We gave away a loss-making division at zero consideration; its liabilities exceeded its assets. The Principal Commissioner has revised the assessment under s.263 saying the negative net worth should have been taxed. Is that revision sustainable?
Not on those facts. The Chennai Tribunal accepted that a negative net worth is to be taken into account in computing the capital gain, but only where there is a positive consideration; where the slump sale consideration is nil, reducing a negative net worth from nil still produces nil, so no tax was lost. The revision failed the second limb of s.263 — no prejudice to the Revenue — and was quashed.
Decided by the ITAT (Mahavir Singh, Vice President and G. Manjunatha, Accountant Member) on 2023-01-11, reported as ITA No. 1049/CHNY/2019, Assessment Year 2014-15, ITAT Chennai 'A' Bench; heard 5 January 2023, pronounced 11 January 2023. It bears on section 50B, section 2(42C), section 263, section 115JB of the Income Tax Act 1961, in Capital Gains and Revision & Rectification matters.
Two things travel together here and practitioners tend to take only the first. The Tribunal did not accept the taxpayer-friendly proposition that a negative net worth is simply ignored; it accepted the Special Bench line in Summit Securities that the negative figure counts, which in a case with a real price means the gain is the price PLUS the absolute value of the negative net worth. What saved this assessee was arithmetic, not principle: with a nil price there was nothing for the negative figure to be added to. So a division handed over for a rupee is in a materially worse position than one handed over for nothing. The second lesson is procedural and general: a s.263 order must satisfy both limbs, and an order that is erroneous but causes no loss of tax cannot be revised — here the Departmental Representative could not answer the Bench's question as to what would be chargeable once the consideration was admitted to be zero. Note the year, AY 2014-15: from AY 2021-22 the consideration is no longer what the parties agreed but the fair market value under Rule 11UAE, so a nil-price giveaway of a division that has any positive FMV1 would now produce a taxable figure and this arithmetic would not repeat.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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On 14 November 2013 the assessee transferred its Medical Ventilator Division, which manufactured medical ventilators, respirators and accessories, to Skanray Technologies Private Limited, Mysore, on a slump sale basis at zero value, the transferee taking over all assets and liabilities on an 'as is where is' basis. The division had been incurring heavy losses and was not the assessee's core business. The total assets of the division were Rs.17.123 million and the total liabilities Rs.35.516 million, so the difference of Rs.18.392 million was shown in the profit and loss account as an exceptional item described as the gain on transfer. Form 3CEA dated 28 November 2014 was obtained, showing written down value of depreciable assets of Rs.26,39,078, book value of other assets of Rs.1,44,84,116, aggregate assets of Rs.1,71,23,194, liabilities of Rs.3,55,15,512 and a net worth of Rs.(-)1,83,92,318. The assessee declared nil capital gain under s.50B on the footing that the consideration was nil, excluded the gain from the total income as separately assessable under s.50B, and offered the amount under s.115JB, on which it paid tax. The assessment was completed under s.143(3). The Principal Commissioner revised that assessment under s.263, directing the Assessing Officer to treat the negative net worth of Rs.1,83,92,317 as taxable in the computation of capital gains, holding that a negative net worth cannot be ignored in working out capital gains on a slump sale and relying on the Special Bench decision in Summit Securities Ltd.
The appeal was allowed and the revision order passed by the Principal Commissioner was quashed (paras 7 and 8). The Tribunal held that the revision was right to the extent that a negative net worth is to be considered while computing capital gains, but only in a case of positive consideration; in the present case the slump sale value was zero, so the computation would fail, and secondly no prejudice was caused to the Revenue by the Assessing Officer's order. Since the second of the twin conditions in s.263 — that the order be prejudicial to the interests of the Revenue — was not fulfilled, the revision order had to fail.
