Grasim Industries Ltd. Vs DCIT (ITAT Mumbai)
Court-Approved Schemes vs. “Slump Sale” after the Finance Act 2021-22: Legal Faultlines and Practical Tax Planning
The Income Tax Appellate Tribunal (“ITAT”), Mumbai, in Grasim Industries Ltd. v. DCIT (ITA No. 2224/Mum/2016, decided on 23 May 2025), revisited a fundamental question in corporate tax law: whether a transfer of an undertaking under a court-approved scheme of arrangement constitutes a “slump sale” within the meaning of Section 2(42C) read with Section 50B of the Income-tax Act, 1961 (“the Act”). This issue, though seemingly settled before the Finance Act, 2021, has acquired renewed significance following the legislative expansion of the definition of “slump sale” to include transfers effected “by any means,” and not merely “as a result of sale.”
The Grasim ruling restores the conceptual clarity between contractual transfers and those effectuated by operation of law, even as it highlights the broader jurisprudential tension created by the 2021-22 amendments that collapsed this distinction.
Statutory and Legislative Context
Prior to the Finance Act, 2021, Section 2(42C) defined a slump sale as the transfer of one or more undertakings “as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities.” Judicial interpretation consistently held that the expression “as a result of sale” presupposed a bilateral contract, consideration, and transfer of property by consent. Court-approved amalgamations and arrangements, effected by statutory compulsion, were therefore treated as transfers by operation of law, not as sales.
The Finance Act, 2021 substituted the words “as a result of the sale” with “by any means,” enlarging the definition’s ambit to cover exchanges, reorganisations, and statutory transfers. The Finance Act, 2022 further amended Section 50B to align the computation of capital gains with this broadened definition. These amendments, effective from 1 April 2021, were intended to curb perceived avoidance through non-cash business transfers. Yet, their breadth has unsettled long-settled distinctions within the tax code itself.
The Tribunal’s Findings in Grasim Industries Ltd. v. DCIT
The assessee had transferred its cement undertaking to a subsidiary pursuant to a court-sanctioned scheme of arrangement under Sections 391-394 of the Companies Act, 1956. The Assessing Officer sought to tax the transfer as a slump sale under Section 50B, arguing that it involved the transfer of a going concern for a lump sum consideration.
Appearing for the assessee, Senior Advocate Shri J.D. Mistri contended that the transaction was not a sale but a statutory vesting arising out of judicial sanction, relying on CIT v. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC) and CIT v. R.R. Ramakrishna Pillai (1967) 66 ITR 725 (SC). It was argued that in such schemes, title passes not through agreement but by the court’s order, which has an overriding statutory effect.
The ITAT agreed with the assessee’s submissions and categorically held-
“A sale postulates transfer by act of parties for a price. Where property vests in another entity under a court’s sanction, such vesting is by operation of law and not pursuant to a contract of sale. The essential elements of a sale, offer, acceptance, and consideration, are absent in such statutory transfers.”
The Tribunal noted that the transaction occurred in the assessment year 2009-10, long before the Finance Act, 2021 amendments. Consequently, the broadened definition could not be applied retrospectively. The Bench, comprising Shri Saktijit Dey (VP) and Shri N.K. Billaiya (AM), concluded that-
“In the absence of any express retrospective provision, the amendment brought by the Finance Act, 2021, which expanded the definition of ‘slump sale’, cannot govern transactions of prior years. The law as it then stood confined such transfers to contractual sales.”
Thus, the Tribunal excluded the court-approved arrangement from the scope of Section 50B and held that no capital gains could be computed on such transfer.
The Doctrinal Divide: Sale vs. Statutory Transfer
The Tribunal’s analysis reaffirms a core doctrinal distinction that lies at the heart of capital gains jurisprudence. A sale, as defined under Section 54 of the Transfer of Property Act, 1882, requires a consensual transaction wherein property is transferred by one person to another in exchange for a price paid or promised. In contrast, a transfer under a scheme of arrangement sanctioned by a High Court or the National Company Law Tribunal (“NCLT”) operates in rem and does not emanate from the volition of parties but from the binding effect of judicial sanction.
This principle had been recognised by the Bombay High Court in Bharat Bijlee Ltd. v. CIT (2014) 365 ITR 258 (Bom), where it was observed that-
“The transfer in a scheme of arrangement under Sections 391-394 is by operation of law. The consideration and vesting arise from the scheme’s sanction, not from the consensual contract of sale.”
The ITAT’s reasoning in Grasim effectively reaffirms this interpretation and distinguishes statutory transfers from contractual sales even after the expanded scope of Section 2(42C).
Temporal Application and Constitutional Consistency
The Tribunal’s insistence on prospective application of the 2021 amendment reflects a consistent constitutional approach. It cited the principle laid down by the Supreme Court in Sedco Forex International Drill Inc. v. CIT (2005) 279 ITR 310 (SC), that a taxing provision cannot be applied retrospectively unless the legislature expressly provides for such effect. The Bench implicitly invoked Article 265 of the Constitution, no tax shall be levied or collected except by authority of law, to underscore that retrospective enlargement of tax liability offends the rule of legality.
The Tribunal also echoed the doctrine of legitimate expectation: taxpayers who undertook reorganisations based on settled judicial interpretations could not be prejudiced by a subsequent legislative recharacterisation of their transactions. The Grasim ruling thereby re-establishes interpretive discipline in the face of expansive statutory drafting.
Analytical Implications and Emerging Faultlines
While Grasim restores certainty for pre-2021 transactions, it leaves unresolved the status of post-amendment schemes. The inclusion of the words “by any means” in Section 2(42C) now blurs the line between transfers under contract and those by statutory fiat. This overlap risks drawing genuine reorganisations, otherwise exempt under Sections 2(1B), 2(19AA), and 47(vii), within the sweep of Section 50B.
From a doctrinal standpoint, this conflation undermines the internal coherence of the Act. The legislative expansion, though ostensibly aimed at curbing avoidance, may in practice overreach into legitimate transactions that Parliament had historically sought to exempt. The Grasim order implicitly warns that a literal reading of the post-2021 definition, without contextual balancing, would result in “taxation of transfers which are legal consequences of court orders, not commercial sales.”
Equally significant is the Tribunal’s reaffirmation that tax computation under Section 50B presupposes the existence of a “sale consideration.” In statutory vesting, there may be an exchange ratio or allotment of shares, but the absence of price payment in money or money’s worth renders the computation mechanism inapplicable. The ruling thus maintains the logical symmetry between chargeability and computability.
Conclusion
The Grasim Industries decision represents a pivotal reaffirmation of interpretative restraint in tax adjudication. By holding that statutory transfers under court-approved schemes cannot be retroactively taxed as slump sales, the ITAT has drawn a clear temporal and doctrinal boundary between law as it stood and law as it was later amended.
Yet, beneath this restoration of certainty lies a more complex reality. The post-2021 framework of Section 2(42C) and Section 50B now threatens to engulf even bona fide reorganisations in its widened net. Unless legislative or judicial clarification is forthcoming, the fundamental distinction between “transfer by act of parties” and “transfer by operation of law” risks erosion, a shift that could unsettle the equilibrium between legitimate corporate restructuring and the tax system’s anti-avoidance objectives.
The Grasim ruling, therefore, is not merely a taxpayer victory; it is a constitutional reminder that while Parliament may widen definitions to close loopholes, it cannot erase the foundational requirement that taxation must follow both form and law. In reaffirming this boundary, the Tribunal has preserved the integrity of judicially sanctioned schemes and the certainty that underpins the rule of law in fiscal matters.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
