Tribunal holds scope of ‘Slump Sale’ restricted to only ‘Sale’ transactions

 

The Hyderabad Bench of the Income Tax Appellate Tribunal (‘ITAT’) in a recent ruling in the case of ITO Vs Zinger Investments (P) Ltd.[#_ftn1][1], has held that transfer of an undertaking for non-monetary consideration pursuant to a scheme of arrangement approved by a high court will not be regarded as ‘slump sale’, as defined under section 2(42C)[#_ftn2][2]of the Income-tax Act, 1961 (‘the Act’). The view expressed in this ruling is similar to that of Mumbai Bench of ITAT in the case of Bharat Bijlee[#_ftn3][3] and Avaya Global Connect Limited[#_ftn4][4]wherein it was held that transfer of an undertaking for a lump sum consideration would be regarded as slump sale only if such transfer is effected by way of ‘sale’.

In this issue we have summarized the ruling.

Facts in brief and ruling of the ITAT

· The Taxpayer is a private Indian company, which transferred its manufacturing division to another Indian company ('Transferee Company'), under a scheme of arrangement approved by the High Court under section 391 to 394 of the Companies Act, 1956. As per the scheme, the Taxpayer received certain investments held by the Transferee Company. Additionally, the Transfree Company issued certain shares to the shareholders of the Taxpayer.

· The Assessing Officer (‘AO’) held that the transfer of manufacturing division tantamounts to a ‘slump sale’ under section 2(42C) of the Act, and therefore the capital gains arising from the transfer should be taxed under section 50B of the Act. On the other hand, the Taxpayer contended that the manufacturing division was amalgamated with the Transferee Company under a scheme of arrangement and it was not a case of transfer under a slump sale.

· The ITAT distinguished a sale and an exchange, based on past judicial precedents, and held that what is covered in the definition of 'slump sale' and consequently in section 50B is only that transfer which is effected by way of a 'sale' for a lump sum consideration. Since, the Taxpayer did not receive any cash / monetary consideration, the transfer in this case was not under a sale, but was a case of an exchange. Accordingly, the transfer was not taxable under section 50B of the Act.