The Tribunal took as admitted that the slump sale consideration declared was nil and that the net worth was negative because the division had incurred continuous losses (para 7). It accepted the assessee's distinction of the Special Bench decision in Summit Securities: there the consideration was a positive figure of Rs.300 crores, made up of Rs.143 crores plus a negative net worth of Rs.157 crores, so the negative net worth had something to be added to; here, with a nil consideration, adding the negative figure still leaves nothing chargeable. It recorded that when the Bench asked the Departmental Representative what the sale consideration was, he admitted it was zero, and that he could not answer what would be chargeable to capital gains once the negative net worth was deducted from zero, nor specify what prejudice had been caused to the Revenue. The Tribunal also noted that the entire working, including the Form 3CEA and the note on the exceptional item in the audit report, had been filed before the Assessing Officer during the assessment proceedings. Applying the twin conditions of s.263, which the Revenue itself had set out in its written submissions, the failure of the prejudice limb was fatal.
Hence, we are of the view that the revision passed by PCIT is right to the extent that negative net worth is to be considered while computing capital gains but in case of positive consideration.
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Handle my notice → Ask a CA on WhatsAppNot on those facts. The Chennai Tribunal accepted that a negative net worth is to be taken into account in computing the capital gain, but only where there is a positive consideration; where the slump sale consideration is nil, reducing a negative net worth from nil still produces nil, so no tax was lost. The revision failed the second limb of s.263 — no prejudice to the Revenue — and was quashed. This was decided by the ITAT (Mahavir Singh, Vice President and G. Manjunatha, Accountant Member) and bears on section 50B, section 2(42C), section 263, section 115JB of the Income Tax Act 1961. It is reported as ITA No. 1049/CHNY/2019, Assessment Year 2014-15, ITAT Chennai 'A' Bench; heard 5 January 2023, pronounced 11 January 2023. Two things travel together here and practitioners tend to take only the first. The Tribunal did not accept the taxpayer-friendly proposition that a negative net worth is simply ignored; it accepted the Special Bench line in Summit Securities that the negative figure counts, which in a case with a real price means the gain is the price PLUS the absolute value of the negative net worth. What saved this assessee was arithmetic, not principle: with a nil price there was nothing for the negative figure to be added to. So a division handed over for a rupee is in a materially worse position than one handed over for nothing. The second lesson is procedural and general: a s.263 order must satisfy both limbs, and an order that is erroneous but causes no loss of tax cannot be revised — here the Departmental Representative could not answer the Bench's question as to what would be chargeable once the consideration was admitted to be zero. Note the year, AY 2014-15: from AY 2021-22 the consideration is no longer what the parties agreed but the fair market value under Rule 11UAE, so a nil-price giveaway of a division that has any positive FMV1 would now produce a taxable figure and this arithmetic would not repeat. If it applies to you, the first step is this: Work the computation both ways before you concede anything: consideration minus a negative net worth means consideration plus the absolute value of the negative figure, which is the Special Bench position the Tribunal accepted.
On 14 November 2013 the assessee transferred its Medical Ventilator Division, which manufactured medical ventilators, respirators and accessories, to Skanray Technologies Private Limited, Mysore, on a slump sale basis at zero value, the transferee taking over all assets and liabilities on an 'as is where is' basis. The division had been incurring heavy losses and was not the assessee's core business. The total assets of the division were Rs.17.123 million and the total liabilities Rs.35.516 million, so the difference of Rs.18.392 million was shown in the profit and loss account as an exceptional item described as the gain on transfer. Form 3CEA dated 28 November 2014 was obtained, showing written down value of depreciable assets of Rs.26,39,078, book value of other assets of Rs.1,44,84,116, aggregate assets of Rs.1,71,23,194, liabilities of Rs.3,55,15,512 and a net worth of Rs.(-)1,83,92,318. The assessee declared nil capital gain under s.50B on the footing that the consideration was nil, excluded the gain from the total income as separately assessable under s.50B, and offered the amount under s.115JB, on which it paid tax. The assessment was completed under s.143(3). The Principal Commissioner revised that assessment under s.263, directing the Assessing Officer to treat the negative net worth of Rs.1,83,92,317 as taxable in the computation of capital gains, holding that a negative net worth cannot be ignored in working out capital gains on a slump sale and relying on the Special Bench decision in Summit Securities Ltd. The matter was decided on 2023-01-11 by the ITAT (Mahavir Singh, Vice President and G. Manjunatha, Accountant Member). On those facts the ITAT held as follows. The appeal was allowed and the revision order passed by the Principal Commissioner was quashed (paras 7 and 8). The Tribunal held that the revision was right to the extent that a negative net worth is to be considered while computing capital gains, but only in a case of positive consideration; in the present case the slump sale value was zero, so the computation would fail, and secondly no prejudice was caused to the Revenue by the Assessing Officer's order. Since the second of the twin conditions in s.263 — that the order be prejudicial to the interests of the Revenue — was not fulfilled, the revision order had to fail.
