There is no wonder that the pandemic has put the economy of the entire world on the backfoot. While even developed countries are struggling to keep up their financial strength, India has been doing well to counter the economic slowdown caused due to Covid-19. Needless to say that the focus was on the yearly Budget of 2021.
Union Budget 2021 was introduced and delivered widely aspiring to meet the expectations of the people of India. The government has proposed various reliefs in conjunction with its plan to promote India as a preferred investment hub. The government has also attempted to streamline factors that were open for interpretation to comply with the target above and theoretically be subject to litigation.
One such talked-about issue was the transfer of undertakings’ taxability where the consideration was discharged by way of non-monetary consideration. The tax fraternity has titled the same as ‘slump trade.’
‘Slump sale’ is currently defined as the transfer of one or more undertakings due to a lump sum sale without attaching values to the individual assets and liabilities in such transactions. Therefore, if the business was transferred for non-monetary consideration, the existing tax law does not define the calculation process. Thus there has always been a debate on “how to calculate tax liability on such slump exchange?”
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Recently, based on an earlier judgment of the Bombay High Court (appeal pending before the Supreme Court of India), the Madras High Court held that the transfer of an undertaking for non-monetary consideration was not ‘slump selling’ and thus not taxable under current tax law [i.e. Under the Income-Tax Act, 1961, Section 50B (ITA)]. The above judgments are primarily that the transaction should be viewed as an ‘exchange’ and not ‘sale’ if there is no monetary value involved in the transaction. Therefore, it would not be possible for the tax department to put such transactions under the scope of ‘slump sales’.
Proposed adjustments in the Budget:
To cover slump exchange transactions within its scope, the Finance Bill, 2021, proposes to extend the meaning of the term’ slump selling.’ The amendment is valid as of the evaluation year (AY) 2021-22 [i.e. corresponding to the 31 March 2021 financial year (FY) ending]. The Finance Bill 2021 Memorandum explained that “the terminology adopted by the parties should be seen in accordance with the law, it must be taken into account that more is the substance of the transaction.” In this regard, the Memorandum also cites an example: ‘a ‘sale’ transaction can be disguised as an ‘exchange’ by the parties to the transaction, but such transactions may already be protected by the concept of a sale by default, as it occurs today, on the basis that it is a sale and not an exchange transfer.’
Effect of the amendment proposed:
Although the amended rules still include the term ‘for a lump sum consideration,’ and one may argue that no lump sum consideration is obtained in a slump exchange transaction, taking into account the amendment and its specific intent as outlined in the Memorandum, it could be challenging to retain such a stance.
The proposed amendment is effective from AY 2021-22 onwards. Accordingly, the taxability of slump exchange transactions already carried out in the FY ending on 31 March 2021 or pending before the National Company Law Tribunal, but named before 31 March 2021, is also subject to the amended provisions.
Although the proposed amendment is prospective, it is clear from the Memorandum language that the proposed amendment clarifies, and the existing concept of slump sales protects that slump exchange transactions. It would also be essential to follow up on the Court’s decisions concerning past slump exchange transactions, taking into account the amendment referred to above.
To get more clarity on tax updates as per Union Budget 2021, it is a great idea to get in touch with top tax consultants like Choksi Tax Services, Dewan P.N Chopra & Co., Khandar Mehta & Shah, S.B. Ghabawalah & Co.