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M/s. SRM Energy Ltd Versus Dy. CIT-2 (1) , Mumbai

2015 (9) TMI 799 - ITAT MUMBAI

Slump sale - CIT confirming addition of negative net worth of the undertaking transferred under the slump sale to the long term capital gain u/s 50B - Held that:- As decided in V Summit securities Limited case [2012 (3) TMI 176 - ITAT MUMBAI] the Assessing Officer was not right in adding the amount of liabilities being reflected in the negative net worth ascertained by the auditors of the assessee to the sale consideration for determining the capital gains on account of slump sale. However, we a .....

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ng out the income under the head profits and gains from business - Held that:- The computation of Total income filed by Assessee shows that assessee had starred the computation of business income from (-) ₹ 4,62,67,764/- as per profit and loss account and without increasing it further by the amount of any profit arising on the sale of the business undertaking which is chargeable to tax under the head capital gains and not under the head of profit and gains of the business and profession. I .....

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GH COURT] has held that the appellate authorities can admit new claim made before them,though the AO cannot admit such claim without filing of fresh return. We are of the opinion,that in the interest of justice, the matter should be restored back to the file of the FAA for fresh adjudication,who will decide the issue after affording a reasonable opportunity of hearing to the assessee. - Decided partly in favour of assessee.

Disallowance of sales tax deferral scheme - assessee had cont .....

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mentioned under circular no 496 is met by the assessee or not. Therefore, in the interest of justice,this ground of appeal is set aside to the file of AO with direction to verify the claim of the assessee in accordance with circular no 496 dated 25.09.1987 and decide the issue in accordance with law after providing proper opportunity to the assessee - Decided in favour of assessee for statistical purposes. - ITA No.495/Mum/2012 - Dated:- 31-8-2015 - Sh. A.D. Jain and Rajendra, JJ. For The Asse .....

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d in law the learned CIT (A) erred in not allowing the deduction of ₹ 2,03,46,191/- from the book profit arising out of the sale of undertaking by way of slump sale ,while working out the income under the head profit and gains of the from business. On the facts and circumstances of the case and in law, the learned CIT erred in upholding the disallowances u/s.43B of provisions for sale tax liability covered under sales tax deferral scheme amounting to ₹ 51,12,586/- Assessee-company, e .....

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ssment proceedings,the AO found that in pursuance of the scheme of amalgamation approved by the Hon ble high courts of Mumbai and Delhi the assessee sold its fabric lining and carpet manufacturing business to Hitkari hi-tech Filters private Limited on slump sale basis at a net consideration of ₹ 10 lakhs,that the net worth of the undertaking was certified at negative figure of Rs. (-) 3,38,69, 898/- as per para 6(e) of the form no 3CEA. However while filing the return of income assessee co .....

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quisition of the industrial undertaking would be taken as NIL. However,the AO was not convinced and held that as the negative a Net worth amounted to reduction in the liability payable by the assessee and it had got benefit of reduction of liability as remission as not payable, that it was clearly a gain in the hands of the assessee,that the decision of Zuari industries limited had not been accepted by the revenue and matter was pending before Hon ble Mumbai High court. Placing reliance on the d .....

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FAA confirmed the addition holding that the case of the Zuari Industries Limited was different,that the assessee had never proved that the industrial undertaking sold by the assessee was saddled with these liabilities. 2.2. During the course of hearing before us,the Authorised Representative fairly admitted before that the case was covered against the assessee by the decision of Special bench of ITAT delivered in the case of V Summit securities Limited(19 Taxmann. Com 102-Mum). We have carefull .....

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en 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 rationale 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 minus All liabilities of the undertaking, which is a capital asset of typical kind. Consequently .....

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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 i .....

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current value of liabilities remains the same as discussed in para 14.4 above. 17.5 Section 50B stipulates that the net worth of an undertaking is equal to the aggregate value of total assets of the undertaking as reduced by the value of liabilities. The aggregate value of the assets and the value of liabilities as per Expl. 2 is the w.d.v of the depreciable assets, book value of other assets and the book value of all the liabilities. To be more elaborate the aggregate value of total assets shal .....

