2025 (5) TMI 691 - AT - Income Tax

Treatment of the sale of business as normal sale OR slump sale - as contended on behalf of the Assessee that the Assessee-Company had entered into a slump sale transaction with the Buyer and had transferred all its operations assets liabilities employees and contracts to the Buyer in its entirety - HELD THAT - As agreement clearly provides for purchase of INR.22.40 crores as lump sum consideration for sale and purchase of business. Clause 2.1.2 specifically provides that no specific values have been assigned to individual assets and liabilities. Whereas Clause 2.1.3 specifically states that the transaction shall constitute slump sale of the business of the Seller as an inseparable whole as a going concern on an as is where is basis . Thus the intention of the parties to undertake transaction of slump sale can be clearly gathered from the terms from the Agreement itself and the same support the stand taken by the Assessee that the transaction was a transaction of slump sale. The reasoning given by the authorities below for rejecting the transaction under consideration as a slump sale transaction does not hold good. In our view the authorities below failed to appreciate true purport of the Agreement and incorrectly concluded that the transaction under consideration was not a slump sale transaction in terms of Section 2(42C). Therefore the addition made by the AO in this regard cannot be sustained. Accordingly the AO is directed to grant benefit of Section 50B to the Assessee and compute the business income accordingly. Decided against revenue.

Summary

The core legal questions considered in this judgment revolve around the characterization and tax treatment of a business transfer transaction undertaken by the Assessee. Specifically, the issues are:

1. Whether the transaction constituted a "slump sale" as defined under Section 2(42C) of the Income-tax Act, 1961, or a normal business sale.

2. Whether the provisions of Section 50B of the Act, which govern taxation of slump sales, apply to the transaction.

3. Whether the Assessing Officer and the Commissioner of Income-tax (Appeals) correctly interpreted the facts and law in treating the transaction as business income rather than capital gains arising from a slump sale.

4. Whether the trade receivables reflected in the Assessee's balance sheet represented assets retained by the Assessee or amounts receivable from the buyer as part of the slump sale consideration.

5. The legal significance of Form 3CEA filed by the Assessee in the context of valuation of assets and liabilities for the slump sale transaction.

6. The correctness of levy of interest under Sections 234B and 234C of the Act by the Assessing Officer.

Detailed analysis of these issues is as follows:

Issue 1 & 2: Whether the transaction qualifies as a slump sale under Section 2(42C) and applicability of Section 50B

The legal framework requires that a slump sale involves transfer of an undertaking as a going concern for a lump sum consideration without values assigned to individual assets and liabilities. Section 2(42C) defines slump sale, and Section 50B governs the computation of capital gains arising from such transactions.

The Assessee contended that the transaction was a slump sale, supported by the Business Sale and Purchase Agreement dated 24/03/2017. The Agreement explicitly describes the transaction as a slump sale "on an as is where is basis" for a lump sum consideration of INR 22.40 crores, without assignment of individual values to assets and liabilities. Clauses 2.1.2 and 2.1.3 of the Agreement clearly define the transaction as a slump sale and confirm the intention of the parties to transfer the business as an inseparable whole.

The Assessing Officer and CIT(A) rejected this characterization, treating it as a normal business sale. Their reasoning included the title of the Agreement ("Sale and Purchase of Business"), absence of a registered slump sale agreement, presence of trade receivables in the Assessee's balance sheet, and the Buyer's statement categorizing the acquisition as a "Common Control Business Combination." The CIT(A) also relied on Clause 2.1.4 of the Agreement, interpreting it to mean that some liabilities were retained by the Assessee, thereby negating the condition of transfer of all assets and liabilities.

The Tribunal examined these contentions and found the reasoning of the Assessing Officer and CIT(A) flawed. The Tribunal emphasized that the Agreement's express terms unequivocally identify the transaction as a slump sale. Clause 2.1.4 was interpreted as a standard indemnity clause allocating tax and statutory liabilities prior to the completion date to the Assessee, which does not amount to retention of business liabilities by the Assessee post-sale. Clause 3.1 of the Agreement further confirms that the Buyer assumes all debts, liabilities, and obligations related to the business up to the completion date, including tax liabilities.

