Telangana High Court ruling on applicability of Slump sale provisions

Background

In a recent ruling, the Telangana High Court (“the Court”) in the case of Spectra Shares and Scrips Limited¹ (“the assessee” or “the Company”) decided on the tax treatment of the transfer of an entire bottling and marketing undertaking carried out for AY 1998-99. The Company was engaged in bottling and marketing Coca-Cola beverages through its own plant, machinery and distribution network. It transferred its entire business undertaking as a going concern for a lump-sum consideration of INR 56.23 crore.

The Assessing Officer dissected the consideration, attributing values to individual assets and seeking to tax portions as capital gains and portions as business income. The Commissioner of Income Tax (Appeals) partly accepted the assessee’s position, while the Tribunal held that the entire consideration represented a capital receipt arising from the transfer of an undertaking as a going concern. The Revenue preferred an appeal before the High Court under Section 260A.

Facts of the case

• The assessee entered into an agreement dated 19-09-1997 to sell its entire bottling and marketing business to Bharat Coca Cola Bottling South East Private Limited for INR 56.23 crore (net: INR 40.31 crore).
• The transfer covered all fixed and movable assets, the distribution network, trade receivables, goodwill and included a non-compete restriction.
• The assessee maintained that the consideration was a lump-sum amount without individual asset-wise valuation, thereby constituting a slump sale.
• The Assessing Officer allocated values to different assets and sought to apply Sections 28(ii), 41(2) and 50B.
• The Commissioner (Appeals) partly accepted the assessee’s position and held that:
• A sum of INR 17.62 crore represented payment for other assets, goodwill, non-compete and termination of agreement, of which INR 4 crore was specifically attributable to goodwill.
• Long-term capital gains should be computed only on land, and short-term capital gains under Section 50 on buildings.
• The remaining consideration could not be allocated to specific assets and must be treated as capital receipt arising from a slump sale.
• Dissatisfied with different parts of the Commissioner’s order, both the Revenue and the assessee filed separate appeals before the Hyderabad ITAT (“the Tribunal”).
• The Tribunal heard both appeals together and allowed the assessee’s appeal while dismissing the Revenue’s appeal.
• Aggrieved by the Tribunal’s order, the Revenue appealed before the Telangana High Court under Section 260A.

Key Issues

1. Whether the transfer of the entire bottling and marketing undertaking constituted a “slump sale” under Section 2(42C) when the Revenue claimed that individual values had been assigned to assets.
2. Whether any portion of the consideration was taxable as revenue receipt under Section 28(ii)(c) on the allegation that the assessee was operating as an agent and the payment represented compensation for termination of an agency arrangement.
3. Whether the amount attributed to non-compete obligations was capital in nature or taxable as revenue income, considering the Revenue’s contention that the assessee lacked independent goodwill or competitive capacity, thereby rendering the non-compete payment ineligible for capital treatment.

Key Takeaways

1. Characterisation of Transfer as Slump Sale

• The High Court accepted the concurrent findings of the CIT(A) and the Tribunal that the assessee had transferred its entire undertaking as a going concern for a lump-sum consideration without assigning values to individual assets. The Revenue did not identify any material error or perversity in these factual conclusions.
• The Court noted that although the transaction satisfied the statutory definition of a slump sale under Section 2(42C), the specific computation provision governing slump sales, Section 50B, was inserted only with effect from 1 April 2000. Since the assessment year in question was 1998–99, Section 50B could not be applied.
• The Court held that Section 41(2), which taxes balancing charge on depreciable assets, was not applicable because the transfer involved the entire business undertaking along with all assets and liabilities, rather than isolated depreciable items.
• The High Court emphasised that the Revenue’s attempt to dissect the lump-sum consideration and attribute artificial values to specific assets was contrary to the legislative scheme. Fragmenting a composite business transfer purely for the purpose of extracting taxable components was not permissible under the Act, particularly when the transaction was factually a sale of a going concern.
• In line with the Hon’ble Supreme Court’s principle in the case of CIT v. B.C. Srinivasa Setty² that charging and computation provisions function as an integrated code, the Court concluded that the slump sale consideration for this year could not be brought to tax by breaking up the transaction or applying computational provisions that were not in force during the relevant period.

2. Applicability of Section 28(ii)(c)

• The Court reviewed the Licensing Agreement between the assessee and Coca-Cola and agreed with the findings of the lower authorities that the arrangement was on a principal-to-principal basis.
• The assessee procured concentrate independently and undertook bottling, marketing and sales at its own risk and cost. There was no agency relationship.
• Since Section 28(ii)(c) applies only to compensation linked to termination or modification of an agency, the Court held that it had no application in the present case.
• The Revenue could not demonstrate any material that the lower authorities had overlooked, nor did it show that the assessee’s role had the characteristics of an agent.
• The High Court therefore found no reason to disturb the conclusion that Section 28(ii)(c) was inapplicable. The Court also clarified that the clause relied upon by the Revenue, Section 28(ii)(e), was introduced only with effect from 1 April 2019 and had no relevance to AY 1998–99.

3. Taxability of Non-Compete Fees

• The High Court observed that the transfer involved termination of all existing business arrangements, imposition of a non-compete restriction, and even a change in the assessee’s corporate name. These events collectively resulted in the assessee losing its entire business structure and the source from which its income was generated.
• Relying on well-established principles from Supreme Court decision in the case of Kettlewell Bullen & Co. Ltd. v. CIT³ and CIT v. D.P. Sandu Bros. Chembur (P.) Ltd.⁴, the Court noted that when a business transfer results in impairment of the trading structure or extinguishment of the source of income, the consideration received is capital in nature. The non-compete obligation was an important part of the overall transfer of the undertaking and formed part of the capital structure of the transaction.
• The Court also accepted the Tribunal’s finding that the entire consideration arose from the transfer of the business itself and could not be recharacterised by treating any component, including the non-compete fee, as revenue income.
• The Revenue did not demonstrate any factual or legal basis to conclude that the non-compete payment represented compensation for loss of future profits rather than compensation for surrender of a capital asset.
• Accordingly, the Court held that the non-compete component formed an integral part of the capital receipt arising from the slump sale and could not be separated and taxed under any other head.

Conclusion

The Telangana High Court concluded that none of the three substantial questions of law raised by the Revenue disclosed any legal infirmity in the concurrent findings of the Commissioner (Appeals) and the Tribunal. The Court found that the appellate authorities had correctly appreciated the factual matrix and applied the appropriate legal provisions, and that the Revenue had failed to demonstrate perversity, misapplication of law, or omission of any material fact.

On this basis, the Court affirmed the Tribunal’s decision in its entirety and held that there was no justification to interfere with the conclusions reached by the lower appellate authorities. Accordingly, the appeal filed by the Revenue was dismissed.

1. [2025] 180 taxmann.com 182 (Telangana HC) ↩︎
2. [1981] 5 Taxman 1/128 ITR 294/2 SCC 460 ↩︎
3. [1964] 53 ITR 261 ↩︎
4. [2005] 273 ITR 1/142 Taxman 713 (SC)/2 SCC 584 ↩︎