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ability also having been transferred by the assessee. The order of the ld. CIT (A) also does not refer to any such contingent liability. So in the instant case the value of liabilities as per section 50B will be the book value of the liabilities of the undertaking. 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 (Rs. 10 towards assets minus ₹ 5 towards liabilities). The calculation of capital gain on the undert .....

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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 .....

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e 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 had 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 .....

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not be in negative. 17.11.1 The ld. AR argued that since the net worth of the undertaking represents cost of acquisition and cost of improvement of the undertaking, such cost can never be in negative. In other words it cannot be contemplated that a person purchades an asset without paying anything but rather taking something more from the seller. He contended that the Act had not ascribed any meaning to the words cost , worth , net worth in the context of section 50B and hence their dictionary m .....

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er liabilities to creditors . Taking clue from these meanings the learned AR came back to Explanation 1 to section 50B which defines net worth and contended that it cannot be considered at a negative figure. 17.11.2 We are not inclined to accept this submission. It is patent that the words net worth and cost have not been given any meaning for the purposes of section 50B. At the same time it equally relevant to note that these words have been used in the context of undertaking which itself refer .....

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ed to in section 50B as Undertaking . 17.11.3 The context of a provision cannot be ignored while finding out the meaning of particular word not defined in the provision or elsewhere in the Act. It had been observed by the Hon ble Supreme Court in several cases that a particular word occurring in one section of the Act, having a particular object cannot carry same meaning when used in different section of the same Act, which is enacted for different object. In Jt. CIT v. Saheli Leasing & Indu .....

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to understand the meaning of those words in the context in which they are used. Words in the section of a statue are not to be interpreted by having those words in one hand and the dictionary in the order. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve. In the case of CIT v. Anand Theatres [2000] 244 ITR 192/ 110 Taxman 338 (SC) it had been held by Their Lordships th .....

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rating words from their context to give each word some particular definition given by lexicographers and then to reconstruct the instrument upon the basis of those definitions. What particular meaning should be attached to words and phrases in a given instrument is usually to be gathered from the context, the nature of the subject-matter, the purpose or the intention of the author and the effect of giving to them one or the other permissible meaning on the object to be achieved. Words are after .....

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pertinent to note that net worth had been defined in section 50B itself as difference between the aggregate value of all assets and value of liabilities. It can be both ways, that is, in some case the aggregate value of all assets may be more than the value of all liabilities and in others it may be value of liabilities exceeding the aggregate value of all assets. In the former case it will be positive net worth and in the latter it will be negative net worth. Negative net worth is not something .....

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net worth can never be in negative, in our considered opinion, is too wide a proposition to be accepted in case of the capital asset in the nature of Undertaking . We, therefore, reject this contention. (ii) Why only negative net worth and not entire liabilities added ? 17.12.1 Taking a dig at the Departmental stand on adding the negative net worth, the ld AR argued in that view of the matter this logic should have then been extended to the entire liabilities of the undertaking worth ₹ 151 .....

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rrent value of such liabilities on a given date. In that view of the matter the figure of net worth is the result of consideration of current value of liabilities which also happens to be their book value vis-Ã-vis the only written down value book value of the assets. If the amount of all liabilities is added to the full value of consideration of the undertaking, it will mean that current/book value of liabilities to the extent it equalizes book value/w.d.v. of the assets had been conside .....

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s to ₹ 95 which is eventually the same figure as the capital gain from the transfer of bundle of assets as one unit. If however we go by the contention of the ld. AR that the entire amount of liabilities should have been added, and add the figure of total liabilities of ₹ 15 to the full value of undertaking of ₹ 90, the figure of ₹ 105 will emerge. It can be seen that ₹ 105 is the agreed value of the bundle of assets of the undertaking and not the amount of capital .....

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8. (iii) Section 48 uses the words deducting from and not adding to 17.13.1 The next leg of the ld. AR s submission was that section 48 clearly provides that the capital gain shall be computed by deducting from the full value of the consideration received or accruing as a result of transfer of a capital asset inter alia the cost of acquisition of the asset and the cost of any improvement thereto, which in the present case is the amount of net worth as per section 50B. He contended that in such a .....

