I. Introduction
Merger and acquisition of one entity into another or takeover of one entity by another is one of the means for organizations who want to exit their businesses and for the organizations looking forward to increase their business size.
In merger/ acquisitions businesses/undertakings are acquired 'lock stock and barrel' as a going concern. In most of such cases the consideration is based on discounted future cash flow of the business/undertaking instead of following the traditional method of the 'intrinsic value' of the assets transferred. Therefore, in such cases the consideration offered for acquisition is a lump sum amount without allocating the same to individual assets and liabilities acquired.
II. On the tax front - Taxing provision
Under the tax laws, any profit or gain arising on transfer of any capital asset is chargeable to tax under the head capital gains. Further, the tax rate depends on whether the asset transferred is a long-term capital asset or short-term capital asset.
However, transfer of undertaking contains several assets, both short-term as well as long-term, without separate consideration being assigned to each asset.
Thus, for taxing such transactions, the Finance Act, 1999 introduced section 50B in the Income tax Act, 1961 ("the Act")whereby such transactions being termed as Slump Sale, profits/gains were to be taxed under the head 'Capital gains', since the undertaking (along-with all its assets/liabilities) transferred was treated as capital assets.
'Slump sale' was further 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 sales.
III. The judicial view
The tax law provides for taxing the sale transaction wherein there is 'sale' of whole of the undertaking for a 'lump sum consideration'. Here these words 'sale' and 'lump sum consideration' have become a cause for tax storms.
Recently, in the case of CIT v. Bharat Bijlee Ltd [2014] 46 taxmann.com 257 (Bom) the taxpayer had insisted on a narrower interpretation of provisions of the slump sale and argued that a transaction can be taxed as slump sale only when there is a 'sale' of undertaking and the resulting consideration is monetary consideration. Thus, the transfer of undertaking against bonds and shares is a transaction of 'exchange' and not that of 'sale' so as to be taxable as slump sale under section 50B of the Act.
The Bombay High Court had accepted the contention of taxpayer and further held that the transaction of exchange in the case had also involved approval of the High Court (as a scheme of amalgamation under Company law) and, thus, was different in species from the transaction of 'slump sale', which is merely a sale against monetary consideration. Thus, the provision of section 50B are not applicable to such transactions of 'exchange'.
IV. Resulting tax controversy and need for clarity
The above ruling by one of the most forefront courts of the country has created controversy surrounding taxability of transfer of undertakings as a going concern.
The following questions are now at the center of controversy:
(a) Does exchange of assets against transfer of undertaking not result in slump sale?
(b) Are the words 'exchange' and 'sale' to be interpreted so narrowly that the term 'sale' covers transactions involving only monetary consideration?
(c) Are requirements of some other laws such as company law result in immunity of the transaction from bringing it under tax net?
V. Recommendation
We hope that the Finance Bill takes a view on above questions and provides clarity on the provisions of slump sale by taking into consideration various manners of transfer of undertakings.
In view of the fact that the Indian industry is looking for expansion and would witness many of such acquisitions among the industry players, to address such issues becomes more important in the upcoming budget.
No comments:
Post a Comment