The Tribunal took as admitted that the slump sale consideration declared was nil and that the net worth was negative because the division had incurred continuous losses (para 7). It accepted the assessee's distinction of the Special Bench decision in Summit Securities: there the consideration was a positive figure of Rs.300 crores, made up of Rs.143 crores plus a negative net worth of Rs.157 crores, so the negative net worth had something to be added to; here, with a nil consideration, adding the negative figure still leaves nothing chargeable. It recorded that when the Bench asked the Departmental Representative what the sale consideration was, he admitted it was zero, and that he could not answer what would be chargeable to capital gains once the negative net worth was deducted from zero, nor specify what prejudice had been caused to the Revenue. The Tribunal also noted that the entire working, including the Form 3CEA and the note on the exceptional item in the audit report, had been filed before the Assessing Officer during the assessment proceedings. Applying the twin conditions of s.263, which the Revenue itself had set out in its written submissions, the failure of the prejudice limb was fatal. In the words reproduced by the source cited on this page: "Hence, we are of the view that the revision passed by PCIT is right to the extent that negative net worth is to be considered while computing capital gains but in case of positive consideration." The decision followed or applied DCIT v. Summit Securities Ltd. (Special Bench, ITAT Mumbai) — accepted in principle and distinguished on the facts.
It was decided by the ITAT on 2023-01-11 and is reported as ITA No. 1049/CHNY/2019, Assessment Year 2014-15, ITAT Chennai 'A' Bench; heard 5 January 2023, pronounced 11 January 2023. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 50B, section 2(42C), section 263, section 115JB, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed and the revision order passed by the Principal Commissioner was quashed (paras 7 and 8). The Tribunal held that the revision was right to the extent that a negative net worth is to be considered while computing capital gains, but only in a case of positive consideration; in the present case the slump sale value was zero, so the computation would fail, and secondly no prejudice was caused to the Revenue by the Assessing Officer's order. Since the second of the twin conditions in s.263 — that the order be prejudicial to the interests of the Revenue — was not fulfilled, the revision order had to fail. It arises in Capital Gains and Revision & Rectification matters, on section 50B, section 2(42C), section 263, section 115JB of the Income Tax Act 1961, and was decided by Mahavir Singh, Vice President and G. Manjunatha, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the consideration is genuinely nil, run the arithmetic in the reply and make the officer or the Commissioner state what sum he says is chargeable. In a s.263 proceeding always plead both limbs; an error without prejudice cannot support revision, and this is a clean illustration. Have Form 3CEA on file with the net worth working; here the Form 3CEA dated 28 November 2014 with the negative net worth of Rs.(-)1,83,92,318 was before the Assessing Officer during the assessment and that is why the order could not be called unexamined. For any transfer in AY 2021-22 or later do not rely on a nil or nominal price; compute FMV1 under Rule 11UAE(2) and FMV2 under Rule 11UAE(3) and take the higher.
