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SREI Infrastructure Finance Limited vs. The Income Tax Settlement Commission & ORS decided by Delhi High Court on 30th March, 2012

June 2, 2012
The transfer of an undertaking under a Scheme of arrangement under Section 391-394 of Companies Act, 1956 is 'Slump sale' which is taxable under Section 50B of the Income-tax Act. Brief fact of the Case :
  • The petitioner (SREI Infrastructure Finance Limited) under a scheme of arrangement, transferred its project financing business and assets based financing business, for a consideration of Rs.375 lakhs.
  • The Settlement Commission (Income Tax Settlement commission) has held that the consideration of Rs. 375 lacs received by the petitioner was taxable under Section 50B of the Act as ''slump sale''.
Petitioner's Contention: The contention of the petitioner is that the ‘transfer’ under the Scheme of Arrangement is not a ‘sale’ under Section 50B of the Act. The Scheme of Arrangement sanctioned by the High Court of Calcutta under Sections 391 to 394 of the Companies Act, 1956 is statutory in nature and character. Section 50B of the Act has no applicability as the ‘transaction’ was under the Scheme of Arrangement and the same is not a ‘slump sale’ as contemplated under Section 2(42C) of the Act. The petitioner claims that Section 2(42C) of the Act deals with limited category/type of transactions i.e. sales, which are construed as a ‘slump sale’ and the broader and wider definition of the term ‘transfer’ as defined under Section 2(47) of the Act is not applicable to ‘slump sales’. High Court's Ruling:
  • The term ‘slump sale’, has been defined in Section 2(42C) of the Act, to mean transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
  • The term ‘transfer’ as used in said section is with reference to the transaction in the nature of ‘slump sale’. Thus 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 are covered by the definition under Section 2(42C) and then by Section 50B of the Act.
  • Section 50B of the Act was inserted to supersede decisions which held that a slump sale (i.e. transfer of business as a going concern) was not taxable for want of cost of acquisition.
  • The High Court further held that it would not be appropriate to construe and regard 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 Act. Use of word ‘sale’ in the term ‘slump sale’ does not and is not intended to narrow down the concept of ‘transfer’ as defined and understood in Section 2(47) of the Act.
  • Fair reading of Section 50B(1) of the Act and proviso thereunder makes it clear that it applies to all ‘transfers’ that can be categorized as a ‘slump sale’. Section 50B(2) of the Act also refers to transfer by way of sale i.e. ‘slump sale’.
  • The High Court observed that the Act was enacted to tax the income or gains made by a taxpayer. The Companies Act, 1956, on the other hand serves, and is intended to serve a different purpose. When a scheme under Section 391-394 of the Companies Act, 1956 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 as per provisions of the Act.
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