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Transfer of undertaking not involving monetory consideration is an exchange transaction and not slump sale

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Recently, the Bombay High Court (High Court) in the case of Bharat Bijlee Limited (the taxpayer or the Company) had an occasion to reconsider the issue of taxability on slump exchange and held the …

Recently, the Bombay High Court (High Court) in the case of Bharat Bijlee Limited (the taxpayer or the Company) had an occasion to reconsider the issue of taxability on slump exchange and held the same to be not taxable under the provisions of Section 50B of the Income-tax Act, 1961 (the Act).

On an appeal of the taxpayer, the Income-tax Appellate Tribunal (the Tribunal) had held that the transfer of an undertaking in exchange for issue of preference shares and bonds, without any mention of monetary consideration for the transfer, was a case of exchange and not a sale, and therefore, provision of Section 50B of the Act were inapplicable. The High Court dismissed the appeal filed by the revenue and upheld the order passed by the Tribunal.


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  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Transfer of undertaking not involving monetory consideration is an exchange transaction and not slump sale 15 May 2014 B Background Recently, the Bombay High Court (High Court) in the case of Bharat Bijlee Limited 1 (the taxpayer or the Company) had an occasion to reconsider the issue of taxability on slump exchange and held the same to be not taxable under the provisions of Section 50B of the Income-tax Act, 1961 (the Act). On an appeal of the taxpayer, the Income-tax Appellate Tribunal (the Tribunal) had held that the transfer of an undertaking in exchange for issue of preference shares and bonds, without any mention of monetary consideration for the transfer, was a case of exchange and not a sale, and therefore, provision of Section 50B of the Act were inapplicable. The High Court dismissed the appeal filed by the revenue and upheld the order passed by the Tribunal. ________________ 1 CIT v. Bharat Bijlee Ltd. (ITA No. 2153 of 2011) – Taxsutra.com Facts of the case  The Company had transferred its Lift Field Operations undertaking under the Court approved arrangement under Section 391, read with Section 394 of the Companies Act, 1956 to M/s. Tiger Elevators Private Limited.  The transfer of the undertaking took place in exchange of preference shares and bonds issued by Tiger Elevators Private Limited to the Company.  The return of income declaring the total income of INR251.2 million, excluding gain, if any, on transfer of undertaking, was filed for the Assessment Year 2005-06 which was selected for scrutiny.  The Assessing Officer (AO) held that the transfer of undertaking was slump sale covered under Section 50B of the Act and hence, gain arising on transfer was subject to tax.
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the decision of the AO, however, the Tribunal reversed the decision of the AO.  The tax department challenged the judgment passed by the Tribunal. Issue before the High Court  Whether, transfer of undertaking in exchange of preference shares and bonds with no monetary consideration under the Court approved scheme of arrangement was covered under the ambit of slump sale as defined under Section 2(42C) of the Act, and thus taxable under Section 50B? Tax department’s contentions  The transaction is squarely covered in the definition of slump sale under Section (42C) of the Act and was liable to tax under Section 50B of the Act.  The transfer of the undertaking was for consideration. That consideration was in rupees/Indian currency. The consideration is the value of the shares which have been handed over as a part of the transfer or the transaction. That does not mean that the transfer is not a slump sale.  Merely because the transfer has been brought by way of scheme of arrangement filed under Section 391 to Section 394 of the Companies Act, 1956 before the High Court, does not mean that it is not a slump sale.  The consideration should be the value of the shares which had been handed over as a part of the transfer or the transaction.  This case should be decided in the light of the decision of the Delhi High Court in the case of SREI Infrastructure Finance Ltd. 2 (SREI decision) holding that the transfer of project finance business and assets was taxable under Section 50B of the Act as slump sale. Taxpayer’s contentions  For slump sale, the transfer has to be by way of sale. In the present case, the undertaking has been transferred in consideration of issue of preference shares to the taxpayer. There was no consideration in money which was paid or received.  The transfer of undertaking was an exchange and not a sale and, therefore, not liable to tax under Section 50B of the Act. _______________ 2 SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission [2012] 207 Taxman 74 (Del)  The question cannot be said to be a substantial question of law as the view taken by the Tribunal is in consonance with law and the factual materials placed on record. High Court’s ruling  The definition of slump sale as defined under Section 2(42C) of the Act together with the explanation, has been referred by the Tribunal in its order. The Tribunal also analysed the transaction/transfer in the present case in the backdrop of the legal principles. The Tribunal referred to the judgment of the Supreme Court in the case of Motors & General Stores (P) Ltd 3 where the transfer of a cinema hall for certain number of cumulative preference shares was held to be ‘exchange’ and not ‘sale’.  In the light of the principles laid down above, the Tribunal then concluded that the Scheme of Arrangement approved by the Court in the present case, cannot be said to be a sale of the undertaking. The transfer of the undertaking had taken place in exchange for issue of preference shares and bonds as the scheme did not refer to any monetary consideration.  The findings of the Tribunal cannot be said to be contrary and based on no material or vitiated by an error of law apparent on the face of the record. Therefore, the appeal does not involve any substantial question of law.  The High Court also distinguished the SREI decision stating that in that case the consideration was money plus shares and not shares or bonds exclusively. Therefore the transfer was sale and not an exchange.  The tax department’s appeal was dismissed as it did not raise the substantial question of law. Our comments This is a welcome decision from the Bombay High Court. The High Court has considered the facts of the case, cases relied upon and merits of the case and thereafter dismissed the appeal on the basis that there is no substantial question of law. Dismissal of the appeal on the basis that there is no substantial question of law impliedly confirms the distinction between slump sale and slump exchange, and also non-taxability of slump exchange. _______________ 3 CIT v. Motors & General Stores (P) Ltd [1967] 66 ITR 692 (SC)
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010