Still good law. The year is AY 2014-15 and the arithmetic in this order does not carry into a current year: from AY 2021-22 the full value of consideration is not the agreed price but the fair market value under s.50B(2)(ii) read with Rule 11UAE, so a division given away at a nil or nominal price will still produce a taxable figure wherever FMV1 is positive, and the reasoning that a nil price yields a nil gain is unavailable. What survives is the ratio that carried the disposal, which is procedural and unaffected: a s.263 revision must satisfy both limbs, and an order that is erroneous but causes no prejudice to the Revenue cannot be revised. No decision doubting this order was located. Separately, the underlying question of how a negative net worth enters the s.50B computation is not finally settled: the Bombay High Court admitted substantial questions of law on exactly that point in Wockhardt Hospitals Ltd v. Addl. CIT, Income Tax Appeal No.1311 of 2017, by order dated 20 January 2020, directing it to be listed with Income Tax Appeal No. 859 of 2012. The questions admitted were whether the capital gain has to be arrived at by adding the negative net worth to the full value of consideration and whether an undertaking can have a negative cost for s.50B purposes. The outcome of those appeals has not been traced, and no Bombay High Court judgment in the matter has been found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
ON WHAT THE ENTRY RESTS ON. The Tribunal's own findings, from paragraph 5 through the disposal at paragraph 8, have been read word for word, and the sentence quoted on this page has been independently re-confirmed. Nothing on this page comes from any earlier part of the order or from the passages in it discussing the Special Bench decision. A WARNING ABOUT THE FIGURES. They are internally inconsistent in the order and they are reproduced here as they stand. The negative net worth appears as Rs.1,83,92,317 in some places, as Rs.1,82,93,317 in others, and as Rs.(-)18,392,318 in the reproduced Form 3CEA table. The Form 3CEA dated 28 November 2014 itself shows written down value of depreciable assets of Rs.26,39,078, book value of other assets of Rs.1,44,84,116, aggregate assets of Rs.1,71,23,194, liabilities of Rs.3,55,15,512 and a net worth of Rs.(-)1,83,92,318. Take the figure from the Form, not from the narrative. A TRAP IN THE PARAGRAPH NUMBERS. The order discusses the Special Bench decision in Summit Securities at length, and paragraph numbers appearing in that discussion belong to that decision and not to this order. This order's own numbering ends at paragraph 8 with the disposal. A citation to a paragraph in the twenties in this case is a citation to something else. WHAT THE TRIBUNAL ACCEPTED AND WHAT IT DID NOT. It did not accept that a negative net worth is ignored. It accepted the Special Bench line that the negative figure counts, so that where there is a real price the gain is the price plus the absolute value of the negative net worth. What saved this assessee was arithmetic: with a nil price there was nothing for the negative figure to be added to. When the Bench asked the Departmental Representative what the sale consideration was, he admitted it was zero, and he could not say what would be chargeable once the negative net worth was deducted from zero, nor what prejudice had been caused to the Revenue. ON WHY THE ASSESSMENT COULD NOT BE CALLED UNEXAMINED. The entire working - the Form 3CEA and the note on the exceptional item in the audit report - had been filed before the Assessing Officer during the assessment proceedings. That is what defeated the suggestion that the officer had not applied his mind, and it is why the Form 3CEA belongs on the file rather than in the appeal papers. ON THE YEAR. Assessment year 2014-15. From assessment year 2021-22 the full value of consideration is the fair market value under Rule 11UAE and not the agreed price, so this arithmetic does not repeat; the procedural holding on the twin conditions in s.263 is unaffected. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the revision order passed by the Principal Commissioner was quashed (paras 7 and 8). The Tribunal held that the revision was right to the extent that a negative net worth is to be considered while computing capital gains, but only in a case of positive consideration; in the present case the slump sale value was zero, so the computation would fail, and secondly no prejudice was caused to the Revenue by the Assessing Officer's order. Since the second of the twin conditions in s.263 — that the order be prejudicial to the interests of the Revenue — was not fulfilled, the revision order had to fail.
TaxSphere, “Pricol Engineering Industries Ltd v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/pricol-engineering-negative-net-worth-with-nil-consideration/ (validity last checked 2026-09-08)
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The Assessing Officer says that because depreciation of a known amount was allowed on the assets over the years, that figure must be the excess over written down value and can be taxed. Nothing in our documents allocates the price. Can he do that?
We bought a business under a slump sale agreement and booked the excess of price over net tangible assets as 'goodwill'. The Assessing Officer says goodwill is not depreciable. Can we still get depreciation on it?
My client's auditor could not upload Form 3CEA with the return and the Assessing Officer has disallowed the whole slump sale loss for that reason alone. Is the report a condition precedent?
The Assessing Officer has broken our lump sum into building, plant and paint shop and charged short-term capital gains, relying on the values the buyer later put in its own books. Can he apportion a slump price like that?