The Tribunal held that the presence of trade receivables in the balance sheet represented the purchase consideration receivable from the Buyer, not assets retained by the Assessee. Thus, the Assessing Officer's and CIT(A)'s factual finding that the Assessee retained part of the assets was incorrect.

On the legal interpretation of Form 3CEA, the Tribunal noted that Section 50B(3) mandates furnishing this form, which contains the accountant's report on the net worth computation of the undertaking. However, the Tribunal clarified that filing Form 3CEA does not imply that individual asset values were assigned or that the transaction ceased to be a slump sale. The statutory requirement of furnishing Form 3CEA cannot be construed as evidence of an itemized sale contrary to the lump sum nature of a slump sale.

Accordingly, the Tribunal concluded that the transaction qualified as a slump sale under Section 2(42C) and was therefore governed by Section 50B for capital gains taxation. The Assessing Officer's addition of the entire sale consideration as business income under Section 28(ii) was unsustainable.

Issue 3: Treatment of the transaction as business income versus capital gains

The Assessing Officer treated the lump sum consideration as business income, contending that the transaction was a normal business sale. The CIT(A) partly agreed but reduced the addition by the net asset value, arriving at a partial disallowance.

The Tribunal, having held that the transaction was a slump sale, directed that the income arising therefrom be treated as capital gains in accordance with Section 50B. The Tribunal ordered that the Assessing Officer compute business income accordingly, granting the Assessee the benefit of capital gains treatment.

Issue 4: Nature of trade receivables reflected in balance sheet

The Assessing Officer and CIT(A) relied on the presence of trade receivables in the Assessee's balance sheet to infer that not all assets were transferred. The Tribunal disagreed, holding that the trade receivables represented the purchase consideration receivable from the Buyer under the slump sale agreement, not receivables of the transferred business. This factual distinction was critical to affirm the slump sale characterization.

Issue 5: Significance of Form 3CEA

The CIT(A) relied on Form 3CEA to conclude that individual asset values were assigned, which negated the lump sum nature of the sale. The Tribunal clarified that Form 3CEA is a statutory requirement for net worth computation and cannot be construed as evidence of itemized valuation or sale. The statutory explanations under Section 50B specify the manner of net worth computation but do not mandate or imply itemization inconsistent with slump sale.

Issue 6: Levy of interest under Sections 234B and 234C

The Assessee challenged the levy of interest under Sections 234B and 234C. The Tribunal disposed of these grounds as consequential in nature, implying that the interest issues would be reconsidered in light of the correct tax treatment of the transaction.

The Tribunal's conclusions on each issue are as follows:

- The transaction qualifies as a slump sale under Section 2(42C) of the Act.

- The provisions of Section 50B apply, and the capital gains arising from the slump sale should be computed accordingly.

- The Assessing Officer's addition of the entire sale consideration as business income is incorrect and cannot be sustained.

- The trade receivables in the balance sheet represent the purchase consideration receivable, not retained assets.

- Form 3CEA's filing does not imply itemization inconsistent with slump sale.

- Interest levies under Sections 234B and 234C are to be reconsidered consequentially.

Significant holdings include the Tribunal's explicit reasoning that:

"The intention of the parties to undertake transaction of slump sale can be clearly gathered from the terms from the Agreement itself and the same support the stand taken by the Assessee that the transaction was a transaction of slump sale."

And:

"Clause 2.1.4 of the Agreement ... is in the nature of standard clause dealing with tax and statutory liabilities only ... Therefore, we reject the contention of the Revenue that a portion of the liabilities pertaining to the undertaking were retained by the Assessee."

Further, the Tribunal stated:

"The statutory requirements of furnishing Form 3CEA giving computation of 'net worth' of undertaking transferred by way of slump sale cannot lead to an adverse inference to the effect that the Assessee has undertaken transaction of itemized sale."

Finally, the Tribunal concluded:

"The reasoning given by the authorities below for rejecting the transaction under consideration as a slump sale transaction does not hold good ... the addition made by the Assessing Officer in this regard cannot be sustained. Accordingly, the Assessing Officer is directed to grant benefit of Section 50B of the Act to the Assessee and compute the business income accordingly."