Synopsis
This Article explores the difference in law between the terms “sale” and “exchange” which are both a mode of transferring property. Various Supreme Court and Other decisions have analysed this difference. The difference also has a bearing on the tax treatment of a sale and an exchange. Recently, the issue has gained importance because of the question of taxation of a slump exchange as compared to a slump sale.
Introduction
“A Rose by Any Other Name Smells As Sweet”— Shakespeare, Romeo and Juliet
While Shakespeare may be right in several cases, when it comes to the transfer of property, there is a difference between ‘Sale’ and ‘Exchange’. Property, whether movable or immovable, can be transferred in a variety of ways, such as, sale, gift, lease, mortgage, exchange, etc. Each of these terms has a different meaning and are not synonyms for one another. What is a sale and what is an exchange has often been the subject-matter of discussion under Tax and other Laws since the consequences of the same vary. Recently, the issue has come into sharp focus because of various decisions under the Income-tax Act dealing with the concept of Slump Exchange. Let us examine the meaning associated with these terms in law.
Meaning of Sale The Transfer of Property Act, 1882 defines sale (in respect of immovable property) to mean a transfer of ownership in exchange for a price paid or promise or part-paid and part-promised. In Samaratmal vs. Govind, (1901) ILB 25 Bom 696. The word ‘ price’ as used in the sections relating to sales in the Transfer of Property Act was held to be in the sense of money.
The Sale of Goods Act, 1930 which deals with the law relating to sale of goods is also relevant. It defines a contract of sale to mean a contract whereby the seller transfers property in goods to the buyer for a price. Where under such a contract, the goods are transferred by the seller, then the contract is called a sale. Thus, price is an essential element under both the Acts. This Act defines the term price to mean money consideration for a sale of goods. Thus, the Sale of Goods Act is very specific in respect of the definition of ‘price’.
Meaning of Exchange An exchange on the other hand, is defined by the same Act to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. The definition of exchange covers both immovable property as well as novable property/goods. Thus, the absence of money is the hallmark of an exchange. A part of the consideration may be in the form of money but there must be something more which must be in kind. E.g., Mr. A lives on a 3 bedroom flat on the 1st floor of a building and he also owns a 2 bedroom flat on the 5th floor of the same building. His neighbour Mr. X lives in a 2 bedroom flat on the 1st floor of the same building. Mr. A and Mr. X agree to swap their 2 bedroom flats, by which Mr. A becomes the owner of both the flats on the 1st floor while Mr. X now owns a flat on the 5th floor. This is a transaction of exchange. In case the properties are of different values, then some money consideration may be paid to neutralise the exchange. However, the transaction yet remains one of an exchange – Fathe Singh vs. Prith Singh AIR 1930 All 426.
Difference As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. However, a sale can also take place where instead of the buyer paying the seller, some debt owed by the seller to the buyer is set-off. That does not make the transaction one of an exchange. For instance in Panchanan Mondal vs. Tarapada Mondal, 1961 (1) I.L.R.(Cal) 619, the seller agreed to sell a property to the buyer for a certain price by one document and by a second document he also agreed to buy another property of the buyer for the same amount. Instead of the buyer paying the seller and vice-versa, they agreed to set-off the two amounts. It was held that the transactions were for execution of two Sale Agreements and not for a Deed of Exchange.
The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act:
(a) CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC)
The Court explained the distinction between an exchange and a sale by an illustration of a person selling his business to a company in exchange for its shares and a person selling his business for money and using that money for subscribing to the shares of that company. The Court held,
“……….. Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale,..”
(b) CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC)
This was also a case of a sale of business to a company in exchange for shares of that company. The board of directors of a company executed a deed styled “exchange deed” whereby the company transferred all the assets of its cinema house for a consideration in the shape of certain preference shares in a sugar company. The question was whether the transaction was a sale? The Supreme Court held:
“………..that in essence the transaction …….was one of exchange and there was no sale of the assets of the cinema house for any money consideration …………
Sale is a transfer of property in goods ………… for a money consideration. But in exchange there is a reciprocal transfer of interest in immovable property, a corresponding transfer of interest in movable property being denoted by the word “barter”. The difference between a sale and an exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter .The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.”
(c) CIT vs. B. M. Kharwar 72 ITR 603 (SC) ” Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange, and not of sale, ……. ”
These decisions have very clearly laid down that the difference between a sale and an exchange is that in a sale the price is always paid in money, whilst in an exchange it is always paid in goods by way of barter. The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.