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to zero. 17.13.2 This contention is again devoid of merits. The reason is obvious for using the words deducting from in section 48 and not deducting from or adding to to the full value of consideration received or accruing as a result of transfer of the capital asset. When we talk of deducting net worth from the full value of consideration for computing capital gain u/s 48, it automatically implies that whatever way the net worth be, that is positive or negative, it will be taken care of accord .....

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ue of consideration and net worth , then the ridiculous results would have followed. Talking of the net worth in negative and considering it in juxtaposition to adding to the full value of consideration, would have had the effect of again reducing it because of the simultaneous use of words negative and adding to in the provision. The legislature had very rightly used the words deducting from only to make its intention clear that for determining the income chargeable under the head Capital gains .....

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is determined by reducing the cost of acquisition and cost of improvement there from. He illustrated his submission by explaining that if a particular asset is sold for ₹ 100, the capital gain cannot be more than ₹ 100 in any case. It had to be ₹ 100 itself in case there is no cost of acquisition or less than that to the extent of the positive cost of acquisition. On the basis of this submission he argued that when the sale consideration of the undertaking is ₹ 143 crore .....

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ssets minus All liabilities), the net worth i.e. cost of acquisition and cost of improvement had also to be of the undertaking (All assets minus All liabilities). In a case where the book value of liabilities is less than the book value/written down value of the assets of the undertaking, the amount of capital gain will be less than the full value of consideration of the undertaking. But if the book value of liabilities is more than the book value/written down value of assets, as is the case und .....

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nds embedded in and had the effect of reducing the full value of consideration accordingly. As such we are not inclined to accept this contention raised on behalf of the assessee. (v) The words as reduced by pre-suppose that preceding figure is higher than the succeeding 17.15.1 The ld. AR contended that Explanation 1 to section 50B provides that the 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 .....

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e possible. The sum and substance of his submissions was that in case the value of liabilities is more than the aggregate value of the total asset then such value of liabilities should be restricted to the aggregate value of total assets thereby giving the amount of net worth at Rs. Nil. He also took us through Clause no. 315 of the Direct Tax Code Bill, 2010 which provides that any direction for aggregation of two or more items shall be construed also to include a direction for aggregation of n .....

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d always be understood to mean that the aggregate value of total assets will be more than the value of liabilities. The dictionary meaning of the word reduced is of no relevance in the computation of capital gain from the transfer of slump sale for the reasons discussed above. The context of a provision is relevant for understanding the meaning of a word which had not been defined in the statute. To contend that the words as reduced by used in Explanation 1 can never have the effect of the value .....

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ities are more than the total assets. The contention that the liabilities cannot be more than the aggregate value of assets, therefore, fails at the very outset. The further argument that if the value of liabilities is more than the aggregate value of total assets then the net worth should be restricted to zero, runs contrary to the main argument that the words as reduced by can never mean that the value of liabilities will be more than the aggregate value of the assets. 17.15.3 Insofar as the r .....

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s amounts, shall be construed also to include a direction for aggregation of negative and positive amounts in all their combinations; (c) the value of any variable in a formula shall be deemed to be nil, if the value of such variable is indeterminable or unascertainable. 17.15.4 The first component of this clause is that the income can be both negative and positive. The second sub-clause is about aggregation of two or more items which may give the negative and also positive amounts. It is beyond .....

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dealing with the computation of income under Chapter IV-D states that the income shall be chargeable to income-tax under the head Profits and gains of business or profession . Even though the reference had been made only to the Profits and gains of business or profession , but it is quite clear that there can be income as well as loss under the head. Can anyone imagine that if there is a loss under the head Profits and gains of business or profession then that should be ignored because the refer .....

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answer to all these questions is simple and plain that a reference to an income under the provisions of Income-tax Act, 1961 automatically refers to the loss as well. What is true for the income in both positive and negative terms is equally true for other items as well. Most importantly it is relevant to note the positioning of Clause 315 in the Direct Tax Code Bills, 2010. It had been incorporated under Chapter XVI with the heading Interpretations and Constructions . It is not as if it had be .....

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o note that the cost of acquisition and cost of improvement of an undertaking or its net worth had been incorporated in section 50B(2) by way of a deeming provision. It had been made clear in sub-section (2) that 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 or improvement for the purposes of sections 48 and 49 . It is trite that a deeming provision or a legal fiction presumes a hypothetical state of affairs and m .....

