DCIT vs. Summit Securities Ltd (ITAT Mumbai Special Bench)

For s. 50B “Slump Sale”, liabilities reflected in “negative net worth” cannot be treated as “consideration” but the resultant “negative net worth” has to be added to the “consideration”

Pursuant to a scheme of arrangement u/s 391 & 394 of the Companies Act, the assessee transferred its “Power Transmission Business” to KEC International Ltd for a total consideration of Rs. 143 crores. The assessee claimed this transaction to be a “slump sale” u/s 50B. The “net worth of the undertaking” was computed at a negative figure of Rs.157.19 crores, being the excess of liabilities over assets. The assessee treated the net worth as Nil and 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, the same had to be added to the consideration of Rs. 143 crores to arrive at the “full value of consideration” of Rs. 300 crores. The CIT (A), relying on Zuari Industries 105 ITD 569 (Mum) & Paper Base Co 19 SOT 163 (Del), held 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 excess of liabilities over assets could be treated as “consideration” in the hands of the assessee & (ii) whether the resultant “negative net worth” could be treated as Nil or had to be added to the “consideration”? HELD by the Special Bench:

(i) On the issue as to the “full value of consideration“, the department’s argument that since the transferor’s liabilities have been taken over by the transferee, it would have to be treated as consideration received by the transferor is not acceptable. In the case of a slump 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. 143 crore does not represent the full value of consideration of the undertaking. Accordingly, the “consideration” is Rs. 143 crores and not Rs. 300 crores as calculated by the AO (George Henderson 66 ITR 622 (SC), Gillanders Arbuthnot 87 ITR 407 (SC) & Attili N. Rao 252 ITR 880 (SC) distinguished);

(ii) On the issue as to the “net worth” of the undertaking, the assessee’s argument that if the net worth is negative (excess of liabilities over assets), it should be taken at Nil is not acceptable. Though, in 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 would 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)