INCOME TAX QUESTIONS & ANSWERS SERIES XXVI
Sub: Whether any sum received from a subsidiary company by a holding company under scheme of arrangement sanctioned by High Court under provisions of Section 391 to 394 of the Companies Act, 2013 , be treated as 'Slump Sale' and liable to Capital Gain Tax?
QUESTION: ABC Finance Corp., a finance company had received certain amount from its subsidiary, under a scheme of arrangement sanctioned by the High Court under sections 391 to 394 of the Companies Act, 1956. Can this scheme of arrangement be treated as slump sale to attract capital gains provisions? Discuss in the light of decided case law.
LET'S CONSIDER SOME IMPORTANT DEFINITIONS
MEANING OF 'SLUMP SALE'
In simple words, 'slump sale' is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel.
As per section 2(42C) of Income -tax Act 1961, 'slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
'Undertaking' has the same meaning as in Explanation 1 to section 2(19AA) defining 'demerger'.
As per Explanation 1 to section 2(19AA), 'undertaking' shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2 to section 2(42C) clarifies that the determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities. Thus, if value is assigned to land for stamp duty purposes, the transaction will be a qualifying slump sale under section 2(42C)
A sale in order to constitute a slump sale must satisfy the following quick test:
i) Business is sold off as a whole and as a going concern;
ii) Sale for a lump sum consideration;
iii) Materials available on record do not indicate item-wise value of the assets transferred
TAXABILITY OF GAINS ARISING ON SLUMP SALE
1. Section 50B of the Income-tax Act, 1961 provides the mechanism for computation of capital gains arising on slump sale. On a plain reading of the Section, some basic points which arise are:
2. Section 50B reads as 'Special provision for computation of capital gains in case of slump sale'. Since slump sale is governed by a 'special provision', this section overrides all other provisions of the Act.
3. Capital gains arising on transfer of an undertaking are deemed to be long-term capital gains. However, if the undertaking is 'owned and held' for not more than 36 months immediately before the date of transfer, gains shall be treated as short-term capital gains.
4. Taxability arises in the year of transfer of the undertaking.
5. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act.
6. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.
7. In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking.
ANSWER:
The facts of the case are similar to that of SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission (2012) 207 Taxman 74 of Income tax Act (Delhi), where the Delhi High Court held that it would be wrong to infer that section 50B is applicable only in case of actual "sale" of assets. Moreover, section 50B of Income tax Act shall be applicable in all types of "transfer" mentioned in section 2(47). When a scheme under sections 391 to 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. However, this cannot be a ground for the assessee to escape tax on 'transfer' of a capital asset under the provisions of the Income-tax Act, 1961. The taxability of the said transaction is to be decided as per the provisions of the Income-tax Act, 1961.
LET'S CONSIDER DECISION OF HIGH COURT IN ABOVE REFERRED CASE
SREI Infrastructure finance Limited vs. Income tax settlement commission(2012) 207 Taxman 74
The transfer of an undertaking under a Scheme of arrangement under Section 391-394 of Companies Act, 1956 is 'Slump sale' which is taxable under Section 50B of the Income-tax Act.
BRIEF FACT OF THE CASE
1. The petitioner (SREI Infrastructure Finance Limited) under a scheme of arrangement, transferred its project financing business and assets based financing business, for a consideration of Rs.375 lakhs.
2. The Settlement Commission (Income Tax Settlement commission) has held that the consideration of Rs. 375 lacs received by the petitioner was taxable under Section 50B of the Act as "slump sale".
PETITIONER'S CONTENTION
The contention of the petitioner is that the 'transfer' under the Scheme of Arrangement is not a 'sale' under Section 50B of the Act. The Scheme of Arrangement sanctioned by the High Court of Calcutta under Sections 391 to 394 of the Companies Act, 1956 is statutory in nature and character. Section 50B of the Act has no applicability as the 'transaction' was under the Scheme of Arrangement and the same is not a 'slump sale' as contemplated under Section 2(42C) of the Act.
The petitioner claims that Section 2(42C) of the Act 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) of the Act is not applicable to 'slump sales'.
HIGH COURT'S RULING
1. The term 'slump sale', has been defined in Section 2(42C) of the Act, to mean transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
2. The term 'transfer' as used in said section is with reference to the transaction in the nature of 'slump sale'. Thus 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 are covered by the definition under Section 2(42C) and then by Section 50B of the Act.
3. Section 50B of the Act was inserted to supersede decisions which held that a slump sale (i.e. transfer of business as a going concern) was not taxable for want of cost of acquisition.
4. The High Court further held that it would not be appropriate to construe and regard 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. Use of word 'sale' in the term 'slump sale' does not and is not intended to narrow down the concept of 'transfer' as defined and understood in Section 2(47) of the Act.
5. Fair reading of Section 50B(1) of the Act and proviso thereunder makes it clear that it applies to all 'transfers' that can be categorized as a 'slump sale'. Section 50B(2) of the Act also refers to transfer by way of sale i.e. 'slump sale'.
THE HIGH COURT OBSERVED THAT
The Income Tax Act,1961 was enacted to tax the income or gains made by a taxpayer. The Companies Act, 1956, on the other hand serves, and is intended to serve a different purpose. When a scheme under Section 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. This cannot, or is not, a ground to escape tax on 'transfer' of a capital asset as per provisions of the Act.
Therefore, although the scheme is approved by the court under sections 391 to 394 of the Companies Act, 1956 it shall be treated as slump sale and capital gains provisions would be attracted.
DISCLAIMER: The above write up is only for information and knowledge of readers. The view expressed above are the personal view of the author. It is advisable to consult with professional in case of necessity.
CAclubindia
