Delhi High Court rules on taxability of the Court approved transfer of undertaking as slump-sale

Snapshot of the ruling

This insight summarizes a recent pronouncement of the High Court of Delhi in the case of M/s SREI Infrastructure Finance Ltd. vs The Income Tax Settlement Commission & Ors1. The Delhi High Court has ruled that transfer of business undertakings under a Scheme of Arrangement (Scheme) approved under section 391-394 of the Companies Act, 1956 (the Cos Act) by a parent company to its subsidiary are covered under the provisions of section 50B of the Income Tax Act, 1961 (the IT Act) i.e. such transfers are slump sale for purposes of section 50B of the IT Act.
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 Commissions 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.

Writ Petition (Civil) No. 1592/2012

SIDFL is a subsidiary company of SIFL.

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.

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 SREIs 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.

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[2008] 26 SOT 397 (MUM.) ITA NO. 6410/MUM/2008