Introduction
Taxation of slump sale has always been a matter of contention. Slump sale is a popular mode of restructuring in which business is transferred as a going concern for a lump sum consideration without assigning values to individual assets and liabilities.
Until 2000, there was no specific provision in the Income-tax Act, 1961 (‘Act’) that specifically dealt with taxation of slump sale. Considering that, an undertaking that gets transferred in a slump sale inter-alia includes intangible assets whose values are not determinable, it was held that surplus arising on the transfer of the undertaking will not be taxable as capital gains for reason that the computation machinery under Section 45 read with Section 48 would fail[1]. Considering the peculiarity in a slump sale where values do not get assigned to individual assets and liabilities, it was also held that the same would not be taxable under Section 41(2) and Section 50 of the Act.
As a result, slump sale was not chargeable to tax till 2000. To plug in these loopholes, the Finance Act, 1999, inserted Section 50B and Section 2(42)(C) in the Act w.e.f. 1 April 2000 to provide for taxation of slump sale. Section 50B of the Act provides machinery for computation of capital gains in case of slump sale by deeming ‘net worth’ as cost of acquisition.
‘Slump sale’ was defined by clause 42(C) of Section 2 of the Act as the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
Considering that the definition of ‘slump sale’ only includes transfer by way of sale, there arises a question as to whether slump exchange would be covered by the provisions of Section 50B. If slump exchange is not covered by the provisions of Section 50B, then the decisions rendered prior to introduction of Section 50B would hold the field and the transaction would not be taxable for want of computation mechanism.
Taxation of slump exchange – The debate
Slump exchange covers those situations wherein the seller receives consideration in any form other than money. Recently, the Madras High Court in the case of Areva T&D Ltd.[2] held that the slump exchange does not attract provisions of Section 50B. This case highlighted the debate whether slump exchange is covered by the definition of ‘slump sale’ in order to be taxable under Section 50B of the Act. This issue has come under judicial scrutiny time and again.
The contention of the assessees who argue against the application of Section 50B is that in such cases, the transfer constitutes an ‘exchange’ and not a ‘sale’ and that, there has to be a ‘sale’ for a transfer to qualify as ‘slump sale’. On the other hand, the Revenue’s contention is that even an exchange can qualify as slump sale and hence, slump exchange should be taxable as slump sale.
Broadly, the question that arises is whether only transfer as a result of sale would be covered by provisions of Section 50B or whether slump sale includes other forms of ‘transfer’ as well as defined in Section 2(47) of Act. Another issue that comes to light is whether transfer for non-monetary consideration can constitute a ‘sale’.
The case of Areva T&D Ltd.
In the facts of the case before the Madras High Court, the assessee had transferred its non-transmission and distribution business to its subsidiary company in exchange for equity shares under a scheme of arrangement approved by the High Court of Calcutta. Initially, the assessee contented that the transaction is slump sale and is covered by Section 50B and did not pay capital gains tax since the entire capital gains were to be invested in Tax Savings Bonds under Section 54EC. However, assessee faced a roadblock since an outer limit of Rs. 50 Lakh was set by the Finance Act, 2007 to avail exemption under Section 54EC. Later, the assessee contended that the transfer cannot be considered as a sale of business and that any transfer of an undertaking otherwise than as a result of sale will not qualify as a slump sale in the light of decision in case of Avaya Global Connect Ltd[3].
The Assessing Officer (‘AO’) concluded that the assessee themselves having agreed to the application of Section 50B cannot change its stand. The AO also relied on the decision of the Supreme Court in Goetze India Ltd. to reject the claim made by the assessee otherwise than by filing a revised return of income. The AO, thus, taxed the assessee under Section 50B of the Act. The Assessee carried the matter in appeal on the question whether the transfer by a scheme of arrangement was a slump sale and taxable as capital gain under Section 50B of the Act.
The revenue contented that the transfer by way of exchange would fall within the meaning of ‘transfer’ and hence, the same would be covered by Section 50B. The revenue relied on the decision of SREI Infrastructure[4] to buttress its contention.
The Court referred to Section 54 of Transfer of Property Act, 1882, to understand the meaning of ‘sale’. The said section defines ‘sale’ as ‘transfer of ownership in exchange of a price’. ‘Price’ is defined in Sales of Goods Act, 1930, as money consideration for sale of goods.
By applying the above two definitions, the Court held that to fall within the ambit of term ‘slump sale’, the transfer should be by way of sale in exchange of monetary consideration. Consequently, if there is no monetary consideration involved in the transaction, then it would not be possible for the revenue to treat the transaction as ‘slump sale’.
