Tuesday, August 12, 2014

Bombay High Court on "Slump Sales"

The Bombay High Court recently considered as interesting point on ‘slump sales’ in the income tax context.  The case, CIT v Bharat Bijlee 365 ITR 258, arose after the assessee company transferred one of its undertakings (as a going concern) to another entity under a scheme of arrangement u/s 391-394 of the Companies Act, 1956.  There was no monetary consideration for the transfer: rather, the consideration was that the transferee issued preference shares and bonds to the transferor.

The Assessing Officer considered the fact that the assessee had in fact received consideration (in the form of preference shares and bonds), and held that the transaction amounted to a ‘slump sale’ within the meaning of s.2(42c) of the Income Tax Act, 1961.  Accordingly, he sought to compute tax on the transfer u/s 50B of the Act. The issue travelled to the Income Tax Appellate Tribunal. The ITAT found as a fact that the transaction was one where there was no monetary consideration; the only consideration was in kind.  Further, the ITAT also found that “this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment / issue of bonds/preference shares.”  On these facts, it was found that the transaction was not a sale, but an exchange. 

Before the High Court, the Revenue contended that the transaction fell within the ambit of s 2(42C). Reliance was placed on the decision of the Delhi High Court in SREIInfrastructure Finance Ltd. v. ITSC.  These contentions were rejected by the Hon’ble High Court; and the findings and conclusions of the ITAT were affirmed.  The High Court applied the principles laid down by the Supreme Court in CIT V. Motors & General Stores (P) Ltd. It held that while the name/label given by parties to a transaction is not conclusive, the real character (or legal substance) of the transaction in the present case was an exchange and not a sale.  The principles laid down by the Supreme Court were not affected by the insertion of s.50B. S 2(42C) refers to “transfers …. as a result of the sale …..”, and hence would have no application to case where the legal character of a transaction is not a sale.  The decision of the Delhi High Court in SREI Infrastructure was distinguished on the basis that in SREI, there was monetary consideration involved in the scheme of arrangement.  The transfer in that case was therefore not an exchange but a sale. [Interestingly, the Delhi High Court in the course of its judgment had held that the term 'slump sale' cannot be construed to mean 'sale' in the narrow sense. The Delhi High Court placed importance on the word 'transfer' in s. 2(42C). On the Delhi High Court's reasoning, it is not clear what 'in the nature of a sale' can refer to. As explained by the Bombay High Court, these observations in SREI must be read in the context of the particular argument canvassed in SREI, that transfers under schemes of arrangement can never be 'sales'.]

The Bombay High Court has thus clarified that s 2(42C) will be applicable only when the true character of the transaction involved is a sale. The Delhi High Court had held that the mere fact that the transaction is under a scheme of arrangement does not necessarily indicate that there is no sale. That Court rejected the argument that transfers under schemes of arrangement were always ‘statutory’ in nature, and could never be considered ‘sales’. The Bombay High Court did not have occasion to consider this holding, having found that the transaction was in any event not a sale. One of the tests is whether there is an element of monetary consideration involved; and this test is to be answered at by looking at the substance of the transaction. The finding of the ITAT [that this was not a case where parties had determined consideration in monetary terms and that allotment of shares/bonds was the real consideration (as opposed to only a mode for disbursement of monetary consideration)] appears to have been determinative in the facts before the Bombay High Court. 

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