Each of the parties to an exchange are both a buyer and a seller of property and hence, each of them has the rights which a seller has and is subjected to the liabilities and obligations of a buyer. This is an unique feature of an exchange since a person plays a dual role of a seller as well as a buyer. The decision in the case of Kama Sahu vs. Krishna Sahu, 1954 AIR(Ori) 105 also throws light on this issue:
“…..It appears from this definition that a sale should always be for a price, but in the case of exchange the transfer of the ownership of one thing is not for any price paid or promised, but for transfer of another thing in return….. If in case a transfer of ownership of an immovable property is exchanged for money, then the transaction cannot be an exchange, but a sale. It being so, unless the properties of both parties are simultaneously transferred in favour of each other, the title to the property cannot pass in favour of the one when the other party does not execute any such document in favour of the other. Exchange can be effected either by one document or by different documents. The consideration for the one document executed in pursuance of an agreement for exchange is the execution of a document by the other party. Unless it is so done, the party who has taken the deed from the other party without himself executing any document in favour of that other party, cannot claim to have got a valid title to the property until and unless he executes a similar document transferring his interest in favour of that other party. …… In the case of an exchange, the intention of parties cannot but be that there should be a reciprocal transfer of two things at the same time and that until such a thing is done, the passing of title under the one document executed in pursuance of the contract, should always be postponed till after the execution of the another document by the other party…”
There cannot be an exchange if the parties to the transaction are not the same. In the case of Than Singh and Ors. vs. Nandu Kirpa Jat and Ors., 1978 AIR(P&H) 94, a Deed of Exchange was executed for two immovable properties between two persons. On the very same day, one of the persons to the Deed of Exchange executed a Sale Deed in respect of the property which she received under the Deed of Exchange. It was contended that the exchange was actually a sale. The Court considered the definition of the terms and held:
“….The deed in question fully complies with the requisites of exchange in terms of S. 118 of the Transfer of Property Act and it admits of no other interpretation except that of exchange. The subsequent transaction may be on the same day but it is not between the same parties. Hence it cannot be said that the deed in fact is a cloak on sale and is not an exchange…”
In Sardara Singh vs. Harbhajan Singh, 1974 AIR(P&H) 345, the Court held that Chapter III of the Transfer of Property Act deals with sales of immovable prop-erty, Chapter IV deals with mortgages of immovable property and charges, Chapter V deals with leases of immovable property, and Chapter VI deals with exchanges. Hence, the very scheme of the Act clearly shows that the sales, mortgages, leases and exchanges of the immovable property are dealt with on totally different footings and it is futile to urge that one takes colour from the other.
Tax Consequences of an Exchange
An exchange is a transfer u/s. 2(47) of the Income-tax Act. Hence, an exchange would give rise to capital gains in the hands of the transferor. If the property is immovable property then the provisions of section 50C / section 43CA of deemed sale consideration would also apply. The transferor would be taxed with reference to the fair market value of the property received by him in exchange for the property given up by him. Thus, it becomes important to arrive at a valuation of the property received as well as the property transferred. Unlike in the case of a sale, where the full value of consideration is to be taxed (except in case of deeming fictions, such as, section 50C) , in the case of an exchange one taxes the fair market value of the property received in exchange. This is a very important distinction between the two.
Stamp Duty is payable on an Deed of Exchange. The higher of the values of the two properties would form the basis for levying stamp duty. The rate of stamp duty is the same as applicable on a conveyance.
Taxation of a Slump Exchange
While on the subject of Sale vs. Exchange, we may also consider the position of a ‘slump exchange’. In the case of a slump exchange, all the assets and li-abilities relating to an undertaking is transferred to a buyer company and in consideration for the same, the buyer company issues its equity shares to the seller entity. Section 2(42C) of the Income-tax Act, defines a slump sale as transfer of one or more undertaking for lump sum consideration without values being assigned to individual assets and liabilities in such a sale. The capital gain arising on a slump sale is computed as per the provisions of section 50B of the Income-tax Act.
However, how does one compute capital gains in the case of a slump exchange? As discussed above, a sale requires that the consideration be in the form of money, whereas in case of a slump exchange, the consideration is shares of the buyer company.
The Mumbai Tribunal in the case of Bharat Bijilee Ltd, TS-96-ITAT-2011 (Mum), has examined the issue of tax-ability of a slump exchange. It held that in order to constitute a “slump sale” u/s. 2(42C), the transfer must be as a result of a “sale” i.e., for a money consideration and not by way of an “Exchange”. In that case, it was held that as the undertaking was transferred in consideration of shares and bonds, it was a case of “exchange” and not of “sale” and so section 2(42C) and section 50B would not apply. As regards taxability u/ss. 45 and 48, it was held that the “capital asset” which was transferred was the “entire undertaking” and not individual assets and liabilities forming part of the undertaking. In the absence of a cost/date of acquisition of the undertaking, the computation and charging provisions of section 45 fail and the transaction cannot be assessed. Hence, there was no tax on the transaction.
A similar view has been taken in the recent decision of Zinger Investments (P.) Ltd (2013) 38 taxmann. com 388 (Hyd).
In Avaya Global Connect Ltd., 26 SOT 397(Mum), the Tribunal held that section 2(42C) only deals with a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise than as a result of sale would not qualify as a ‘slump sale’. It was further held that if the transfer is as a result of a Court-approved Scheme of Arrangement under which no monetary consideration is paid, then it is not a sale of an undertaking by the assessee.
However, in Virtual Software and Training (P), (2008) 116 TTJ 920 (Delhi) , there was a transfer of an undertaking as a going concern in consideration for an issue of equity shares of the buyer company. The Delhi Tribunal held that such a transaction would also be covered under the definition of slump sale under the Income-tax Act. Even if the trans-action did not constitute a sale under the Sale of Goods Act or Transfer of Property Act, it would still constitute a transfer u/s. 2(47) of the Income-tax Act.
The Delhi High Court in the case of SREI Infrastructure Finance Ltd, TS-237-HC-2012 (Del) had an occasion to consider a case where a sale of an undertaking was carried out by way of a Court-approved Scheme of Arrangement for consideration in cash. The Court held that the definition of slump sale was wide enough to cover sales which took place under Court Schemes also. It may be noted that this was not a case of a slump exchange but was actually a sale by virtue of a Court Scheme.
Conclusion
The way in which a transaction is structured and its documentation drafted would determine its tax and other consequences. Unintended consequences could follow if proper care is not taken while structuring and drafting.
Exercise of due care and caution is required and we need to remember that sale and exchange are as apart as chalk and cheese and never the twain shall meet!
