Telangana High Court upholds treatment of business transfer as slump sale – fragmentation of consideration not permissible

 The Hon’ble Telangana High Court, in a recent decision, upheld the finding of the Tribunal that the transfer of a business undertaking as a going concern for a lump-sum consideration constituted a slump sale, rejecting the Revenue’s approach of fragmenting the transaction and taxing parts of the consideration as business income.

Background

• The taxpayer transferred its entire bottling and marketing business as an undertaking under an agreement dated 19 September 1997.
• The sale included all tangible and intangible assets, marketing network, goodwill, and a non-compete clause, for a lump-sum consideration.
• The Assessing Officer (AO) allocated the consideration among individual assets and taxed certain income as business income and capital gains.
• Both CIT(A) and Tribunal held that the transfer constituted a slump sale of a going concern on a lump-sum basis, with the entire amount being a capital receipt.

Revenue’s Arguments

·       The taxpayer acted merely as an agent/distributor of the counterparty and had no independent goodwill.

·       The compensation represented loss of future income, not transfer of a capital asset.

·       Payments under the non-compete clause should be treated as revenue receipts.

·       The existence of individual asset level values implied that the transaction should be taxed component wise under section 50B (capital gain on slump sale).

Taxpayer’s Arguments

·       The transfer was of the entire business as a going concern, and no specific values were assigned to individual assets.

·       The arrangement with the counterparty was on a principal-to-principal basis, not agency, and therefore business income provisions did not apply.

·       The transfer resulted in extinguishment of the source of income, and the consideration was accordingly capital in nature.

·       The specific statutory provisions governing such transfers (Section 50B) were introduced w.e.f. 1 April 2000 and hence not applicable to the year under consideration.

High Court Ruling

·       The Court held that the business was transferred for a lump-sum consideration without assigning values to individual assets and therefore constituted a slump sale.

·       It upheld the concurrent factual findings of the lower authorities that the transfer was of a going concern, and fragmenting the consideration for taxation purposes would be contrary to the intent of the law.

·       The Court further observed that since the transfer led to complete cessation of business and extinguishment of its source, the entire consideration was capital in nature.

·       It reaffirmed that subsequent legislative provisions could not be retrospectively applied to alter the tax treatment of past transactions.

Key Takeaway
This decision reiterates that the transfer of a business undertaking as a going concern for lump-sum consideration should be regarded as a slump sale, with the entire consideration treated as capital in nature. The ruling also emphasises that the tax authorities cannot artificially apportion the consideration among different assets to tax portions of it as revenue income.