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Capital Gains of Sick Company

13 April 2010

Dear All,

Please reply to my following query at the earliest:

"A SICK COMPANY AFTER SO MANY YEARS OF STRUGGLE ,COULD SELL S PROPERTY (BUILDING) ONLY TO PAY OFF THE STATUTORY CREDITORS.SO THE CASE OF SHORT TERM CAPITAL GAIN ARISES.HERE I WANT TO KNOW,IS THERE ANY CASE STUDY /CIRCULAR/NOTIFICATION AVAILABLE SPECIFYING THAT CAPITAL GAIN IN SUCH CASES ARE EXEMPTED?"

THANKS

Rupesh

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15 Replies

Amir (Learner) (4016 Points)
Replied 13 April 2010

Dear Rupesh,

Sec 47 (xii) reads as under

any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial company is being managed by its workers’ co-operative :

Provided that such transfer is made during the period commencing from the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of that Act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

Explanation.—For the purposes of this clause, “net worth” shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);]

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CA Shiv (Business Controller) (2987 Points)
Replied 13 April 2010

hello Amir... we understand the wording of section which says about the property in Land... Do you have any case law or some thing more than the copy paste of the act... It will be more helpfulll..

As per my opinion it wont be taxed as capital gain and can claim exemption...

Amir please give some suggestion...

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RUPESH CHOUDHURY (Student) (484 Points)
Replied 14 April 2010

Dear Mr. Amir & Mr. Shivang..thanks 4 sharing..can u plz put some more light..

Amir (Learner) (4016 Points)
Replied 14 April 2010

HI Rupesh,

I think the sale consideration should be divided between Land & Building if other conditions specified u/s 47 are being met..

Then exemption can be claimed in respect of CG attributable to Land.

Shivang Sir has rightly said that CG attributable to building shall be charged to Tax, exemption u/s 54 EC is one option which can be looked in but I don't think the company will exercise that option since it has to discharge its liabilities towards its creditors.

CA Shiv (Business Controller) (2987 Points)
Replied 14 April 2010

Hello amir, nice way of answer ....can you provide some way to do that or some case law to exempt the company..

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Amir (Learner) (4016 Points)
Replied 14 April 2010

Dear Shivang Sir,

In composite sales, gains must be bifurcated into long-term and short-term - Where the land is a long-term capital asset and the building thereon is a short-term capital asset, and both are sold together for a consolidated consideration, the gains must be bifurcated into long-term (pertaining to land) and short-term (pertaining to building) and brought to tax, since the land is an independent and identifiable capital asset, and it continues to remain so even after the construction of building - CIT v. Dr. D.L. Ramachandra Rao[1999](Madras)

Nicky (Chartered Accountant) (245 Points)
Replied 14 April 2010

The ratio laid down by Amir has aslo been upheld in CIT V/s Citibank N.A. (2003) (Bom)

I too agree with Amir on the tax treatment

and Shivang ur questions states to exempt company however that is not possible there is an exemption to the definition of transfer provided under section 47 which Amir has explained pretty well..

So in a nutshell if the Company is Sick and is being operated and run by workers coperative only then land portion of the transaction would be exempt..

CA Shiv (Business Controller) (2987 Points)
Replied 14 April 2010

Thanks Amir and Nicky for your case.. I agree to that...

Since the company is in liquidation, there has to be some way out for the benefit of the company to exempt from the capital gain being a sick company. Author has told tht he will have a look that the company falls in the perview of section 17(1). Its not yet clear yet for him. If it really does than have to try to exempt the Capital gain. Only if its possible.

For the purpose of the land and building, we have to calculate the depreication from retrospective effect just to see is it benefcial to separate it or not.

Thanks for your support guys...

