The simplicity of the Shakespearean adage ‘A Rose by any other name would smell just as sweet’ unfortunately does not apply to the word ‘slump sale. While the corporate world is familiar with this word, its precise, legal definition is still under scrutiny. What does slump sale truly mean? Simply put a slump sale is the sale of a business as a going concern with all its assets and liabilities on an as-is-where-is basis for a lump sum amount as consideration. In a slump sale no particular value is given to the individual assets and liabilities of a business.
A slump sale under the Indian law means 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 sales1. Slump sales in the recent past have become an effective and preferred tool to undertake business transfers due to the associated tax benefits under the Income Tax Act, 1961 (“IT Act“).
In a noteworthy judgement2 by the Madras High Court, it has been held that a monetary consideration is necessary for a transaction to qualify as a ‘sale’, and consequently for a transaction to be a ‘slump sale’. It further held that a transfer of business in lieu of issuance of shares by a company as consideration does not amount to a ‘sale’ and therefore, cannot be considered a ‘slump sale’ under the IT Act.
Background of the Case
Areva T&D India Limited (“Areva“) had transferred its non-transmission and distribution business on a going-concern basis, to its subsidiary Alstom Industrial Products Limited (“Alstom“), pursuant to a scheme of arrangement sanctioned by the Calcutta High Court under the Companies Act, 1956. Areva for this transfer received Rs. 413 million in the form of fully paid up equity shares of Alstom as consideration for the transaction on the basis of an independent joint valuation undertaken.
Areva then branded the transaction as a slump sale and filed its income-tax return accordingly taking into consideration the benefit provided to slump sale transactions under the IT Act with respect to computation of capital gains in case of a slump sale. Thereafter, due to certain amendments to the IT Act, Areva raised an alternate submission and contended that the transfer of the non T & D business was by way of a scheme of arrangement approved by the High Court of Calcutta under the Companies Act, 1956 and therefore, it could not be considered as a sale of business and would not qualify as a slump sale because no monetary consideration was paid and only equity shares of Alstom were issued to Areva for the transfer.
This submission of Areva was disregarded by the assessing officer, on appeal, the Commissioner for Income Tax (Appeals) also upheld the order of the assessing officer and subsequently even the Income Tax Appellate Tribunal upheld the order on the second appeal and took the view that the transaction was a slump-sale, as determined by the Areva on the first instance. Furthermore, all three held that Areva was estopped from raising any alternate contention.
Findings of the Madras High Court
The argument placed before the Madras High Court is a plea by Areva that the transaction was not a slump sale, but an exchange. Although the word ‘sale’ has not been defined in the IT Act, we 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.
The Madras High Court held that, to bring the transaction within the definition of a slump sale, there should be a transfer of an undertaking as a result of the sale for lump sum consideration. Additionally, necessarily the sale should be by way of transfer of ownership in exchange of a price paid or promised or part paid and part promised and the price should be a money consideration. If there is no monetary consideration involved in the transaction, then it would be not possible to bring the transaction undertaken by Areva within the definition of the term ‘slump sale’ as defined under the IT Act.
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. It is to be noted that no monetary consideration, was passed on from Alstom to Areva, but there was only an allotment of shares.
It was argued before the Madras High Court that even in the scheme of arrangement, the word ‘consideration’ has been used and that therefore, it is a transfer and the provisions of Section 50B of the IT Act with respect to a slump sale and the arising capital gain tax would stand attracted. The Madras High Court held that the mere use of the expression ‘consideration for transfer’ cannot be said to be a transaction as a sale. The Madras High Court allowing the appeal upheld that a monetary consideration is necessary for a transaction to qualify as a slump sale.
While the Madras High Court has held that a monetary consideration is required for a transaction to be considered as a slump sale, this issue has been highly contentious and different high courts have in the past had contrary viewpoints regarding this issue. The matter may only come to rest after the Supreme Court weighs in on it and provides some conclusiveness regarding the same.
1 Section 2 (42C) of Income Tax Act, 1961.
2 Areva T&D India Ltd. v. CIT, Tax Case Appeal No. 673 of 2018.