Finance Bill, 2021 has proposed to amend the provisions of the Income Tax Act, 1961 related to the scope of term ‘slump sale’ to cover all types of transfers as specified under Section 2(47) of the Income-tax Act, 1961 (“Act”). Thus the definition of ‘slump sale’ is proposed to be expanded to that extent.
Clarification for the Slump Sale
In order to provide certainty, it is proposed to clarify that slump sale shall include all types of transfer.
Section 50B deals with charging gains from slum sale of an undertaking under the head ‘capital gains’. In a slump sale, an undertaking is transferred from one person to another as a going concern for a lumpsum consideration without values being assigned to the individual assets and liabilities transferred.
Section 50B was introduced in the statute by the Finance Act, 1999. Prior to insertion of section 50B, there was no computation mechanism in the Act for charging capital gains tax on slump sale. Finance Act, 1999 has provided the clarity that the gains arising from such sales would be taxed under the head “capital gains” and there should be no ambiguity with regard to the mode of computation of such profits and gains.
Section 2(42C) was also inserted in the Act to define the term ‘Slump Sale’ as transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to the individual assets and liabilities.
The word ‘sale’ is not defined in the Income Tax Act. One can rely upon its meaning set forth in other statutes such as the Transfer of Property Act, 1882 which defines the word ‘sale’ to mean a transfer of ownership in exchange for a price paid or promised or part paid and part promised. The word ‘price’ is not defined either under the Income Tax Act, 1961 or under the Transfer of Property Act, 1882, but is defined under Section 2(10) of the Sale of Goods Act, 1930 to mean money consideration for the sale of goods.
Section 118 of the Transfer of Property Act, 1882 also defines the term ‘exchange’ by stating that when two persons mutually transfer the ownership of one thing for the ownership of another, neither thing nor both things being money only, the transaction is called an exchange.
Hence, after acquiring the undertaking, if the buyer pays no monetary consideration but issues allotment of shares, then such a transaction is consistently held to a transfer for exchange and not slum sale in the absence of money consideration,
It was consistently held that a monetary consideration is necessary for a transaction to qualify as a slump sale.
Thus, in order to provide for more clarity and to include exchange transactions for non-monetary consideration in case of slump sale within the ambit of slump sale transactions, an amendment is proposed in section 2(42C) of the Act.
Rationalisation of the provision of slump sale
Section 50B of the Act contains special provision for computation of capital gains in case of slump sale. Sub-section (42C) of section 2 of the Act defines “slump sale” to mean the transfer of one or more undertakings as a result of the sale for lump sum consideration without value being assigned to individual assets and liabilities in such cases. This has been interpreted by some courts that other means of transfer listed in sub-section (47) of section 2 of the Act, in relation to the definition of the word ― ‘transfer’ in relation to a capital asset like an exchange, relinquishment etc, are excluded.
While discussing transfer as a result of sale it needs to be kept in mind that it is the substance of the transaction that is more important than the name given to it by the parties to the transaction. For example, a transaction of “sale” may be disguised as “exchange” by the parties to the transaction, but such transactions may already be covered under the definition of slump sale as it exists today on the basis that it is transfer by way of sale and not by way of exchange. This principle was enunciated by Hon'ble Supreme Court in CIT vs. R.R. Ramakrishna Pillai [(1967) 66 ITR 725 SC]. Thus, if a transfer of an asset is in lieu of another asset (non-monetary) it can be said to be monetized in a situation where the consideration for the asset transferred is ascertained first and is then discharged by way of non-monetary assets. In this situation, it would be a case of transfer by way of sale and would thus be covered within existing provisions of section 50C of the Act. Based on this principle, Hon‘ble SC in the case of Artex Manufacturing Company [(1997), 227 ITR 260] held that the sale of the business on a going concern for a lump-sum non-monetary consideration was transfer by way of sale on the ground that the slump price was determined by the value on the basis of itemized assets, though this price was not mentioned in the agreement. Similarly, Hon'ble SC in the case of Dhampur Sugar Mills [(2006) 147 STC 57] considered the case of a dealer who took a sugar mill on long term lease for an agreed amount of license fee and in satisfaction therefore, the dealer was required to give the entire quantity of molasses to the owner of the sugar mill. It was held that the said transaction “in effect and substance” involved passing of monetary consideration and was accordingly liable to sales tax.
Thus, a transfer which “in effect and substance” is by way of sale is also currently covered in the definition of slump sale under section 50C of the Act as interpreted by various courts. However, it is still seen that tax avoidance schemes are drawn to defeat the intent of this provision and Courts can always intervene to find the true substance of the transaction and purpose of section of 50C of the Act.
In order to make the intention clear, it is proposed to amend the scope of the definition of the term “slump sale” by amending the provision of clause (42C) of section 2 of the Act so that all types of “transfer” as defined in clause (47) of section 2 of the Act are included within its scope.
This amendment will take effect from the 1st April, 2021 and shall accordingly apply to the assessment year 2021-22 and subsequent assessment years.
Clause 3 of the Finance Bill, 2021 amends section 2(42C) of the Income Tax Act, 1961 to expand the definition of slump sale to include all transfers whether for monetary consideration or not.
Amendment of section 2.
3. In section 2 of the Income-tax Act,––
…..
…..
(v) in clause (42C),─
(I) for the words “undertaking as a result of the sale”, the words “undertaking, by any means,” shall be substituted;
(II) after Explanation 2, the following Explanation shall be inserted, namely:––
‘Explanation 3.––For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47);’;
Amended provisions Explained
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
It is also proposed to amend clause (42C) of the said section which defines the expression “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 the individual assets and liabilities in such sales.
It is proposed to expand the scope of the definition of the term “slump sale” so as to mean the transfer of one or more undertakings, by any means, for lump sum consideration without value being assigned to individual assets and liabilities in such cases.
It is also proposed to insert an Explanation to the said clause so as to provide that the word “transfer” shall have the meaning assigned to it in clause (47) of the said section.
Conclusion
Though amendment is proposed in the definition of ‘slump sale’ to include exchange transfers within the purview of Slump sale, however, the law did not provide the methodology to determine the monetary value of exchanges assets is not provided which may lead to unwanted litigation. Even if section 50D applies, guidelines are required from the government to determine the monetary value of the assets given in exchange to acquire the undertaking.
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