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Transfer of shares of subsidiary not a slump sale, rules Bombay High Court

PALAK SHAH | | Updated on: Apr 28, 2019

The transfer of a subsidiary’s share cannot be ‘slump sale’ of an undertaking, the Bombay High Court and the Appellate bench of Mumbai tax tribunal have ruled.

The court and tribunal rulings could deter income tax officials from branding every large equity transaction as a slump sale of a business to a third party and levy capital gains tax under section 50B of the Income Tax Act, experts told BusinessLine .

Slump sale

A slump sale is nothing but outright sale of a business and is defined as under section 2(42C) of the IncomeTax Act as the transfer of one or more undertakings as a result of sale for a lump sum monetary consideration without values being assigned to the individual assets and liabilities in such sales.

The tax department had erred in holding that a 2010 transaction between UTV Software Communication and The Walt Disney Company (South-east Asia) was a slump sale and levied short-term capital gains tax under section 50B, which provides the mechanism for computation of capital gains arising on slump sale.

UTV Software held 49 per cent stake in its subsidiary UHEL, while two other shareholders held 50 per cent and one per cent in UHEL.

All the three shareholders independently transferred their entire equity independently to Walt Disney.

The tax tribunal held that UTV Software had only sold its shares in UHEL and that the undertaking of UHEL was not the subject matter of the sale as it did not hold 100 per cent stake in the company.

Both the court and tribunal relied on the Supreme Court order in case of Vodafone International vs Union of India; and Bacha Guzdar vs tax tribunal wherein it was held that sale of shares of a company did not tantamount to sale of assets of the company.

The High Court observed that there was only a change in the pattern of the company’s shareholding, which would not make it a slump sale as the undertaking continued to be vested in UHEL and unless provided in the tax act, the transfer of shares does not result in transfer of underlying assets.

Published on April 28, 2019

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