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Zuari Industries Ltd. v. ACIT, Circle-2, Margaon

Month-Year : Feb - 2007
Author/s : 9 SOT 563 (Mum.)
Title : Zuari Industries Ltd. v. ACIT, Circle-2, Margaon
Details :

The assessee company sold its cement division to another company. The liabilities exceeded assets by Rs.150.46 cr. The consideration was Rs.75.98 cr. The assessee claimed that since liabilities exceeded assets, as per S. 50B, no capital gains would arise since Rs.75.98 cr. is capital receipt. However, the AO held as per formula in S. 50B that the capital gain would be Rs.226.44 cr. (Rs.75.98 plus Rs.150.46 cr.)

The CIT(A) upheld the contention of the AO and the ITAT allowed the appeal and held that the capital gains would be Rs.75.98 cr. and not Rs.226.44 cr. The following were the observations :

1. If liabilities exceeded assets, the net worth is to be taken as zero.

2. The capital gains cannot exceed sale consideration.

3. S. 50B uses the term ‘net worth’. The dictionary meaning of the term ‘worth’ is value of goods or assets or property, which suggests positivity. At best the worth can be nil.

4. No prudent person would buy an asset unless the value of the asset is more than liabilities.

5. If liability is to be added to the sale consideration, then the same has also to be excluded from the computation of the ‘net worth’.

Cases referred :

1. CIT v. Attili N. Rao, 252 ITR 880 (SC)

         2. Premier Automobiles Ltd. v. ITO, 264 ITR 193 (Bom.).

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