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News Alert
12 March, 2012
Negative net worth to be added to sale consideration for determining capital gains on slump sale
In brief
Facts
In a recent ruling in the case of Summit Securities Ltd. 1, the Mumbai Special
Bench of the Income-tax Appellate Tribunal (the Tribunal) held that negative net
worth of an undertaking should not be ignored / disregarded for determining the
capital gains on a slump sale. The Tribunal held that net worth, when it is a
negative figure, cannot be equated to zero and the same should be added to the
sale consideration to arrive at capital gains.
•
The assessee is engaged in the business of real estate, investment activities,
manufacturing of transmission line towers and undertaking turnkey projects in
India and abroad.
•
Pursuant to a scheme of arrangement, the assessee transferred its power
transmission business to KEC International Ltd. by way of slump sale for a
total consideration of INR 1.43 billion.
•
In its audit report, the assessee declared the net worth of the undertaking as a
negative sum of INR 1.57 billion.
1
DCIT v. Summit Securities Limited [TS-140-ITAT-2012 (Mum)]
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PwC News Alert
March 2012
Issue
Why was only negative net worth and not entire liabilities added ?
Would it be correct to add negative net worth of the undertaking to the
consideration received for determining capital gains on that sale?
•
Assessing Officer’s views
The assessing officer was of the view that capital gains should be computed at INR
3 billion by either:
•
Taking the sale consideration at INR 3 billion (INR 1.43 billion +INR 1.57
billion) on account of the liabilities taken over; or
•
Adding negative net worth of INR 1.57 billion to the amount of sale
consideration to arrive at capital gains.
If negative net worth has to be added to the sale consideration, then logically
the entire liabilities of the undertaking amounting to INR 15.17 billion should
be added and not only the negative net worth of INR 1.57 billion, which is a
fraction of the total liabilities.
Section 48 uses the words ‘deducting from’ and not ‘adding to’
•
The assessee further submitted that section 48 of the Income-tax Act, 1961 (the
Act) clearly provides that capital gains shall be computed by deducting the full
value of the consideration received or accruing from the cost of acquisition of
the asset and the cost of any improvement.
•
If the negative net worth is added to the full value of consideration, it will be
against the language of the section.
•
Furthermore, the assessee 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 instead of
“deducting from.”
Ruling of Commissioner of Income-tax (Appeals)
•
The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the assessee’s
contention that negative net worth should be ignored for determining capital
gains on slump sale.
•
The CIT(A) relied on the decisions of the Mumbai and the Delhi Tribunal in
the case of Zuari Industries Ltd2 and Paper Base Co Ltd3 respectively.
Capital gains cannot be more than full value of consideration
•
Assessee’s contentions
The amount of capital gains is always a part of the full value of consideration,
which is determined by reducing the cost of acquisition and the cost of
improvement. These gains cannot be more than full value of consideration.
Cost of acquisition cannot be negative
•
The net worth of the undertaking represents the cost of acquisition and cost of
improvement of the undertaking. This cost can never be negative.
The words ‘as reduced by’ pre-suppose that preceding figure is higher
than the succeeding
•
2
3
The assessee contended that section 50B of the Act provides that 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’.
Zuari Industries Ltd. v. ACIT [2007] 105 ITD 569 (Mum)
Paper Base Co. Ltd. v. CIT [2008] 19 SOT 163 (Del)
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PwC News Alert
March 2012
•
In the event that the value of liabilities is more than the aggregate value of the
total asset, then the value of liabilities should be restricted to the aggregate
value of total assets, thereby considering the amount of net worth of the
undertaking as zero.
Tribunal Ruling
•
Conclusion
The Tribunal held that the amount of liabilities should not be added to the sale
consideration for determining capital gains on account of the slump sale. The
Tribunal also affirmed that negative net worth should be added to the sale
consideration, thereby negating the views expressed in the case of Zuari Industries
Ltd. (above) and Paper Base Co. Ltd. (above).
The Tribunal held that the amount of net worth will be a negative sum of INR
1.57 billion and not zero. The amount of capital gains chargeable to tax will be
INR 3 billion, and not INR 1.43 billion as declared by the assessee.
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