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