CIT vs. Bharat Bijlee Ltd (Bombay High Court)

S. 50B applies only to a “sale” for a “monetary consideration” and not to a case of “exchange” of the undertaking for shares under a s. 391/394 scheme of arrangement

The assessee transferred its Lift Division to Tiger Elevators Pvt. Ltd under a scheme of arrangement u/s 391 & 394 of the Companies Act, 1956. The transfer of the undertaking took place in exchange of preference shares and bonds issued by Tiger Elevators as per a valuation report. The assessee claimed that the transfer was not liable to tax on capital gains on the basis that there was no “cost of acquisition” of the undertaking. The AO held that the transaction was a “slump sale” as defined in s. 2(42C) and that the gains had to be computed u/s 50B. This was upheld by the CIT (A). On appeal by the assessee to the Tribunal, the Tribunal 54 SOT 571 accepted the claim of the assessee. On appeal by the department to the High Court HELD dismissing the appeal:

The definition of the term “slump sale” in s. 2(42C) 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 sale. In Motors & General Stores (P) Ltd 66 ITR 692 (SC) it was held that a “sale” meant a transfer for a monetary consideration and that an “exchange” would not amount to a “sale”. On facts, scheme of arrangement shows that the transfer of the undertaking took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, does not mean that monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares. In other words, this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment or issue of bonds/preference shares. All the clauses read together and the entire Scheme of Arrangement envisages transfer of the Lift Division not for any monetary consideration. 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. Thus, it was a case of exchange and not a sale. Therefore, s. 2(42C) of the Act was inapplicable. If that was not applicable and was not attracted, then, s. 50B was also inapplicable. The judgement of the Delhi High Court in SRIE Infrastructure Finance Ltd 207 Taxman 74 (Del) is distinguishable on facts. There is no necessity to analyze the circumstances in which s. 50B was inserted in the statute book.