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Sec 50B slump Sale -Doubt

CA Naresh Kumar Hegde (CA) (136 Points)

09 September 2010

Can anyone clarify............

What is the tax implication under sec 50B when the networth of the undertaking is negative or Zero?

I heard that a judgement is there in this matter. Anybody knows????????

Thanks in advance....

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6 Replies

Sunshine (Helping All) (10575 Points)
Replied 09 September 2010

i guess cost will be zero in this case....

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Ganisht (CA Final) (196 Points)
Replied 09 September 2010

hi Dear,

Sec 50B clearify that when a undertaking is transfered by the way of slump sale then net worht will be considered. moreover if net worth is zero then cost to the second undertaking who absorb the first one will be net worth i.e Zero.

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 09 September 2010

cost will be zero

CA Naresh Kumar Hegde (CA) (136 Points)
Replied 09 September 2010

Freinds,

I got the judgement. The cost of acquisition is Nil.

In Zuari Industries Ltd vs CIT (298 ITR AT 97), the assessee was engaged in the business of manufacture and sale of chemicals, fertilisers and allied products as well as cement and furniture.

It sold its cement division located in Andhra Pradesh to Zuari in which 50 per cent stake was held by the assessee against lump-sum consideration of Rs 75.98 crore paid by way of allotment of 7,59,80,000 fully paid-up equity shares of face value of Rs 10 each under the scheme of arrangement approved by the Bombay High Court. This scheme was effective from April 1, 2000. In the return filed for the assessment year 2001-02, it stated that the net worth of the cement division, as per computation done under Section 50-B of the Act, was a negative figure of Rs 150.46 crore.

As such, in the absence of cost, which was necessary for computing capital gain, the relevant section for computing the capital gains did not apply.

Thus, the consideration received amounted to a capital receipt, not chargeable to tax. The claim of the assessee was rejected by the assessing officer (AO). He computed the capital gains at Rs 226.443 crore. This was upheld by the Commissioner (Appeals).

Tribunal ruling

The Income-tax Appellate Tribunal (ITAT) held that Section 50-B was introduced by the Finance Act, 1999 with effect from April 1, 2000. Prior to this, there were disputes as to whether transfer of business or an undertaking by way of slump sale constituted transfer of capital asset and whether there was any cost of acquisition of such business or undertaking or division.

After the insertion of Section 50-B, profits on transfer of such asset are chargeable to tax under the head “capital gains” and the cost of acquisition for the purpose of Section 48 would be the net worth as computed under Section 50-B.

The profit arising on the transfer of the cement division by way of slump sale was chargeable to tax under the head "capital gains". The value of assets as per books of account was much more than the value of liabilities. The Tribunal observed that no prudent person would have acquired the unit unless the value of assets or benefit attached to the division was more than the liabilities. The division was purchased since the value of assets was more than the liabilities.

The Tribunal opined that it was because of the artificial provision of Section 43(6)(c) of the Act that the value of depreciable assets had to be computed at a substantially low figure, which resulted in the value of assets being less than the liabilities. However, on that account, the net worth should not be reduced below "nil" since this would be contrary to the scheme of the section itself.

Therefore, the "net worth" of the cement division should be taken as "nil" which would be deemed to be the cost of acquisition for the purpose of computing the capital gains under Section 48. The assessing officer was directed by the Tribunal to assess the capital gain at Rs 75.98 crore.