Share transfer versus slump sale: equity sale treated as capital gains, with valuation rules held inapplicable.

A transfer of only equity shares in an Indian subsidiary was treated as a share transfer, not a slump sale, because the subsidiary's underlying assets and liabilities remained with the company and the transaction did not amount to transfer of the undertaking itself. On that basis, the capital gains were stated to be taxable at 10 per cent under section 112(1)(c)(iii). The consideration was considered ascertainable from the valuation report and discounted cash flow method, so the deeming rule in section 50D and the reference mechanism in section 55A were said to be inapplicable. The section 56(2)(viia) point was treated as irrelevant to the seller, and the permanent establishment objection was regarded as redundant.

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Issues: Whether the capital gains arising from transfer of equity shares of an Indian company by a non-resident Australian company were taxable at 10 per cent under section 112(1)(c)(iii) of the Income-tax Act, 1961, or whether the transaction was a slump sale or otherwise attracted sections 50B, 50D and 55A of the Income-tax Act, 1961.

Analysis: The applicant transferred only its equity shares in the Indian subsidiary and the underlying assets and liabilities of the subsidiary remained with the company after the transfer. The strategic arrangements linked with the business relationship were terminated on closing, but that did not convert the share transfer into a transfer of the undertaking itself. The facts were held to be on all fours with the principle that a mere transfer of shares results only in a change of shareholding and not in a slump sale of the undertaking. The consideration for the shares was also found to be ascertainable on the basis of the valuation report and the discounted cash flow method, so the deeming machinery in section 50D and the reference mechanism in section 55A were not attracted. The contention based on section 56(2)(viia) was held to be irrelevant to the seller, and the permanent establishment objection was treated as redundant once the transaction was accepted as a share transfer giving rise to capital gains in the hands of the applicant.

Conclusion: The transfer was held to be a share transfer and not a slump sale, section 50D and section 55A were inapplicable, and the capital gains were answerable to tax at 10 per cent under section 112(1)(c)(iii) in favour of the assessee.

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