Mergers and acquisitions, it may be recollected, have been further freed by the recent amendments vide the Finance Act, 1999. Under Chapter XXC of the Income Tax Act, 1961, in case of specified cases of transfer of immovable property, an intimation has to be filed with the appropriate authority. The appropriate authority may decide that it will itself buy the said property and would pay the declared consideration to the proposed seller.

The obvious objective is to discourage understatement of sale consideration with an objective to evade taxes since, if this is done, the seller may be forced to sell to the government at the declared low price.

However, difficulties would arise when business undertakings are transferred as a part of business restructuring transactions such as acquisitions, mergers,spin-offs, etc. In such cases, the immovable property is not transferred independently. The sale consideration is typically a composite one and separate value is not ascribed to the property.

In fact, the acquirer may not be interested to buy the property independently and would place a far different value if it is purchased independently. Further, the property may fetch a much higher or lower price if sold independently. In such a case, how will the provisions operate.

Do the parties have to file the appropriate declaration? What price would be disclosed in it? Can the authority insist on bifurcation of sale proceeds? Can the authority acquire the property while leaving out other assets and liabilities? Can the authority acquire the whole undertaking? To address this, one would have to look at the scheme.

The term immovable property has been defined in two categories. Under the first category, it includes land, buildings, etc, along with machinery, furniture, etc., if these are to be transferred alongwith. There is no scope for including liabilities, workmen, etc, if these are to be transferred along with. The second category covers rights in respect of buildings, etc. which accrue from transactions such as being a member of a society, company or through other agreements or arrangements.

Apparently, this category would also not cover transfer of undertakings. However, transfer of undertakings would involve transfer of immovable property also. Can it be said then that since immovable property is being transferred, the provisions would be attracted? To answer this question, one would have to consider whether an undertaking is an independent asset by itself and is not merely a term to refer the aggregation of its various components.

It is well settled that undertaking is an asset by itself (Killick Nixon and Co vs CIT 66 ITR 714 (SC); West Coast Electricity Supply Corp Ltd vs CIT 107 ITR 483 (Mad)). In view of this, it could be said that the provisions would not apply at all. Note, however, that it hasbeen held in Hindustan Lever Ltd.'s case ((1994) 207 ITR 772 (Cal)) that immovable property includes transfer of undertaking even if liabilities, workmen, etc, are being transferred along with.

The court stated that these all are mere encumbrances over the property. The court actually implied that the authority was free to direct acquisition of the whole undertaking including the workers, creditors, etc. and, making a logical conclusion, run it! It is respectfully submitted that this decisions needs reconsideration.

When an undertaking is transferred, the principal objective is not to transfer the immovable property with the transfer of other items being mere attachments. The fact may be that the value of the property may be a small portion. Liabilities transferred along with are not mere encumbrances over the immovable property and they may have no charge or connection over them. Note that here the assessee himself had filed the declaration and it was the authority who opined that there was no transferof immovable property.

Let us consider the second important condition. There has to be a sale consideration for the transfer of immovable property. When there is a fixed sum for transfer of the undertaking, no value is ascribed separately for the immovable property.

As discussed earlier, it may be impossible to separate the value of the property from the sale consideration and even if one could value the property separately, this figure would cannot be said to be the value envisaged as part of the sale consideration. Hence, the provisions would fail to apply on yet another ground.

While the aforesaid difficulties arise in simple sale of undertakings, the complexities increase when the transfer is in the form of amalgamations or takeovers. Amalgamations involve a peculiar method of valuation of shares, direct allotment of shares to the shareholders of the transferor company, etc. Takeovers involve the additional complication that shares and not the undertaking or the property are transferred.

Inconclusion, one may say that while there is good case for saying that transfer of undertakings in any forms of business restructuring would not attract the provisions of pre-emptive acquisitions, a clarificatory amendment may eliminate the uncertainty.

The author is a Mumbai-based chartered accountant