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M/s. Wockhardt Hospitals Limited Versus Addl. CIT-10 (1) , Mumbai and Vice-Versa

2017 (1) TMI 982 - ITAT MUMBAI

Addition on account of negative net worth of the undertaking under slump sale while computing capital gains u/s.50B - Held that:- We find that the assessee and FHL had entered into a business agreement, that as per the agreement excess liabilities arising during the transition period had to be adjusted from the lump-sum amount of ₹ 186.58 crores,that during the process of transaction liability of ₹ 43.36 crores arose. In these circumstances, the FAA had rightly held that lump-sum con .....

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#8377; 15 crores was kept in the said account for settling the future liabilities,that the assessee was to receive the amount from the Escrow a/c.after a period of 2 years,that a liability amounting to ₹ 2.79 crores arose and was settled during the year,that the assessee had filed a revised return and made the claim about it, that there is no doubt about the incurring of the expenditure.The assessee had produced necessary evidences in that regard and same were found to be genuine by the FA .....

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th the order of the FAA,as four hospitals of the assessee were owned by it for a period of more than 36 months and that it is a case of slump sale.Upholding his order,we dismiss Gr.No.2. - Disallowance u/s 14A - Held that:- We find that assessee had not earned any exempt income during the year, nor had it claimed any expenditure against any tax free income.Thus,the twin pre-condition for invoking the provisions of section 14A r.w.r.8D of the Rules i.e.,earning of exempt income and claiming e .....

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r. Assessee-company,engaged in the business of running hospitals,filed its return of income on 15/10/2010.A revised return was filed on 01/03/2012,declaring income at ₹ 8.19 crores.The AO completed the assessment,u/s.143 (3) of the Act,on 28/03/2013, determining its income at ₹ 325.89 crores. ITA/7454/Mum/2013: 2. First ground of appeal,raised by the assessee,is about addition to the extent of ₹ 252.61 crores on account of negative net worth of the undertaking under slump sale .....

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as per clause 3 of the agreement. He observed that computation of cost of acquisition and cost of improvement for slump sale was governed by section 50B of the Act,that as per the provisions of the said section net worth was being to be the cost of acquisition and cost of improvement, that the networks was to be computed on the basis of reducing the aggregate liabilities from the aggregate assets,that in the case under considera - tion the net worth of the assessee was negative,that the liabilit .....

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the Authorised Representative (AR)fairly considered that issue stands covered against the assessee by the above referred order of the Summit Securities Ltd.(supra).We are reproducing the relevant portion of the order and it reads as under: "(ii) That the Assessing Officer had observed that the sale consideration of ₹ 143 crores was not at arm's length and that was why he adopted the figure at ₹ 300 crores adding the negative net worth to the declared sale consideration. By e .....

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icer for determining the so-called fair market value of the undertaking to substitute it with its full value of consideration received or accruing. He had simply added the amount of negative net worth to the consideration received for determining the so called 'fair market value" of the undertaking to substitute it with the full value of consideration received or accruing. Thus the process of determining fair market value as adopted by the Assessing Officer had no sanction of law. The a .....

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o all the liabilities of the undertaking, a part of such liabilities representing negative net worth could not be again added to the sale consideration. Once the sale consideration had been approved by the High Court, the Department was not entitled to contend that the consideration of ₹ 143 crores did not represent the full value of consideration of the undertaking. The full value of consideration of the undertaking for the purposes of computing the capital gains under section 48 should b .....

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res it automatically implied that the liabilities are more than the total assets. The contention that the liabilities could not be more than the aggregate value of assets, therefore, failed. 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, ran contrary to the argument that the words "as reduced by" can never mean that the value of liabilities will be more than the aggregat .....

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owing the above,first ground of appeal is decided against the assessee. 4.Ground number two deals with levy of interest u/s. 234B of the Act and same is consequential in nature. ITA/7021/Mum/2013: 5.Ground 1.a.,raised by the AO,is about deleting the disallowance,amounting to ₹ 18.43 crores.During the assessment proceedings,the AO found that the assessee had claimed expenditure of ₹ 18,43,30,378/- under the head expenses incurred in connection with slumpsale. He held that section 50B .....