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departure from the meaning and scope of the word, phrase or expression to which it is attached, it is but natural that such artificial meaning must have full application in that regard. To put it simply a deeming provision had to be brought to a logical conclusion. Coming back to section 50B(2) it is observed that by this deeming provision the net worth of the undertaking had been explained to mean the aggregate value of total assets of the undertaking or the division as reduced by the value of .....

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d 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 had to be invariably accepted in both the situations whether it is positive or negative. If we accept this contention of the learned AR that the amount of negative net worth determined u/s 50B should be taken as zero, then it would mean creating one more legal fiction by ourselves within the existing legal fiction which .....

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hat the deduction u/s 80HHC(3)© can be allowed only if there is a positive profit on the exports of both self manufactured goods as well as trading goods and if there is a loss in either of the two then the loss had to be taken into account for the purpose of computing profits. The facts of that case are that there was a loss of ₹ 6.86 crore from the export of trading goods and profit of ₹ 3.78 crore from export of self-manufactured goods. The assessee claimed deduction u/s 80HH .....

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his strength of this judgment that the learned AR contended that the figure of negative net worth computed u/s 50B be also ignored and taken as nil as had been done by the Hon ble Supreme Court in this case. 17.15.7 There is no merit what so ever in this contention. The ratio decidendi in the case of IPCA Laboratory Ltd. (supra) operates in an altogether different field, being the eligibility or otherwise of deduction u/s 80HHC in case there is loss from one set of exports and profit from the ot .....

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duction, but if the net figure is a loss then the assessee will not be entitled to deduction. At this juncture it will be relevant to note that section 80AB clearly provides that the deductions are to be made with reference to the income included in the gross total income. This section states that where any deduction is required to be made or allowed under any section included in this Chapter under the heading C. Deductions in respect of certain incomes in respect of any income of the nature spe .....

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ides that the aggregate amount of the deductions under this Chapter shall not in any case exceed the gross total income of the assessee and the gross total income had been defined u/s 80B(5) to mean the total income computed in accordance with the provisions of this Act before making any deduction under this Chapter. Basically there are deductions either based on certain payments or in respect of certain incomes. The overall amount of all the deductions can in no case exceed the gross total inco .....

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il the benefit of deduction. And no deduction is available when there is either no eligible income at all or a loss. In both such cases the amount of deduction will be Nil. Section 80HHC falls in Chapter VI-A C. Deductions in respect of certain incomes . Unless there is an income from exports included in the gross total income, there cannot be any deduction in respect of section 80HHC. The existence of a positive income is a requisite condition to claim deduction under the relevant section falli .....

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ling with section 45 read with sections 48 and 50B providing for the computation of capital gain on the transfer of capital asset. Section 45 recognizes not only the positive income chargeable to tax as capital gain but also loss from the transfer of capital assets which is available for set off and carry forward in the same or subsequent years as per the provisions of Chapter Set off, or carry forward and set off consisting of sections 70 to 80. Unlike section 80HHC which provides for deduction .....

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ear that the reliance of the learned AR on the case of IPCA Laboratory Ltd. ( supra) for contending that the negative figure of net worth be ignored, is clearly misconceived. We, therefore, reject the contention that the words as reduced by in section 50B pre-suppose that the aggregate value of all the assets must be invariably more than the total liabilities and in case it is not so, then the resultant negative figure should be taken as zero. 17.15.8 In support of the contention that the negati .....

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sis of compromise on which the Hon ble Bombay High Court held that stamp duty would be payable by the party. It was further observed that under the amalgamation scheme, what is transferred is a going concern and not assets and liabilities separately. As a going concern what is the value of the properties is to be taken into consideration. The learned Advocate General in that case contended that the stamp duty should be recovered on the market value of shares of the transferee company allotted to .....

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gain only the full value of consideration should be taken and the net worth representing excess of liabilities over the book value of assets should be ignored. 17.15.9 Stamp duty is always charged on the sale consideration. In that case the Hon ble High Court held that the stamp duty was payable on the sale consideration of the undertaking as one unit without increasing it with the amount of liabilities transferred. In fact it supports the contention of the ld. AR, which had been accepted by us .....

