Mumbai ITAT rules that transfer of an undertaking under slump exchange is not liable to capital gains tax

The Mumbai Tribunal holds that Transfer of undertaking against issue of bonds / shares is not a “slump sale” and not taxable as capital gains.

Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Bharat Bijlee Limited Vs. ACIT (ITA NO. 6410/MUM/2008) (Judgment Date: 11 March 2011, Assessment Year: 2005-06)  , held that where a business undertaking is transferred against issue of bonds / shares, the transaction is not a “Slump Sale” as defined under Section 2(42C) of the Income-tax Act, 1961 (the Act) and therefore provisions of section 50B of the Act relating to computation of capital gains in case of Slump Sale are not applicable to such transfer.

Further it is held that as the cost of acquisition / improvement of business can not be ascertained, computation mechanism fails and such transfer is not liable to tax

Facts of the case

• During the year the taxpayer transferred its Lift Field Operations Undertaking (the Undertaking) to M/s. Tiger Elevators Pvt. Ltd.

• The transfer was under the Court approved Scheme of Arrangement under Section 391 read with section 394 of the Companies Act, 1956.

• The transfer of the undertaking was in exchange for Preference shares and Bonds issued by Tiger Elevator Pvt. Ltd. to the taxpayer.

Tribunal’s Ruling

The Tribunal made following observations / conclusions in its Order:

• Consideration for transfer of undertaking was bonds / shares and there was no monetary consideration.

• Monetary consideration is pre-requisite for sale.

• Thus it was a case of exchange and not sale.

• Consequently, the transaction was not a “Slump sale” as defined under Section 2(42C) of the Act.

• Therefore, the provisions of section 50B of the Act relating to computation of capital gain in case of slump sale were also not applicable.

• Further, the transfer being one of the going concerns, it is not possible to ascertain cost of acquisition and the cost of improvement of the undertaking.

• In view of the above, since, computation provisions cannot be applied in the present case, charge of capital gain to tax should also fail.

Our Comments :- Similar view was also expressed by the Mumbai bench in the case of Avaya Global Connect Ltd. Vs. ACIT [2009] 122 TTJ 300 (Mum) wherein it was held that transfer of business under a scheme of arrangement does not amount to slump sale as defined under Section 2(42C) of the Act. It should be noted that in case of Avaya Global, however, no consideration was paid by the transferee entity. The Tribunal held that in absence of consideration, the transaction cannot be treated as sale.