Further, the Court held that the decision of SREI infrastructure is not applicable to the facts of the present case as in that case there was a monetary consideration which is conspicuously absent in the assessee’s case. The Court placed reliance on the decision of High Court of Bombay in case of Bharat Bijlee[5] and held Section 50B of the Act is not applicable in case of slump exchange.
The Court also observed after relying on the case of Sadanand S. Varde[6] that when an amalgamation takes place, the transfer of assets takes place by the force of the company court's order and/or by operation of law and it ceases to be a contractual or consensual transfer. The Court also placed reliance on the decision of the Supreme Court in case of Devi Das Gopal Krishnan[7] wherein it was held that mere passing of title to the goods absent any contract between the parties, express or implied, cannot lead to an inference of sale.
The Court observed that sale involves an agreement between the parties and if the transfer happens pursuant to an approval of a scheme or arrangement, it is not a contractual transfer, but a statutorily approved transfer and cannot be brought within the definition of the word ‘sale’. Accordingly, since the transfer took place pursuant to a scheme of arrangement, the Court held that the same is not a contractual transfer, but a statutorily approved transfer and cannot be brought within the definition of the word ‘sale’.
In addition to the above decision, the Courts have, in the following cases, held that only slump sale for a cash consideration will attract Section 50B:
- Bharat Bijli Ltd.[8]
- Bennett Coleman & Co. Ltd.[9]
- Zinger Investments[10]
- Oricon Enterprises Limited[11]
- Avaya Global Connect Ltd.[12]
The position emanating from the above judicial precedents can be summarized as follows:
- The definition of slump sale under Section 2(42C) is only restricted to transfer resulting from ‘sale’ and does not include other ‘transfers’ as given under Section 2(47) of the Act.
- Transfer by way of a scheme of arrangement is a statutorily approved transfer and not contractual or consensual transfer, hence, does not qualify as ‘sale’.
- Only those transfers in which an entity is transferred as a going concern for a monetary lump sum consideration constitutes ‘slump sale’. If the consideration is paid in any form other than in monetary terms, then the transaction will not qualify as ‘slump sale’.
However, contrary views[13] are available from various courts to say that the term ‘transfer’ must be given a wider import and that it cannot just be restricted to cover ‘sale’. It was held in these cases that even if the consideration for transfer of an undertaking is in the form of shares, it will still attract Section 50B of the Act.
Conclusion
The above judicial precedents make it clear that there is a conflict of opinion between various High Courts on the issue whether slump exchange is covered by the definition of ‘slump sale’ for the purposes of taxability under Section 50B of the Act. These cases are pending before Supreme Court and a final word on this vexed issue is eagerly awaited.
[The authors are Senior Associate and Associate respectively in Direct Tax practice team, Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] PNB Finance v. CIT, [2008] 175 Taxman 242 (SC). In this case, reliance was placed on the decision of the Supreme Court in the case of CIT v. BC Srinivasa Shetty, 1981 AIR 972, for the proposition that if the computation cannot be made in absence of cost of acquisition, then the charging section itself would not be applicable.
[2] Areva T & D Ltd. v. CIT, [2020] 119 taxmann.com 171.
[3] Avaya Global Connect Ltd. v. ACIT, 2008-TIOL-415-ITAT-Mum.
[4] SREI Infrastructure Finance Ltd. v. IT Settlement Commission, [2012] 20 taxmann.com 476 (Delhi HC).
[5] Commissioner of Income-tax v. Bharat Bijlee, [2014] 46 taxmann.com 257 (Bombay).
[6] Sadanand S. Varde v. State of Maharashtra, (2001) 247 ITR 609.
[7] Devi Das Gopal Krishnan v. State of Punjab, (1967) 20 STC 430.
[8] CIT v. Bharat Bijli Ltd., [2014] 46 taxmann.com 257 (Bombay HC).
[9] Bennett Coleman & Co. Ltd., [2018] 89 taxmann.com 415 (Mumbai ITAT).
[10] Income-tax officer v. Zinger Investments, [2013] 38 taxmann.com 388 (ITAT Hyd).
[11] Oricon Enterprises Limited v. ACIT, [2018] 94 taxmann.com 250 (Mumbai ITAT).
[12] Avaya Global Connect Ltd. v. Asstt. CIT, [2008] 26 SOT 397.
[13] SREI Infrastructure Finance Ltd. v. IT Settlement Commission, [2012] 20 taxmann.com 476 (Delhi HC); Virtual Software Training (P.) Ltd. v. ITO, [2007] 17 SOT 347 (Delhi ITAT).