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mount as per the facts of the case is ₹ 143 crore and not ₹ 105 akin to ₹ 300 crore as per facts prevailing before us. Besides that, this judgment does not support the point that negative net worth should also be ignored for calculating the capital gain. Here it is pertinent to note that presently we are not concerned with only the determination of sale consideration of the undertaking but also the capital gain on its transfer, which obviously on a macro level refers to the sal .....

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en payable on the profit from the transfer of undertaking and not the sale consideration. Moreover this is basically a case under the Bombay Stamp Act and that too in the context of amalgamation under section 394 of the Companies Act, 1956, whereas we are not confronted with the question of determination of any stamp value much less in the amalgamation. We, therefore, hold that the reliance of the ld. AR on this judgment in any context other than the question of determination of full value of co .....

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business of manufacture and sale of cars. It entered into a joint venture agreement with a foreign company to establish a joint venture company. The assessee sold one of its business undertakings as a whole to the joint venture company for a lump sum consideration. The Assessing Officer took it as a case of sale of itemized assets and allocated sale value to building, plant and machinery and paint shop. After deducting written down value there from, he calculated short term capital gain. The Hon .....

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ld have been done on the business as a whole which business itself is a capital asset. The matter was eventually remanded to the Assessing Officer for computation of capital gain on sale of business in its entirety u/s 45 read with sections 2(42C) and 50B. We fail to appreciate as to how this case supports the assessee s contention in any manner. In the present case also the assessee sold the entire undertaking as one unit and the Assessing Officer had not computed capital gain on different asse .....

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mposite figure thereby giving the net amount of capital gain of ₹ 95 from the transfer of the undertaking as one capital asset and not any separate capital gain arising from the transfer of individual assets. Both the assets and liabilities have been considered as one composite unit and the eventually full value of consideration is for the undertaking as a whole and not towards any separate assets or liabilities. It can be noticed that in that case the computation of capital gain was remit .....

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(All assets minus All liabilities) as a result of the transfer of undertaking (-) Net worth or the cost of acquisition and cost of improvement (All assets minus All liabilities) of the undertaking. 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. It had to be so because we are computing capital gain on the transfer of the undertaking which is again nothing but All assets mi .....

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ssets minus only ₹ 1360 crore towards Part of all liabilities{total liabilities are ₹ 1517 crore}). Obviously it cannot be so because 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 . 20. In view of the detailed discussion made above, we are with utmost respect unable to concur with the view expressed by the Mumbai Bench of the Tribunal in .....

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in its appeal by holding that the CIT(A) was not correct in coming to the conclusion that the negative figure of the net worth of ₹ 157 crore should be ignored for working out the capital gains in case of a slump sale. The summary of our conclusion is that the amount of Net worth will be a negative figure of ₹ 157 crore and not Zero. Resultantly the amount of capital gain chargeable to tax will be ₹ 300 crore and not ₹ 143 crore as declared by the assessee. Respectfully, .....

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he assessee-company,that the sum was not added to the loss of the company while making the computation of total income,that the amount of profit on sale of asset was clubbed under the head of extra ordinary items in the profit and loss account,that the amount was also not excluded by the AO while passing the order,that mistake came to knowledge of the assessee and it raised the issue before the FAA,that the he did not consider the claim by it and observed that no application u/s 154 of the act f .....

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account and without increasing it further by the amount of any profit arising on the sale of the business undertaking which is chargeable to tax under the head capital gains and not under the head of profit and gains of the business and profession. It had credited extra-ordinary item in the profit and loss account of ₹ 2,55,74,116/-. As per note no B (6) of schedule 12 of the balance sheet at serial no item no 10 shows profit on sale of non-woven fabrics business under slump sale an amount .....

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ion,who will decide the issue after affording a reasonable opportunity of hearing to the assessee. Ground no.2 is allowed in favour of the assessee, in part. 4. Third ground of appeal is against disallowance of ₹ 51,12,586/- pertaining to sales tax deferral scheme. During the assessment proceedings,the AO found that the assessee had debited an amount of ₹ 1,05,10,218/- on account of sales tax. He held that the amount of sales tax liability was pertaining to the unit sold by the asses .....

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