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| Aseem Chawla: No capital gains tax on undertaking transfer under a scheme of arrangement |
| Aseem Chawla / New Delhi Oct 10, 2008, 15:34 IST |
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In the recent ruling, the Mumbai Income Tax Appellate Tribunal (‘ITAT’), in case of Avaya Global Connect Ltd* (‘Avaya’) ruled that the taxpayer should not be taxed on the transfer of an undertaking having negative net worth under the scheme of arrangement.
In this case, Avaya Global Connect Ltd transferred one of its undertaking ie Tata Fane Division (‘TFD’) as a going concern to ITEL Industries Pvt Ltd (‘ITEL’), under a scheme of arrangement sanctioned by the Mumbai High Court. The net worth of the undertaking was negative, ie, the value of liabilities exceeded the value of the assets. In view of the negative net worth, the scheme provided that ITEL was not required to pay any consideration for the transfer to either Avaya or to its shareholders.
The Hon’ble ITAT held that the transfer of undertaking would not qualify as ‘demerger’ as all the conditions enumerated under Section 2(19AA) of the Income Tax Act, 1961 (‘Act’) were not fulfilled as in the instant case, ITEL did not issue shares to the shareholders of the Avaya in consideration for transfer of TFD.
Further, the Hon’ble ITAT held that transfer of undertaking under the definition of slump sale only covers transfer by means of ‘sale’. Accordingly, the transfer through other modes like extinguishment, relinquishment etc. would not qualify as slump sale. Accordingly, the impugned transfer would not be characterised as ‘slump sale’.
The Hon’ble ITAT ruled that in the instant case, the capital gains tax under Section 45 of the Act cannot be levied as the machinery provision of computation of capital gains as contained in the Section 48 of the Act fails.
One may find reference of the said ITAT decision in situations where there is a transfer of business undertaking through a court approved scheme of arrangement.
* I.T.A. No. 832/Mum/07, ITAT Mumbai
The writer is partner – tax practice, Amarchand & Mangaldas & Suresh A. Shroff & Co
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