By ACA Sanjeev Jain
Synopsis
Earlier
there were two tribunal judgements wherein it was held that transfer
effected as a result of the Court approved scheme could not said to be a
sale of an undertaking. Consequently, such a transfer could not be said
to be as a result of sale and therefore provisions u/s 50B read with
section 2(42C) would not apply. However Hon’ble Delhi High Court in his
recent judgement of SREI’s has announced a contrary view as against
earlier decisions pronounced by the tribunal.
Conclusion/View Point: -
When
a scheme under Sections 391-394 of the Cos Act is sanctioned by the
Court, it is treated as a binding statutory scheme because the scheme
has to be implemented and enforced. This cannot, or is not, a ground to
escape tax on, transfer‟ of a capital asset under and as per provisions
of the IT Act. Hence, all transfers in the nature of sales‟ i.e. Slump
sales‟ are covered by section 2(42C) of the IT Act and accordingly tax.
Impact analysis
The
Mumbai Income Tax Appellate Tribunal („Tribunal‟) in the case of Avaya
Global Connect Ltd. vs ACIT3 held that transfer effected as a result of
the Court approved scheme could not said to be a sale of an undertaking.
Consequently, such a transfer could not be said to be as a result of
sale and, therefore, the provisions of section 50B read with section
2(42C) would not apply. Similarly, the Tribunal in the case of and
Bharat Bijilee Ltd. vs ACIT4 observed that such court approved transfer
cannot said to be sale of undertaking by the taxpayer. Interestingly,
both these decisions have neither been relied upon by SREI nor dealt
with by the High Court. The judgment of the Delhi High Court in SREI‟s
case wherein a contrary view has been expressed, though not the
jurisdictional High Court, could still have an impact of overturning the
decisions of the Tribunal.
Facts of the case
- SREI Infrastructure Finance Ltd („SIFL‟) entered into a scheme under section 391-394 of the Cos Act pursuant to which it transferred its project finance business and assets based financing business („business undertaking‟) to SREI Infrastructure Development Finance Ltd („SIDFL‟)2 for a lumpsum consideration of Rs. 375 lakhs.
- SIFL claimed that the said transfer was not a sale and also not a „slump-sale‟ under section 50B read with section 2(42C) of the IT Act and hence, not subject to capital gains tax.
- SIFL filed an application under section 245C(1) of the IT Act before the Settlement Commission to disclose additional incomes. The Settlement Commission passed the final order wherein, inter-alia, it held that the receipt of Rs. 375 lakhs as consideration for transfer of business undertaking was chargeable to tax as „slump-sale‟ under section 50B of the IT Act and computed taxable capital gains thereon.
- SIFL filed a writ petition to challenge the Settlement Commission‟s order before the Delhi High Court on the aforementioned alleged addition.
Key question adjudicated by the Delhi High Court
Whether
transfer of business undertaking under the Court sanctioned scheme can
be considered „slump-sale‟ and attract the provisions of section 50B of
the IT Act and therefore, receipts be subject to capital gains taxation
Ruling of the Delhi High Court
- The key ratios/decision/principles laid down by the Delhi High Court are summarized as under.
- The term „slump sale‟ is defined in section 2(42C) to mean „transfer‟ of an undertaking as a result of a „sale‟.
- The use of the word „transfer‟ in section 2(42C) is significant and any type of „transfer‟ which is in nature of slump-sale i.e. when lump sum consideration is paid without values being assigned to individual assets and liabilities is covered by section 2(42C) and therefore, by section 50B of the IT Act. This is the reasonable, plausible and natural grammatical meaning which has to be given to the definition of „slump sale‟.
- It is not 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 IT Act. The intention of the legislature was to plug in the gap and tax slump sales and not to leave them out of the tax net. The term „slump sale‟ has been used in the enactment to describe a particular and specific type of transfers called slump sales. Use of the word „sale‟ in the term „slump sale‟ does not narrow down the concept of „transfer‟ as defined and understood in section 2(47) of the IT Act.
- The word „transfer‟ as defined in section 2(47) is an inclusive definition of wide import.
- Hence, all transfers in the nature of „sales‟ i.e. „slump sales‟ are covered by section 2(42C) of the IT Act.
- While the IT Act was enacted to tax the income or gains made by a taxpayer, the Cos Act is intended to serve a different purpose. Therefore, when a scheme under Sections 391-394 of the Cos Act is sanctioned by the Court, it is treated as a binding statutory scheme because the scheme has to be implemented and enforced. This cannot, or is not, a ground to escape tax on „transfer‟ of a capital asset under and as per provisions of the IT Act.
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