SUDHIR & PRADEEP JI (CA FINAL+LLB + DISA) (2299 Points)
Replied 14 April 2010

thanks amir sir

RUPESH CHOUDHURY (Student) (484 Points)
Replied 14 April 2010

Originally posted by : CA Shivang
	Thanks Amir and Nicky for your case.. I agree to that... Since the company is in liquidation, there has to be some way out for the benefit of the company to exempt from the capital gain being a sick company. Author has told tht he will have a look that the company falls in the perview of section 17(1). Its not yet clear yet for him. If it really does than have to try to exempt the Capital gain. Only if its possible. For the purpose of the land and building, we have to calculate the depreication from retrospective effect just to see is it benefcial to separate it or not. Thanks for your support guys...

Thanks all..mr.Shivang.Mr.Amir & Mr. Nicky..u all guys doin wonderful jobs..

Here I want 2 inform u all that,Actually the company is not declared sick under the Sick Industrial Companies Act,1985.

So I think the Company cant avail the exemption under section 47.And thats why in my original Ques. I asked are there any Notifications/circulars/case studies available for the help of the company?

Though due to some mysterious reasons the company was not declared Sick Company ,its actually a sick company and now wants to revive itself after paying off the Stat dues.

Please help..

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Amir (Learner) (4016 Points)
Replied 14 April 2010

Dear Rupesh,

Bhai u have changed the entire facts that Company is not a Sick company....Therefore this exemption cannot be availed...

Apart from Sec 47 I don't think there is anyother provision which provides exemption to a WEAK Company (& not Sick).

So in this case options to save tax will be -

1) Since Co's position is not good so I feel there must be some current years & brought forwds losses - Following can be set of with the capital gain -

a) Current Year's PGBP Loss

b) Current Year's Unabsorbed Depreciation

c) Brought forward Unabsorbed Depreciation.

2) Another option would be to claim sec 54EC by investing in Bonds. If I am not wrong these Bonds matures after 3 years so Company can enter into an agreement to handover the bonds proceeds to the Creditors or by making them benificiary or nominee whatever...Tough one since it requires creditors consent & I don't think they will agree to it...so not probable but definately possible.

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RUPESH CHOUDHURY (Student) (484 Points)
Replied 15 April 2010

Dear Amir & All,

I 'm extremely sorry..I shouldnt have used the word SICK.

I have gone thru some case studies the results of which tell that a Company cant get any relaxation just because it is an WEAK company.

And the following are some replies to ur suggestions:

The Capital gain comes to around 3 crores.The company neither have any brought forward capital losses nor any unabsorbed depreciation.And the business loss is meagre amount ,some few lakhs.
regarding 54EC-Actually one Asset Reconstruction company got the property sold,took its commission ,paid off a lot off dues handed over the rest amount to the WEAK company(the amount is virtually NIL).So the company cant deposit anything in the bonds also..

Now I think all trhe doors are shut.

Anyways u hab come along a long way to help..thanks..

-Rupesh

Nicky (Chartered Accountant) (245 Points)
Replied 15 April 2010

Dear Rupesh,

I just want to understand the concept of a company becoming weak i.e. virually sick without incurring losses, which according to you are meagre and ends up having gains of 3 Crores.... Is it a a weak company or there is some financial mismanagement...

Just asking because want to understand for knowledge purposes only...

RUPESH CHOUDHURY (Student) (484 Points)
Replied 15 April 2010

Dear Mr.Nicky,

Though the company has an accumulated losses of around 2.89 crores,it could never be utilized ,because the returns for last four years was filed recently.So PGBP losses couldnt be carried forward.And also due to the Inheritence tussle within the family ,the company was badly hit some 2 decades back..also production was also stagnant, and taking the benefits,almost no creditors paid dues.And during the period ,because the management couldnt concentrate on the business the statutory compliance was not adhered to and the interests and penalties grew in exponential manner.Finally ,recently the family came to some sort of settlement.So as usual,its first trying to clear off all the creditors then to revive the business..and its in the "clearing off the creditors " stage.

And plz dont go by the denomination.Compared to 3 crores of Capital gain a huge amount of creditors are also standing.if I reveal u the name of the company then u ll easily believe it..

And its still having the goodwill,technology,etc..Also the fund is not a problem,though the promoters are left with a litttle bit ,outside help will be flown in once the creditors are cleared.And during that process that capital gain problem had crept in..

Thanks 4 ur interest...