Capital gains relating to slump sale & Recent Developments

Transcription

1 Capital gains relating to slump sale & Recent Developments Praful Poladia 16 April 2011

2 Contents Introduction Pre-section 50B position Section 50B : Overview Slump sale Undertaking Cost of acquisition of Undertaking Slump Sale v/s Itemised Sale Slump Sale : Some issues Implications in the hands of the purchaser

3 Introduction

4 Pre-Section 50B position Transfer of undertaking as a going concern for slump consideration not liable to capital gains No taxation with reference to individual asset in absence of earmarked sale consideration No taxation for transfer of business as cost of undertaking and cost of improvement not ascertainable Charge fails in absence of support computation mechanism SC in PNB Finance Ltd (307 ITR 75) in the context of slump sale held as under. In this case, s. 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated code. Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is s. 45. Capital gains relating to slump sale & Recent Developments Page 4

5 Section 50B : Overview Section 50B introduced w.e.f. AY for computation of capital gains in case of slump sale of undertaking. CBDT Circular 779 dated 14 September 1999 explaining provisions of S.50B states. A new section 50B has been inserted in the Income tax Act containing special provision for computation of capital gains in case of slump sale.. Slump sale defined u/s.2(42c) Undertaking defined u/s.2(19aa) Net worth of undertaking constitutes cost of acquisition Long term v. Short term determined w.r.t age of the undertaking Indexation benefit not available Report from an accountant which certifies computation of net worth to be furnished in prescribed form Capital gains relating to slump sale & Recent Developments Page 5

6 Popular forms of reorganisation Illustrative popular forms of reorganisation Share transfer Demerger Assets transfer Business transfer Itemised sale Slump sale Capital gains relating to slump sale & Recent Developments Page 6

7 Popular modes of slump sale Popular modes of slump sale All cash deal Swap deal Cash cum swap deal Capital gains relating to slump sale & Recent Developments Page 7

8 Slump Sale

9 Slump sale Sec 2(42C) Section 2(42C) defines slump sale as slump sale 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 sales. Conditions to be satisfied cumulatively in order to qualify an arrangement as slump sale There should be transfer of one or more undertakings Transfer should be as a result of sale Sale should be for a lump sum consideration No values should be assigned to individual assets or liabilities in such sales Specific exception provided Determination of value of an asset or liability solely for the purpose of payment of stamp duty, registration fees or other similar taxes or fees not regarded as assignment of values to individual assets or liabilities Is definition in line with concept of slump sale understood by the Courts? Capital gains relating to slump sale & Recent Developments Page 9

10 Meaning of slump price Sale for a lump sum consideration without assignment of values to individual assets and liabilities Factors supporting lump sum consideration Business valuation on DCF or yield method Valuation as a multiple of capacity, customer base etc Negotiated value for the undertaking Issues : Whether following impact the slump sale Absence of assignment of individual values in document of sale v/s. in transaction of sale Reference in any collateral documents or evidences such as Board resolution, pre-sale correspondences exchanged; asset valuation report, etc [Refer, Artex Manufacturing [227 ITR 260(SC)] Capital gains relating to slump sale & Recent Developments Page 10

11 Meaning of slump price Impact of separate valuation of Land and Building or intangible for payment of stamp duty / registration charges / sales tax Adjustment contemplated for working capital.[refer, Premium Automobiles (264 ITR 229(Bom)] Separate mention in respect of value of liability taken over (or) mention about cap on value of contingent liability Capital gains relating to slump sale & Recent Developments Page 11

12 Undertaking

13 Meaning and scope of Undertaking Sec 2(19AA) Undertaking is defined in Explanation 1 to Sec 2(19AA) as under For the purposes of this clause, undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Inclusive definition : undertaking in popular sense covered Extracts from P. Alikunju, M.A. Nazeer Cashew Industries v. CIT 166 ITR 804 (Ker) Undertaking" in common parlance means an "enterprise", "venture", "engagement". It can as well mean "the act of one who undertakes or engages in a project or business" (Webster)... Construing this word "business", the Supreme Court in Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) has observed that the word "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. Capital gains relating to slump sale & Recent Developments Page 13

14 Meaning and scope of Undertaking Sec 2(19AA) Extracts from CIT v. Textile Machinery Corporation 80 ITR 428 (Cal) The words "industrial undertaking" in the Indian IT Act, 1922, should, in our view, be interpreted to mean any venture or enterprise which a person undertakes to do and which has relation to some industry or has some industrial consequences Undertaking" is a very general and wide term. It has both literary as well as technical connotations Normally, anything undertaken to be done is an undertaking. Yallamma Cotton Woollen and Silk Mills Co Ltd vs Official Liquidator 40 Com Cas 466 while examining the expression undertaking in the context of floating charge Mysore HC observed as. undertaking is not anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Capital gains relating to slump sale & Recent Developments Page 14

15 Meaning and scope of Undertaking Sec 2(19AA) Additionally, undertaking covers : A part of an undertaking A unit of an undertaking A division of an undertaking A business activity taken as whole Specific exclusion Individual assets or liabilities or any combination thereof not constituting a business activity Should undertaking be a going concern? Capital gains relating to slump sale & Recent Developments Page 15

