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Unit 14: Restructuring: Conversion and Slump Sale

Notes

Caselet Sankheya Chemicals’ Case

n Sankheya Chemicals Ltd. v. ACIT, 8 SOT 50 (Mum.), the Chemical Division of the
assessee-company was sold as a going concern on 1st April, 1990 for a lump sum price
Iof ` 20 lakhs. The said business consisted of the leasehold rights of the land, factory
building, plant and machinery and electrical installation which were transferred to the
subsidiary company, along with other assets and liabilities including transfer of raw
material and other licences, etc.
The same Mumbai Tribunal was inter alia asked to consider whether provisions of S. 50B
were retroactive in its operation so as to bring within its net the gains of transfer of a
business for a slump consideration prior to introduction of S. 50B.
Taking into consideration the facts of the case in totality, the Tribunal held that no tax was
eligible to the gains arising on the transfer of the business undertaking as a going concern
by the assessee-company and the gains on such transfer were not includible in the hands of
the assessee as income from short-term capital gains by relying on Coromandel Fertilisers Ltd.
v. DCIT, 90 ITD 344 (Hyd.). The Tribunal also noted that S. 50B of the IT Act was introduced
w.e.f. 1st April 2000 and in the facts of the present case, the business undertaking was sold
on 1st April 1990, i.e., prior to the introduction of the provisions of S. 50B of the IT Act.
The Mumbai Tribunal in this case noted with approval the decision of the Hyderabad
Bench in the case of Coromandel Fertilizers Ltd. (supra) which held as under: “. . . . . . S.
50 and S. 50B are mutually exclusive. In other words, S. 50B is attracted when there is a
slump sale and S. 50 is attracted when there is an itemised sale. S. 50B was not applicable
for the assessment year in question, as it had no retrospective operation. So, the position
that emerged was that what was transferred by the assessee was the cement unit as a going
concern for a lump sum price, and so, the sale in question was a slump sale, and so, S. 50
was not attracted. . . . .”
Source: http://www.thetaxcorp.in/Contents/details.aspx?ID=3157

14.4 Transfer of Assets between Holding and Subsidiary Company

A Holding Company is one which controls another company either by means of holding shares
in that company or by having power to appoint the whole or majority directors of that company.
A Holding Company may have control on more than one company also. A company controlled
by a Holding Company is called a Subsidiary Company. The companies becoming subsidiaries
continue to remain and function as separate legal entities. The terms “subsidiary” and “holding
company” are frequently defined by reference to section 1159 of the Companies Act, 2006 or

section 736(1) of the Companies Act, 1985 (the former drafted to reflect the latter) which set out
that a company is the “subsidiary” of its “holding company” if the holding company:
1. holds a majority of the voting rights in it; or
2. is a member of it and has the right to appoint or remove a majority of its board; or
3. is a member of it and (under an agreement with other members) controls a majority of the
voting rights in it.
A “member” is any person that is entered into a company’s register of members. In most cases
a holding company will hold the majority of the voting rights in its subsidiary and therefore

will rely on the first part of the above definition. However, in cases where the holding company
only controls the voting rights or board appointments and the legal title of the shares has been
transferred to a nominee, the relationship between holding company and subsidiary for the
purposes of the definition has been broken.

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