2014 (5) TMI 512 - HC - Income Tax

Transfer of Lift Division Not a Slump Sale under Income Tax Act

The High Court held that the transfer of the Lift Division was not a slump sale under the Income Tax Act, as it was deemed an exchange rather than a sale ... Deduction of provision for warranty – estimated present value of contingent liability - Held that:- Following M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai [2009 (5) TMI 16 - SUPREME COURT OF INDIA] with making of provision on the basis of estimated present value of contingent liability holds good during the assessment years in question qua warranty claims – Decided against Revenue. Transfer of Lift Division – Slump sale - The argument of the petitioner was that this is a transfer under the Scheme of Arrangement but is not a sale - Held that:- Relying upon Commissioner of Income Tax, Andhra Pradesh v/s Motors & General Stores (P) Ltd. [1967 (5) TMI 3 - SUPREME Court] the tribunal was rightly of the view that it is only if there is a sale of the cinema house and the other assets that the taxable profits and gains are to be computed u/s 10(2)(vii) as the amount by which the written down value exceeds the amount for which the assets are actually sold - the word 'sale' or 'sold' have not been defined in the Indian Income Tax Act, 1922 - These words have to be construed by reference to other enactments - a reading of the clauses in the Scheme of Arrangement shows that the transfer of the undertaking has took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, would not mean that the monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares - The Scheme does not refer to any monetary consideration for the transfer - The parties were agreed that the assessee was to transfer the undertaking and take bonds/preference shares as consideration - it was a case of exchange and not a sale - Section 2(42C) of the Act was inapplicable - If that was not applicable and was not attracted, then, Section 50B was also inapplicable - the Tribunal was of the view that the transfer of Lift Division comes within the purview of Section 2(47) of the Act but cannot be termed as a slump sale – the finding of fact cannot be said to be perverse or based on no material – as such no substantial question of law arises for consideration – Decided against Revenue. Issues Involved:1. Whether the transfer of the Lift Division constitutes a slump sale under Section 2(42C) and Section 50B of the Income Tax Act, 1961.2. Whether the deduction claimed by the assessee on account of the provisions for warranty is valid.Issue-wise Detailed Analysis:1. Transfer of Lift Division as a Slump Sale:The primary issue in this appeal was whether the transfer of the Lift Division by the assessee constituted a slump sale under Section 2(42C) and Section 50B of the Income Tax Act, 1961. The Assessing Officer had determined that the transfer was a slump sale and taxed it accordingly. This decision was upheld by the Commissioner of Income Tax (Appeals) but reversed by the Income Tax Appellate Tribunal (ITAT).The Tribunal noted that the transfer of the Lift Division was executed under a Scheme of Arrangement sanctioned by the Court, wherein the consideration was in the form of preference shares and bonds issued by the transferee company, Tiger Elevators Pvt. Ltd. The Tribunal analyzed the definition of 'slump sale' under Section 2(42C), which requires the transfer to be for a lump sum consideration without values being assigned to individual assets and liabilities.The Tribunal referred to the Supreme Court's judgment in the case of Commissioner of Income Tax, Andhra Pradesh v/s Motors & General Stores (P) Ltd., which distinguished between a sale and an exchange. The Tribunal concluded that the transfer in question was not a sale but an exchange, as there was no monetary consideration involved. The preference shares and bonds issued could not be equated to a monetary consideration. Therefore, the transfer did not qualify as a slump sale under Section 2(42C), and consequently, Section 50B was not applicable.The High Court upheld the Tribunal's findings, stating that the Tribunal's decision was based on a harmonious reading of the Scheme of Arrangement and the legal principles. The Court emphasized that the Tribunal's finding that the transfer was an exchange and not a sale was not perverse or based on no material. The Court also distinguished this case from the Delhi High Court's judgment in SREI Infrastructure Finance Ltd., where the transfer involved a monetary consideration.2. Deduction on Account of Provisions for Warranty:The second issue was whether the deduction claimed by the assessee on account of provisions for warranty was valid. The Tribunal had allowed the deduction, and the revenue challenged this decision in the appeal.The High Court noted that the Supreme Court's judgment in Rotork Controls Pvt. Ltd. v/s Commissioner of Income Tax had already settled this issue in favor of the assessee. The Supreme Court had held that provisions for warranty are allowable as a deduction. Therefore, the High Court concluded that the appeal did not raise any substantial question of law regarding the deduction for warranty provisions.Conclusion:The High Court dismissed the revenue's appeal, holding that the transfer of the Lift Division was not a slump sale under Section 2(42C) and Section 50B of the Income Tax Act, 1961. The Court also upheld the Tribunal's decision allowing the deduction for provisions for warranty, as it was covered by the Supreme Court's judgment in Rotork Controls Pvt. Ltd. The appeal did not raise any substantial question of law and was accordingly dismissed.