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of the Act were subject to the provisions of section 45 and section 48, that there was nothing in the section about the expenses incurred with regard to slump said, that the section dealt with cost of acquisition and improvement only.The assessee referred to the Case of Summit Securities Ltd (supra) in its support.After considering the submission of the assessee and the assessment order, the FAA held that the assessee had incurred expenditure of ₹ 18.43 crores for transfer of hospital, th .....

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lt the issue as under: "(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 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 .....

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th the mode of such computation as prescribed therein. The modus operandi to compute capital gain from the transfer undertaking thus provides for reducing the cost of 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 .....

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of lower rate of taxation on long term capital gain as provided under section 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 though it to curtain the benefit of indexation to the cost of acquisition and cost of improvement. Respectfully,following the above order of the Tribunal,we decide ground 1.a against the AO. 6.Ground 1.b(i) deals with deleting the enhancement of slump .....

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had to be open for two years for amount of ₹ 15 crores between the two parties from the amount and if any further claimed were there same were to be adjusted from the above amount.The AO did not allow the deduction which occurred during the course of transaction,stating that it amounted to double deduction of liabilities that incurred during the transaction and that the assessee was not eligible for deduction. 6.1.During the appellate proceedings before the FAA,the assessee made elaborate .....

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t same was adjusted from 186.58 crores,that the AO had wrongly added the disputed amount in the asset site and also in the liability side,that the amount in question was liability which was to be accounted in the liability decide and had to be deducted from the lump-sum consideration,that the amount was not received by the assessee nor had it accrued to him,that same had to be deducted from the lump-sum consideration received by the assessee.Finally, he held that the amount was to be allowed as .....

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lump-sum consideration received by the assessee had to be taken at ₹ 143.1 crores [Rs.1 86.58 crores(-) ₹ 43. 36 crores].We are of the opinion that the order of the FAA does not suffer from any factual or legal infirmity.Therefore, upholding the same we decide ground 1.b(i) against the AO. 7.Ground 1.c is about allowing deduction of ₹ 2.79 crores from lump-sum consideration received by the assessee. During the assessment proceedings, the AO found that the assessee had claimed s .....

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rred to certain case laws.After considering the submissions of the assessee and the assessment order,he held that in agreement for slump sale consideration paid to the assessee was governed by clause 3 of the agreement, that as per the agreement escrow account was to be opened, that ₹ 15 crores from the amount of lump sum consideration were to be deposited in that account, that as per the terms of the agreement future claims were to be settled from the account,that during the process of sl .....

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ed the said amount in pursuance of the agreement entered into with FHL. 7.2.The DR left the issue to the discretion of the bench and the AR relied upon the order of the FAA. 7.3.We have heard the rival submissions and perused the material before us.We find that in pursuance of the agreement,entered into by the assessee,with FHL Escrow Account was opened,that ₹ 15 crores was kept in the said account for settling the future liabilities,that the assessee was to receive the amount from the Esc .....

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Ground No.1.c . 8.Ground 2 is about treating the short term capital gains(STCG) as long term capital gains (LTCG).During the assessment proceedings,the AO found that the assessee owned 12 hospitals and 2 Nursing schools,that out of the 12 hospitals four were owned over a period of 3 years and rest of the hospitals were owned for a period less that 3 years,that it had claimed LTCG arising out of the slump sale for transferring the hospitals and nursing schools to FHL. The AO treated the entire g .....

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material,the FAA held that as per the provisions of 50B holding period of the assets sold on a lump sum basis had to be considered as a whole unit,that holding period of each asset was to be ignored.He referred to proviso (1) of section 50B of the Act and held that if assets were to be assessed under the head STCG all should have existed below 36 months,that even if one of the assets existed for a period more than three years same has to be treated as Long term asset.He referred to the order of .....

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ertaking 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. The relevant criteria for considering whether the undertaking is a short-term or long term is the period of owning and holding the undertaking as a while and not individual assets of such undertaking. Suppose t .....

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see 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. Respectfully,following the above,we hold that there is no need to interfere with the order of the FAA,as four hospitals of the assessee were owned by it for a period of more than 36 months and that it is a case of slump sale.Upholding his order,we dismiss Gr.No.2. 9.Last GOA is about disallowa .....

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