2012 (4) TMI 319 - HC - Income Tax

Court affirms taxability of Rs. 375 lacs as capital gains under Section 50B

M/s SREI Infrastructure Finance Ltd. Versus The Income Tax Settlement Commission & Ors.

The court upheld the taxability of Rs. 375 lacs as capital gains under Section 50B of the Income Tax Act in a case involving a Scheme of Arrangement ... Slump Sale - 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 was sanctioned by the High Court of Calcutta under Section 391 to 394 of the Companies Act, 1956 and is statutory in nature and character. It is pleaded that 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. - Held that:– The term ‘transfer’ is used in Section 2(42C) 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 clause 2(42C) and then by Section 50B of the Act - decision of the Supreme Court in Vania Silk Mills (P) Ltd. Vs. CIT (1991 (8) TMI 2 - SUPREME Court) gave definition of “transfer” in Section 2(47) of the Act is inclusive, and therefore, extends to events and transactions which may not otherwise be “transfer” according to its ordinary, popular and natural sense. The Act i.e. Income Tax Act, 1961 was enacted to tax the income or gains made by an assessee. The Companies Act, 1956, on the other hand serves, and is intended to serve a different purpose and, therefore, when a scheme under Sections 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 under and as per provisions of the Act. Issues Involved:1. Taxability of Rs. 375 lacs under Section 50B of the Income Tax Act as capital gains on 'slump sale'.2. Applicability of Section 50B to transactions under a Scheme of Arrangement sanctioned by the High Court.3. Interpretation of 'slump sale' and 'transfer' under Sections 2(42C) and 2(47) of the Income Tax Act.Detailed Analysis:Issue 1: Taxability of Rs. 375 lacs under Section 50B of the Income Tax Act as capital gains on 'slump sale'The petitioner, SREI Infrastructure Finance Ltd., contended that the transfer of its project finance business to its subsidiary, SIDFL, under a Scheme of Arrangement sanctioned by the High Court of Calcutta, should not be considered a 'slump sale' under Section 50B of the Income Tax Act. The Settlement Commission, however, determined that the consideration of Rs. 375 lacs received from SIDFL was taxable as capital gains under Section 50B. The court upheld this decision, emphasizing that Section 50B applies to any transfer of business as a going concern for a lump sum consideration without individual values assigned to assets and liabilities.Issue 2: Applicability of Section 50B to transactions under a Scheme of Arrangement sanctioned by the High CourtThe petitioner argued that since the Scheme of Arrangement was sanctioned by the High Court under Sections 391 to 394 of the Companies Act, 1956, it should not be considered a 'sale' under Section 50B. The court rejected this argument, stating that the statutory nature of the scheme does not exempt it from being categorized as a 'slump sale' for tax purposes. The court referred to the Supreme Court's decision in Hindustan Lever vs. State of Maharashtra, which clarified that an order sanctioning amalgamation is based on a compromise between companies and constitutes a transfer of property, thus falling within the definition of 'conveyance'.Issue 3: Interpretation of 'slump sale' and 'transfer' under Sections 2(42C) and 2(47) of the Income Tax ActThe court analyzed the definitions of 'slump sale' under Section 2(42C) and 'transfer' under Section 2(47). It concluded that the term 'slump sale' includes any transfer of business for a lump sum consideration without assigning individual values to assets and liabilities. The court emphasized that the term 'transfer' under Section 2(47) is broad and inclusive, covering various forms of asset disposition, including sales, exchanges, and relinquishments. The court rejected the petitioner's argument that Section 50B should apply only to 'sales' in a narrow sense and not to broader 'transfers' as defined in Section 2(47).The court cited the Supreme Court's decision in CIT, Cochin vs. Grace Collis, which held that the extinguishment of rights in a capital asset constitutes a 'transfer' under Section 2(47), independent of whether it is consequent upon a traditional sale. This interpretation supports the inclusion of statutory transfers under schemes of arrangement within the ambit of 'slump sale' for tax purposes.Conclusion:The court dismissed the writ petition, affirming that the Rs. 375 lacs received by the petitioner from SIDFL under the Scheme of Arrangement is taxable as capital gains under Section 50B of the Income Tax Act. The court upheld the broad interpretation of 'slump sale' and 'transfer', ensuring that statutory schemes of arrangement are not exempt from capital gains tax. No other contentions were raised, and the petitioner did not rely on Section 47 of the Act. The petition was dismissed with no order as to costs.