Slump Sale: Transfer under a scheme under the Companies Act can also attract Section 50B.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Sections 2 (42C) , 2 (47) , 50B of the Income-tax act, 1961.

Section 47  of  the Income-tax act, 1961- exemption from transfer,  was not an issue before the Court.

Sections 391 to 394 of the Companies Act, 1956.

SREI Infrastructure Finance Ltd.   Versus  The Income Tax Settlement Commission & Ors. 2012 - TMI - 212606 - DELHI HIGH COURT - Income Tax

J.K. (Bombay) (P.) Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1968 -TMI - 98612 - SUPREME COURT OF INDIA]

Madhu Intra Limited and Anr., VAT Automation Pvt. Ltd. and Stuti Developers Pvt. Ltd. and Ors. Vs. Registrar of Companies and Ors., [2004 -TMI - 110638 - HIGH COURT OF CALCUTTA]

Sadanand S. Varde and Ors. vs. State of Maharashtra and Ors., 2000 -TMI - 14681 – (BOMBAY High Court)

CIT, Cochin vs. Grace Collis (Mrs.) and Ors., [2001 -TMI - 5986 - SUPREME Court]

CIT vs. Rasiklal Maneklal (HUF), [1989 -TMI - 5275 - SUPREME Court],

Vania Silk Mills (P) Ltd. Vs. CIT, [1991 -TMI - 5336 - SUPREME Court]

Hindustan Lever vs. State of Maharashtra, [2003 -TMI - 108347 - SUPREME COURT OF INDIA]

Haji Sk. Subhan v. Madhorao (SCC p. 535, para 11) 

Sale, lump sum consideration and slump sale:

Sale:

Normally we can say that whenever there is transfer of a property for some consideration, there is a sale. In case of sale of an undertaking, when business is sold as a going concern, there is sale of undertaking. When individual consideration is not specified for assets and liabilities with which the undertaking is transferred, it is generally understood transfer for a lump sum consideration. What we understand in commercial world as a lump sum consideration, is broadly called slump sale. The expression has its scope widened or narrowed due to many conditions laid down in the meaning. This is the reason that lot of litigation is going on  the issue whether a transaction is slump sale or not.

Author remember a case wherein an undertaking was sold. Most of  fixed assets were sold , however some movable assets like stock-in-trade, some office equipment and vehicles were not transferred. Any liability was not transferred. In the initial MOU a lump sum amount was fixed, which was subsequently revised and individual valuation of assets transferred was fixed by  parties after due verification of assets and their condition. The CIT(A) considered that this is a case where lump sum amount is fixed for all assets (most of  fixed assets of undertaking) have been transferred for a lump sum consideration, therefore he applied section 50B considering that in the initial MOU lump sum consideration was fixed for assets of the undertaking to be transferred.

As there was no transfer of all of assets, value of each asset was placed after verification, and  any liability was also not transferred the assessee was advised to file appeal before ITAT because the deal was in fact not a deal of slump sale of undertaking . Even if sale of assets can be considered as a sale for lump sum consideration ( allocation being after though as alleged by CIT(A) it would not be a slump sale. .

The expression ‘slump sale’ should not be restricted in its scope, when the conditions of a transaction being in nature of slump sale are satisfied. This is the crux of the issue decided by Delhi High Court in case of SREI Infrastructure Finance Ltd. in a Writ Petition against the order of the Settlement Commission.

Broad conclusions from the ruling in  case of SREI:

   Broadly speaking the term ‘slump sale’ has been defined to mean a transfer of a business undertaking or a business for a lumpsum consideration with all its assets and liabilities, without values being assigned to individual assets/liabilities.

       The said term has no other significance and we should not read into and understand that the word ‘sale’, used in the term ‘slump sale’, as a cause/reason to give a restrictive meaning to “slump sale”, i.e. it can only apply to “sales” in a narrow sense and not to “transfers” under Section 2(47).

       "transfer" is s defined in section 2(47) of the Income-tax Act ("the Act"). According to this meaning  a wide and inclusive definition of ‘transfer’ is prescribed  and as per this definition and transfer can be regarded  as 'slump sale' if the deal  satisfies conditions of section 2(42C) which defines 'slump sale'.

        A transfer under a scheme of arrangement sanctioned by Court under sections 391 to 394 of the Companies Act,1956  can also be brought within meaning of  ‘slump sale’ if as per scheme  conditions of section 2(42C) of the Act are satisfied.

 The  argument that "section 50B read with section 2(42C) is only applicable to "sale" in a narrow sense and not to 'transfer' under section 2(47) cannot be accepted.

 The judgments  of the Supreme Court in J.K. (Bombay) (P.) Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd. [1970] 40 Comp. Case 689 (SC) is on the general proposition as to statutory nature of the scheme sanctioned under sections 391 to 394 of Companies Act,1956 and is not relevant for interpreting 'transfer' as defined in section 2(47) of the Act.

The Act i.e. Income-tax Act, 1961 was enacted to tax the income or gains made by an assessee. The Companies Act, 1956, on the other hand serves, and is intended to serve a different purpose and, therefore, when a scheme under sections 391-394 of the Companies Act, 1956 is sanctioned by the Court, it is treated as a binding statutory scheme because the scheme has to be implemented and enforced.

Thus transfer being under a scheme cannot, be  a ground to escape tax on 'transfer' of a capital asset under and as per provisions of the Act.

A transfer of an undertaking of a company under terms and conditions of scheme under the Companies act as approved by High Court can be a case of ‘slump sale’ is relevant conditions are satisfied.