ITAT Surat on Slump Sale Capital Gains: Advance Included in Consideration Cannot Also Reduce Net Worth

1. Overview of the Decision

The Surat Bench of the Income Tax Appellate Tribunal, in Daman Ganga Recycled Resources LLP Vs ACIT, ITA No. 86/SRT/2026, pronounced on 15/10/2026 for Assessment Year 2016-17, examined computation of capital gains on a slump sale under Section 50B of the Income Tax Act 1961.

The core dispute was whether an advance of ₹50,00,000, already forming part of the slump sale consideration of ₹4,75,00,000, could at the same time be reflected as a liability in the undertaking’s balance sheet so as to reduce the net worth and thereby alter the capital gains computation.

The Tribunal held that, on the specific facts, the same ₹50,00,000 could not receive dual and inconsistent treatment. Once it was accepted to be part of the full consideration for the slump sale, it could not be retained as a liability for the purpose of reducing net worth. The capital gains of ₹62,37,948, as originally declared by the assessee, were therefore upheld, and the addition of ₹50,00,000 to short-term capital gains was deleted.

In the same appeal, the Tribunal also condoned a 90‑day delay in filing, applying the “substantial justice” principle laid down by the Hon’ble Supreme Court.

2. Background Facts

(i) Business and Return Filing

  • The assessee, Daman Ganga Recycled Resources LLP, a Limited Liability Partnership assessed in the status of a firm, was engaged in manufacturing kraft paper and recycling products.
  • For AY 2016-17, the assessee filed its return of income on 08.10.2016, declaring total income of ₹36,64,664.
  • The case was selected for limited scrutiny through CASS, and notices under Section 143(2) and Section 142(1) were issued by the Assessing Officer (AO).

(ii) Slump Sale of Manufacturing Division

  • During the year, the assessee transferred its manufacturing division to M/s Maheshwari Logistics Private Limited as a going concern.
  • The transaction was effected through a Business Transfer Agreement (BTA) dated 30.09.2015.
  • Under clause 3.1(a) of Article III of the BTA, a lump-sum sale consideration of ₹4,75,00,000 was agreed.
  • Out of this, ₹50,00,000 had been received as advance from the purchaser on 21.09.2015, prior to the date of transfer.
  • The assessee treated this transfer as a slump sale within the meaning of Section 2(42C), and computed short-term capital gains under Section 50B.

(iii) Net Worth and Capital Gain Computation

  • As on 30.09.2015, an audited balance sheet of the undertaking was drawn up.
  • The net worth as per books, after considering all assets and liabilities (including current liabilities), stood at ₹3,62,62,052.
  • Among the current liabilities, an amount of ₹50,00,000 had been recorded as “Advance from Customers”, being the advance received from M/s Maheshwari Logistics Private Limited towards the slump sale.
  • Since this advance was not an independent liability of the undertaking but part of the slump sale consideration itself, the assessee added back this ₹50,00,000 to book net worth for the limited purpose of computing net worth under Section 50B.
  • Thus, the assessee computed net worth at ₹4,12,62,052 (₹3,62,62,052 + ₹50,00,000).
  • Full value of consideration: ₹4,75,00,000.
  • Net worth (as adjusted): ₹4,12,62,052.
  • Resultant short-term capital gain returned: ₹62,37,948.

3. Assessment Proceedings and Addition

(i) AO’s Treatment Under Section 50B

The AO accepted that the transaction qualified as a slump sale under Section 2(42C) and that Section 50B applied. However, while examining the capital gains computation, the AO took the following approach:

  • He held that Explanation 1 to Section 50B mandates computation of net worth strictly on the basis of values as appearing in the books of account, without any further adjustment.
  • On that reasoning, he refused to add back the ₹50,00,000 advance to the book net worth.
  • Accordingly, he treated the net worth as ₹3,62,62,052, being the figure directly derived from the audited balance sheet, without modification.

In the assessment order, the AO reasoned, inter alia, as follows:

“From the perusal of the section 50B, it becomes clear that the values as appearing in the books of accounts are to be considered and no other adjustments are allowed to be made.”

He further observed that:

“…since the advance has been received in the bank account of the firm, the current asset of the firm also increases. Thus, there is increase in the current asset as well as current liability of the division by an equal amount of Rs. 50,00,000; which shall have no effect on the net worth of the division.”

The AO also noted that:

“Section 50B(3) of the Income Tax Act, 1961 provides that the assessee shall furnish a report of an accountant certifying that the net worth, as calculated, is correct. No such report has been filed by the assessee, along with its return of income.”

On this basis, the AO:

  • Disallowed the assessee’s adjustment of ₹50,00,000 to net worth.
  • Treated net worth of ₹3,62,62,052 as cost of acquisition.
  • Computed short-term capital gain at ₹1,12,37,948 (₹4,75,00,000 – ₹3,62,62,052).
  • Made an addition of ₹50,00,000 over and above the capital gain returned.
  • Also initiated penalty proceedings under Section 271(1)(c) for alleged furnishing of inaccurate particulars of income in respect of ₹50,00,000.

4. First Appeal Before CIT(A)

The assessee preferred an appeal before the CIT(A).

(i) Reasoning of the CIT(A)

The CIT(A) examined the assessee’s submissions and the AO’s order, and concluded as under: