang/2018 Page 13 of 19 undertaking 1 Secured loans 2 5 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 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 ITA No.1933/Bang/2018 Page 14 of 19 the capital asset and the full value of consideration, the cost of acquisition and cost of improvement cannot be anything but the Book value/w.d.v of `All assets minus All liabilities’ of the undertaking. This is what section 50B specifically provides that the cost of acquisition and cost of improvement of the undertaking, being the `net worth’ is `the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account’. 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 14. The Hon’ble special Bench in para 17.3 and 17.4 which is reproduced in para 8 of this order, mentions that to find a correct amount of capital gain it is sine qua non that all the three variables viz., full value of consideration, Net worth, & capital gain in this computation must match with their inherent contents being `All assets minus All liabilities’ of the undertaking. The Bench goes on to explain the manner of computation of capital gains with examples for both the cases positive net worth as well as where the net worth is a negative figure 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 ITA No.1933/Bang/2018 Page 15 of 19 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 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. No. Particulars Book value Market value Agreed value 1 WDV of depreciable assets as per Balance Sheet 108 105 2 Non-depreciable tangible assets as per Balance Sheet 3 Non-depreciable intangible assets 4 Other assets A Aggregate value of assets of the 10 108 105 ITA No.1933/Bang/2018 Page 16 of 19 undertaking 1 Secured loans 6 5 5 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 ITA No.1933/Bang/2018 Page 17 of 19 this background when we compute the capital gain 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) 15. In conclusion, the Hon’ble Special Bench held that that the Assessing Officer was not right in adding the amount of liabilities being reflected in the negative net worth to the sale consideration for determining the capital gains on account of slump sale. The Hon’ble Special Bench however agreed with the contention of the Revenue that the negative net worth cannot be ignored for working out the capital gains in case of a Slump Sale. 16. From the decision of the Hon’ble Special Bench in the case of M/s Summit Securities Ltd (Supra), findings are summarized as under: ITA No.1933/Bang/2018 Page 18 of 19 (i) Slump sale involves transfer of “an undertaking or a division” as one capital asset consisting of all its assets and liabilities (ii) 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”. (iii) The cost or net worth can never be in negative (iv) “Deducting” net worth from the full value of consideration for computing capital gain, automatically implies that whatever be the net worth, (that is positive or negative), will be taken care of accordingly. (v) 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. (vi) 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. (vii) Contents of all the three components viz. Capital gain, Full value of consideration and Net worth are common, that is, `All assets minus All liabilities’ of the undertaking. (viii) The computation of capital gain is from the transfer of `All assets minus All liabilities’ and hence both the Full value of consideration and Net worth must be of `All assets minus All liabilities’. ITA No.1933/Bang/2018 Page 19 of 19 17. Respectfully following the above, we hold that negative net worth cannot be ignored for computing capital gain on slump sale. We thus, direct the Ld.AO to compute the capital gains in accordance with the principles laid down by Hon’ble Special Bench in case of M/s. Summit Securities Ltd. (supra). 18. In the result, the appeal filed by assessee stands dismissed. Order pronounced in court on 15 th February, 2022. Sd/- Sd/- (B R BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, 15 th February, 2022 / vms / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore