Dy. CIT v. Summit Securities Ltd.

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The Tax Publishers2012 TaxPub(DT) 1833 (Mum-Trib) : (2012) 135 ITD 0099 : (2012) 145 TTJ 0273 : (2012) 068 DTR 0201 : (2012) 015 ITR (Trib) 0001 INCOME TAX ACT, 1961 --Appeal [Tribunal]--Powers of Tribunal Admissibility of additional ground--Issue as to whether the negative net worth of assessee's undertaking would be taken as zero or in negative, which has a direct bearing on computation of capital gains on slump sale is required to be admitted as it does not require investigation of fresh facts. Moreover, it is not within the power of Tribunal but also its duty to decide the said issue. 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 Rs. 300 crore and the second, which appears to be alternative is that the Commissioner (Appeals) was not justified in ignoring the negative figure of net worth for computing capital gain on the sale of PTB. The Special Bench has been constituted to determine as to 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 Departmental Representative, apart from emphasizing that the sale consideration should be taken at Rs. 300 crore has also assailed the finding of the learned first appellate authority by urging in alternative that the figure of net worth at a negative of Rs. 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 Rs. 143 crore, the negative net worth of Rs. 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 Rs. 300 crore. His alternative contention can be simply depicted as follows : Full value of consideration of the undertaking (Rs. 143 crore) as reduced by the net worth of the undertaking (- Rs. 157 crore) giving capital gain of Rs. 300 crore [Rs. 143 crore minus (-) Rs. 157 crore or in other words, Rs. 143 crore plus (as minus into minus is equal to plus) Rs. 157 crore]. 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 this Bench 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 this Bench 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 ITAT Rules, 1963 which 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 Commissioner (Appeals) for ignoring the negative figure of net worth but the learned Departmental Representative also made submissions on this point. The Tribunal not only allowed him to argue on other aspects but also invited the learned senior Authorised Representative to address on the question of negative net worth held by the Commissioner (Appeals) to be taken as zero. Thus, the prescription of rule 11 is fully satisfied. In the present case it is not as if the Departmental Representative has taken leave to argue any additional ground. Ground No. 2 of the Revenue's appeal specifically challenges the finding of the Commissioner (Appeals) 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, it is not only within the power of the Tribunal but also 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. Income Tax Act, 1961 Section 254(1) ITAT Rules, 1963 Rule 11 INCOME TAX ACT, 1961 --Capital gains--Computation Slump sale vis-a-vis full value of consideration negative net worth--The assessee-company was engaged in the business of real estate, investment activities, manufacturing of transmission line towers and undertaking turnkey projects in India and abroad. In the return filed for the immediately preceding year i.e. assessment year 2005-06 the assessee claimed long-term capital loss of Rs. 2,78,98,07,932 on slump sale. While finalizing the assessment order for such earlier year, the assessing officer did not consider long-term capital gain on slump sale by observing that the scheme for the transfer of undertaking came into operation after closure of business hours of 31-3-2005. 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 Rs. 281.41 crore in the current year. In the revised return, the long-term capital loss was increased to Rs. 3,26,78,73,707. Once again a revised computation of long-term capital gain was filed showing long-term capital loss at Rs. 3,12,94,43,625. Factual matrix leading to the capital loss is as follows : A composite scheme of arrangement between the assessee-company, KEC International Ltd. (formerly, KEC Infrastructure Ltd.), BF Ltd. (subsidiary of the company), KEC H Ltd. and the respective shareholders under section 391 of the Companies Act, 1956 was approved by the High Court of judicature at Mumbai on 27-9-2005. The composite scheme was for sale of 'investments' by the assessee-company to KECH Ltd. and sale of the 'power transmission business' ('PTB') to KEC Infrastructure Ltd, (later came to be known as KEC Inter Ltd.) and the merger of BF Ltd. with KEC H Ltd. The scheme was presented to the Bombay High Court on 28-6-2005 and it was approved on 27-9-2005 with effect from the closure of the business hours on 31-3-2005 or say w.e.f. 1- 4-2005. 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 Inter Ltd. for a total consideration of Rs. 143 crore. The assessee claimed this transaction as a slump sale under section 50B and audit report under section 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 Rs. 157.19 crore. As such, the entire sale consideration of Rs. 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 H Ltd. for a consideration of Rs. 115 crore and claimed long-term capital loss of Rs. 455.94 crore thereon. In the present appeal, this Special Bench is 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 Rs. 143 crore by way of equity and preference shares. It received 3,76,35,858 equity shares of Rs. 10 each fully paid-up at a total premium of Rs. 92.36 crore. The assessee also received 12,99,966 preference shares of Rs. 100 each. The receipt of these equity and preference shares constituted total sale consideration of Rs. 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 under section 50B(3) and the valuer's report, the assessing officer held that PTB was not sold at an arm's length. Considering the net worth of the assessee-company at a negative figure of Rs. 1,57,19,00,953, the assessing officer came to hold vide para 4.2 of the assessment order : 'that the total consideration ought to have been received of Rs. 300 crore (Rs. 143 crore + Rs. 157 crore) on slump sale, which is to be treated as long-term capital gains on slump sale'. To fortify his view, the assessing officer 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 Rs. 391 crore, even if finally the fair value was fixed at Rs. 143 crore. He further noted that the report of the valuer was prepared in the context of scheme under sections 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 ALP. The Commissioner (Appeals) accepted the contention advanced on behalf of the assessee in para 3.11 of the impugned order that the 'net worth' as defined under section 50B cannot be a negative figure and in case it is so, that is, where the liabilities are more than the value of assets as computed under section 50B, then for the purposes of computing capital gain under section 48, the net worth would be considered as nil. Held: For computing capital gains on slump sale the negative figure of net worth cannot be ignored as the amount of net worth would be zero and amount of net worth would be negative figure. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1833 (Mum-Trib) : (2012) 135 ITD 0099 : (2012) 145 TTJ 0273 : (2012) 068 DTR 0201 : (2012) 015 ITR (Trib) 0001

INCOME TAX ACT, 1961

--Appeal [Tribunal]--Powers of Tribunal Admissibility of additional ground--Issue as to whether the negative net worth of assessee's undertaking would be taken as zero or in negative, which has a direct bearing on computation of capital gains on slump sale is required to be admitted as it does not require investigation of fresh facts. Moreover, it is not within the power of Tribunal but also its duty to decide the said issue.

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 Rs. 300 crore and the second, which appears to be alternative is that the Commissioner (Appeals) was not justified in ignoring the negative figure of net worth for computing capital gain on the sale of PTB. The Special Bench has been constituted to determine as to 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 Departmental Representative, apart from emphasizing that the sale consideration should be taken at Rs. 300 crore has also assailed the finding of the learned first appellate authority by urging in alternative that the figure of net worth at a negative of Rs. 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 Rs. 143 crore, the negative net worth of Rs. 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 Rs. 300 crore. His alternative contention can be simply depicted as follows : Full value of consideration of the undertaking (Rs. 143 crore) as reduced by the net worth of the undertaking (- Rs. 157 crore) giving capital gain of Rs. 300 crore [Rs. 143 crore minus (-) Rs. 157 crore or in other words, Rs. 143 crore plus (as minus into minus is equal to plus) Rs. 157 crore]. 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 this Bench 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 this Bench 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 ITAT Rules, 1963 which 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 Commissioner (Appeals) for ignoring the negative figure of net worth but the learned Departmental Representative also made submissions on this point. The Tribunal not only allowed him to argue on other aspects but also invited the learned senior Authorised Representative to address on the question of negative net worth held by the Commissioner (Appeals) to be taken as zero. Thus, the prescription of rule 11 is fully satisfied. In the present case it is not as if the Departmental Representative has taken leave to argue any additional ground. Ground No. 2 of the Revenue's appeal specifically challenges the finding of the Commissioner (Appeals) 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, it is not only within the power of the Tribunal but also 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.

Income Tax Act, 1961 Section 254(1)

ITAT Rules, 1963 Rule 11

INCOME TAX ACT, 1961

--Capital gains--Computation Slump sale vis-a-vis full value of consideration negative net worth--The assessee-company was engaged in the business of real estate, investment activities, manufacturing of transmission line towers and undertaking turnkey projects in India and abroad. In the return filed for the immediately preceding year i.e. assessment year 2005-06 the assessee claimed long-term capital loss of Rs. 2,78,98,07,932 on slump sale. While finalizing the assessment order for such earlier year, the assessing officer did not consider long-term capital gain on slump sale by observing that the scheme for the transfer of undertaking came into operation after closure of business hours of 31-3-2005. 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 Rs. 281.41 crore in the current year. In the revised return, the long-term capital loss was increased to Rs. 3,26,78,73,707. Once again a revised computation of long-term capital gain was filed showing long-term capital loss at Rs. 3,12,94,43,625. Factual matrix leading to the capital loss is as follows : A composite scheme of arrangement between the assessee-company, KEC International Ltd. (formerly, KEC Infrastructure Ltd.), BF Ltd. (subsidiary of the company), KEC H Ltd. and the respective shareholders under section 391 of the Companies Act, 1956 was approved by the High Court of judicature at Mumbai on 27-9-2005. The composite scheme was for sale of 'investments' by the assessee-company to KECH Ltd. and sale of the 'power transmission business' ('PTB') to KEC Infrastructure Ltd, (later came to be known as KEC Inter Ltd.) and the merger of BF Ltd. with KEC H Ltd. The scheme was presented to the Bombay High Court on 28-6-2005 and it was approved on 27-9-2005 with effect from the closure of the business hours on 31-3-2005 or say w.e.f. 1- 4-2005. 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 Inter Ltd. for a total consideration of Rs. 143 crore. The assessee claimed this transaction as a slump sale under section 50B and audit report under section 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 Rs. 157.19 crore. As such, the entire sale consideration of Rs. 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 H Ltd. for a consideration of Rs. 115 crore and claimed long-term capital loss of Rs. 455.94 crore thereon. In the present appeal, this Special Bench is 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 Rs. 143 crore by way of equity and preference shares. It received 3,76,35,858 equity shares of Rs. 10 each fully paid-up at a total premium of Rs. 92.36 crore. The assessee also received 12,99,966 preference shares of Rs. 100 each. The receipt of these equity and preference shares constituted total sale consideration of Rs. 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 under section 50B(3) and the valuer's report, the assessing officer held that PTB was not sold at an arm's length. Considering the net worth of the assessee-company at a negative figure of Rs. 1,57,19,00,953, the assessing officer came to hold vide para 4.2 of the assessment order : 'that the total consideration ought to have been received of Rs. 300 crore (Rs. 143 crore + Rs. 157 crore) on slump sale, which is to be treated as long-term capital gains on slump sale'. To fortify his view, the assessing officer 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 Rs. 391 crore, even if finally the fair value was fixed at Rs. 143 crore. He further noted that the report of the valuer was prepared in the context of scheme under sections 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 ALP. The Commissioner (Appeals) accepted the contention advanced on behalf of the assessee in para 3.11 of the impugned order that the 'net worth' as defined under section 50B cannot be a negative figure and in case it is so, that is, where the liabilities are more than the value of assets as computed under section 50B, then for the purposes of computing capital gain under section 48, the net worth would be considered as nil. Held: For computing capital gains on slump sale the negative figure of net worth cannot be ignored as the amount of net worth would be zero and amount of net worth would be negative figure.