By Shripal Lakdawala, Madhvi Jajoo, and Ronak Surana
Budget 2021 has been presented in the most unprecedented times and broadly delivered to the expectations of the people of India. The government has proposed many reliefs which are in line with its intention of promoting India as a preferred jurisdiction for investment. With a view to align with the said objective, the government has tightened various loose ends which were open for interpretation and could be potentially subject to litigation.
One such issue was the taxability of business transfer where consideration was discharged by way of non-monetary consideration (i.e. by way of issuance of shares or bonds or other instruments) and was titled as “slump exchange” by the tax fraternity.
Currently ‘slump sale’ is defined to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such transactions. Hence, if the business was transferred for a non-monetary consideration then the current tax law does not stipulate its computation mechanism and hence there was often a debate on “how one should compute tax liability on the said slump exchange”.
Recently, the Madras High Court relying on an earlier decision of Bombay High Court (appeal pending before the Supreme Court of India), had held that transfer of an undertaking for non-monetary consideration is not ‘slump sale’ thus not chargeable to tax as per the current tax law [i.e. under section 50B of the Income-tax Act, 1961 (ITA)]. Primarily, the rationale for the above judgements is that if there is no monetary consideration involved in the transaction, then the transaction may be regarded as an ‘exchange’ and not ‘sale’. Accordingly, it would be not possible for the tax department to bring such transactions under the ambit of ‘slump sale’.
Change proposed in the Budget:
The Finance Bill, 2021, proposes to widen the definition of the term ‘slump sale’ so as to cover slump exchange transactions within its ambit. The amendment once legislated shall be applicable from assessment year (AY) 2021-22 [i.e. corresponding to the financial year (FY) ending 31 March 2021]. Further, the Memorandum to the Finance Bill 2021 has clarified that “the terminology adopted by parties should be seen in the true spirit of law and it needs to be kept in mind that it is the substance of transaction that is more”. The Memorandum also cites an example in this regard, “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 a transfer by way of sale and not by way of exchange.”
Impact of the proposed amendment:
- under the tax net. Whilst, the revised provisions still contains the language ‘for a lump sum consideration’ and one may argue that no lump sum consideration is received in a slump exchange transaction, keeping in mind the amendment and its clear intention as highlighted in the Memorandum, the tenability of such position may be difficult.
- The proposed amendment shall be effective from AY 2021-22. Thereby, taxability of slump exchange transaction already effected in FY ending 31 March 2021 or pending before the National Company Law Tribunal, but with an appointed date prior to 31 March 2021, shall also be governed as per the amended provisions.
- Whilst the proposed amendment is prospective in nature, the language in the Memorandum suggests that the proposed amendment is clarificatory in nature and that slump exchange transactions are covered under the definition of slump sale as it exists today. Accordingly, it would be interesting to track Court rulings going forward in relation to past slump exchange transactions, taking into consideration the above amendment.
(Shripal Lakdawala is a Partner, Madhvi Jajoo is a Senior Manager and Ronak Surana is an Assistant Manager with Deloitte Haskins and Sells LLP. The views expressed by the authors are their own.)