16 Meaning and scope of Undertaking Sec 2(19AA) Transfer of business undertaking excluding certain assets / liabilities considered not fatal to slump sale concept. Test to apply : Whether buyer is put in position to continue the running business without the impugned asset? Citation Premier Automobiles vs ITO (264 ITR 229)(Bom) DCIT vs Mahalasa Gases & Chemicals (84 TTJ 992)(Bang) Rohan Software (P) Ltd vs ITO (115 ITD 302)(Mum) Max India Ltd [112 TTJ 726] I.C. I India Ltd [23 SOT 58] Exclusion of asset Transfer of manufacturing undertaking - sundry debtors not transferred Transfer of manufacturing and distribution undertaking - excess land, vehicle and debtors not transferred Sale of software business including intellectual properties, etc; exclusion of building and motor car does not defeat slump sale Transfer of manufacturing division -Technical know-how transferred in subsequent period; until that use thereof given on royalty payment Transfer of fertilizer unit - Bank balance, cheque on hands, unpaid insurance claims not transferred Capital gains relating to slump sale & Recent Developments Page 16

17 Cost of acquisition

18 Cost of acquisition of Undertaking Net worth of an undertaking constitutes cost of acquisition Net worth defined to mean aggregate value of total assets of undertaking (excluding revaluation) as reduced by book value of liabilities Aggregate value of total assets In case of depreciable assets Capital assets claimed deduction u/s 35AD : WDV of block of assets : NIL Other assets : Book value Illustrative ambiguities Cost / book value of scientific research assets claimed u/s.35 Cost / book value of scientific research assets for which weighted deduction claimed u/s.35(2ab) Cost / book value of Telecom license amortised under section 35ABB. Capital gains relating to slump sale & Recent Developments Page 18

19 Slump Sale v/s Itemised Sale

20 Relevant consideration from seller s perspective Itemized sale Huge block of asset of other items and / or expansion plan for recoupment where consideration likely to get adjusted in block of assets without giving rise to immediate taxable income. (However, this may impact future depreciation) Presence of high cost non depreciable assets where benefit of indexation or FMV substitution as on is available. Transfer of obsolete / non-moving stockin-trade / consumable likely to result in business loss. Cases where section 50C or TP provisions etc permitting notional taxation is not a concern Sales tax, stamp duty, etc is not a concern Slump sale From the perspective of sales tax and stamp duty. If rigor of section 50C is to be avoided. If balance sheet has certain nondepreciable assets which have lost value and are not likely to fetch any price. If appreciation is attributable to inventory or depreciable assets. If age of undertaking is more than 3 years whereas the age of valuable assets within it is less than 3 years. Capital gains relating to slump sale & Recent Developments Page 20

21 Slump Sale : Some issues

22 Issue 1 : Impact of negative net worth Scenario A Sale consideration 100 Less: cost of acquisition (networth) Aggregate value of total assets 300 (500) Less: Value of liabilities (200) NIL Capital Gains (restricted to) 100 (negative net worth ignored) Scenario B Sale consideration 100 Less: cost of acquisition (networth) Aggregate value of total assets Less: Value of 300 (500) (200) liabilities Capital Gains [100 (-200)] 300 Which of the scenario represents correct computation of capital gains? Capital gains relating to slump sale & Recent Developments Page 22

23 Issue 2 : Applicability of section 50B in case of slump exchange The transaction XYZ transfers one of its business undertaking Division A XYZ Division B Allotment of shares ABC (Division A) to ABC In exchange, ABC allots its equity shares to XYZ by way of consideration ( ie.other than money) For XYZ, difference between fair value of business Transfer of Division A over net worth results into capital gains Since there is no presence of money consideration, admittedly transaction is of exchange and not a sale* Will section 50B apply to slump exchange? *Refer Motor and General Motors Pvt 66 ITR 692(SC) Capital gains relating to slump sale & Recent Developments Page 23

24 Issue 3 : Some issues Is section 50B a charging provision or machinery provisions? Impact on exemption under sections 47(xiii) /(xiv) or 47(iv)/(v) etc. which exempts capital gains chargeable under section 45 Impact on exemptions under sections 54EC / 54G Does section 50C apply to slump sale covered by section 50B? Capital gains relating to slump sale & Recent Developments Page 24

25 Implications in hands of purchaser

26 Implications in hands of purchaser Purchaser entitled to allocate value of consideration to individual asset on fair basis including intangible assets acquired, depreciable assets, stock in trade, etc. [Refer, Shreyans Industries Ltd 277 ITR 443 (P&H) ] Subject to fifth proviso to section 32, entitled to depreciation w.r.t actual cost determined. Unless governed by specific provision, entitled to reckon cost of acquisition of asset at actual price paid Beware about seller s tax arrears / liability [S.281 / S.170] Capital gains relating to slump sale & Recent Developments Page 26

27 Thank you for your participation! This Presentation provides certain general information existing as at the time of production. This Presentation does not purport to identify all the issues or developments pursuant to the transaction. Accordingly, this presentation should neither be regarded as comprehensive nor sufficient for the purposes of decision-making. Contributor does not undertake any legal liability for any of the contents in this presentation. The information provided is not, nor is it intended to be an advice on any matter and should not be relied on as such. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of the contributor, this document may not be quoted in whole or in part or otherwise referred to in any documents.