Tuesday 8 May 2012

Slump sale by way of Scheme of Arrangement taxable as capital gains

Background
 The taxpayer transferred its project finance business and assets based financing business under a scheme of arrangement approved by the High Court of Calcutta under section 391 to 394 of the Companies Act, 1956.
 The taxpayer, a public limited company had entered into a scheme of arrangement with its subsidiary pursuant to which it transferred its project finance business and asset based financing business to its subsidiary for a lump sum consideration of Rs 37.5 million. The taxpayer had filed an application with the Settlement Commissioner disclosing additional income not reported and assessed previously. The Settlement Commissioner passed its final order on various aspects including on the taxability of Rs 37.5 million received as consideration for transfer of its business. The Settlement Commission held that the transfer of business under a scheme of arrangement qualified as a „slump sale‟ as defined under section 2(42C) of the Income-tax Act („Act‟) and the gain arising thereon were taxable under section 50B of the Act.
Contentions of the Taxpayer
 The taxpayer contended that the „transfer‟ under a scheme of arrangement sanctioned by the High Court is not a sale under section 50B of the Act as the same is not a „slump sale‟ as contemplated under section 2(42C) Act.
 The taxpayer claimed that section 2(42C) deals with limited category/ type of transactions i.e. sales, which are construed as a „slump sale‟ and the broader and wider definition of the term „transfer‟ as defined under section 2(47) was not applicable to “slump sale”.
 Accordingly, it contended that where a transfer of business for lump sum consideration takes place by any mode other than „sale‟, such transfers are not taxable under the Act.

Observations and Ruling of the High Court
 The High Court observed that as defined under the Act, „slump sale‟ would cover any transfer of a business for a lump sum consideration. It held that it would not be correct to construe the word „slump sale‟ to mean that it applies to „sale‟ in a narrow sense and as an antithesis to the word „transfer‟ as used in section 2(47) of the Act.
Conclusion
 The ruling is likely to bring all transfers of business for a lump sum consideration under the net of tax regardless of whether the transfer is by way of sale or by way of scheme of arrangement which does not comply with the conditions laid in definition of “demerger” under section 2(19AA) of the Act.
 The ruling may have the effect of overruling observations in Mumbai ITAT decision in Bharat Bijilee Limited. In that case the ITAT had held that transfer of undertaking against issue of bonds/ shares did not constitute a “slump sale” and was not taxable as capital gain.
Source: M/s SREI Infrastructure Finance Limited vs. The Income tax Settement Commission & Ors. (Writ petition (Civil) No. 1592/2012) dated 30th March, 2012

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