Recently, the Hon’ble Madras High Court in the case of M/s Areva T&D India Ltd v CIT has given a ruling that transfer of an undertaking wherein shares were issued as consideration would not be taxable u/s 50B of the Act.
Facts of the case
The facts of the case were that the assessee had transferred its Non-Transmission and Distribution business (non T & D business) to its subsidiary company namely M/s.Alstom Industrial Products Limited for a total consideration of Rs.413 million being the fair value of the non T & D business as determined by the valuers by their joint report dated 05.1.2006. As per the net worth of the undertaking worked out to Rs.29,33,04,531/-, that the capital gains arising out of the transfer worked out to Rs.11,96,95,469/-, that after setting off the long term capital loss of the earlier years amounting to Rs.1,78,27,854/-, the taxable capital gains for the assessment year worked out to Rs.10,18,67,615/-.
The assessee contended that the aforesaid gain was not taxable as the transfer of undertaking as the transfer of non T & D business was by way of a scheme of arrangement under Sections 391 and 394 of the Companies Act, 1956 and could not 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 and thus, the provisions of Section 50B of the Act could not be applied to their case.
The lower authorities including the Tribunal did not agree with the contention of the assessee and the matter reached ultimately reached to the Madras High Court.
Decision of the High Court
The Hon’ble Court noted that in terms of section 50B of the Act, any profits or gains arising from slump sale shall be chargeable to income tax as capital gains arising from the transfer of long term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. 25. Section 2(42C) of the Act defines the expression ‘slump sale’ to mean 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.
Section 2(47) of the Act defines the term ‘transfer’ in relation to capital assets and it is an inclusive definition, which includes i. sale, exchange or relinquishment of an asset; ii. extinguishment of any rights; iii. compulsory acquisition; iv. conversion of asset as stock in trade of a business; v. maturity or redemption of zero coupon bonds; vi. any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; vii. any transaction, which has the effect of transferring or enabling the enjoyment of any immovable property.
The Court noted that the argument of the Revenue was that plea of the assessee that the transaction was not a slump sale, but an exchange would also be covered within the definition of the expression ‘transfer of capital asset’ because it is an inclusive definition and transfer includes exchange. Therefore, it would fall within the definition of the expression ‘slump sale’ as defined under Section 2(42C) of the Act and consequently, Section 50B of the Act would stand attracted.
The Court further noted that admittedly, the word ‘sale’ is not defined under the Act. Therefore, necessarily one has to rely upon the definitions in the other Statutes, which define the word ‘sale’. Section 54 of the Transfer of Property Act, 1882 defines the word ‘sale’ to mean a transfer of ownership in exchange for a price paid or promised or part paid and part promised. The word ‘price’ is not defined either under the Income Tax Act, 1961 or under the Transfer of Property Act, 1882, but is defined under Section 2(10) of the Sale of Goods Act, 1930 to mean money consideration for the sale of goods. Therefore, to bring the transaction within the definition of Section 2(42C) of the Act as a slump sale, there should be a transfer of an undertaking as a result of the sale for lump sum consideration. Therefore, necessarily the sale should be by way of transfer of ownership in exchange of a price paid or promised or part paid and part promised and the price should be a money consideration. If there is no monetary consideration involved in the transaction, then it would be not possible for the Revenue to bring the transaction done by the assessee within the definition of the term ‘slump sale’ as defined under Section 2(42C) of the Act.
The Court also referred to Section 118 of the Transfer of Property Act, 1882 which defines the term ‘exchange’ by stating that when two persons mutually transfer the ownership of one thing for the ownership of another, neither thing nor both things being money only, the transaction is called an exchange.
The Court then referred to the decision of the Bombay High Court in the case of CIT Vs. Bharat Bijlee Ltd. reported in (2014) 365 ITR 258]. In the said case, there was a transfer of lift division and the assessee claimed it to be an exchange and not a sale. The Assessing Officer held that the transaction would squarely fall within the definition of the expression ‘slump sale’ under Section 2(42C) of the Act. This order was confirmed by the CIT(A), which was reversed by the Tribunal. Challenging the same, the Revenue was on appeal before the Bombay High Court and relied on the decision of the Delhi High Court in the case of SREI Infrastructure Finance.
The Bombay High Court distinguished the decision in the case of SREI on the fact that in that case the consideration for transfer was a combination of money and shares whereas in the case before the Bombay High Court the consideration was only on account of issue of shares and held that a transaction of exchange is outside the purview of slump sale.
The Madras High Court then referred to the decision of the Apex Court in the case of Motors and General Stores Pvt. Ltd. to explain the meaning of the term ‘consideration’. The Hon’ble Supreme Court observed that there was an exchange of properties described for 5% tax free cumulative preference shares of the company and the valuation was done for the purpose of stamp duty and in essence, the transaction was one of exchange and there was no sale of the properties for any monetary consideration. Accordingly, the Apex Court held that ‘consideration for transfer’ cannot be said to be sale in case of exchange of properties.
The Madras High Court finally relied upon the judgement of the Apex Court in the case of State of Madras Vs. Gannon Dunkerley & Co. (Madras) Ltd. [reported in 1959 SCR 379] wherein it was held that in order to constitute a sale, it was necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which, of course, presupposed capacity to contract, that it must be supported by money consideration and that as a result of the transaction property must actually pass in the goods and unless these elements were present, there could be no sale. Thus, if merely title to the goods passed but not as a result of any contract between the parties, express or implied, there was no sale.
Relying upon the aforesaid judgement the Madras High Court held that the transfer, pursuant to approval of a scheme of arrangement, is not a contractual transfer, but a statutorily approved transfer and cannot be brought within the definition of the word ‘sale’ and accordingly decided the matter in favour of the assessee.
With the aforesaid judgement of the Madras High Court, the balance tilts in favour of the fact that a slump exchange pursuant to a court recognised scheme is not a slump sale. Be that it may, if one were to read the proviso and sub-section (1) to Section 50B together and in a harmonious way, it is clear that it applies to all types of “transfers” that can be categorized as a “slump sale”. Sub-section (2) to Section 50B of the Act also refers to transfer of an undertaking or division by way of sale i.e. “slump sale” and prescribes the mode of computing and calculating capital gains on such transactions.
Taxpayers can definitely take benefit of this ruling, but my sense is that very soon the definition of slump sale would be changed to negate the aforesaid decision.