Slump Sale has been one of the widely used ways of business acquisition in India. The Concept of Slump Sale is quite old but it gained popularity post 1990s. The concept of Slump Sale was incorporated in the Income tax Act, 1961 (‘the IT Act’) by the Finance Act, 1999 when Section 2(42C) was inserted defining the term slump sale and Sec 50B
Pre‐insertion of Section 50B
- The Supreme Court in PNB Finance Ltd. V. CIT 2008 -TMI - 31364 – (SUPREME COURT) after considering Sections 41(2), 45 and 50B held that gain from slump transactions is neither taxable as business income u/s. 41 (2) nor as Capital gains u/s. 45 of the Act.
- To attract section 41 (2), the subject matter should be depreciable assets and the consideration received should be capable of allocation between various assets. In case of a slump sale, there is an undertaking which gets transferred (including depreciable and Non‐depreciable assets) and it is not possible to allocate slump price to depreciable assets and therefore, the same cannot be taxed u/s. 41 (2).
- To attract Capital Gain, held that the charging section and the computation sections are integrated code and if one fails other fails. If the computation sections fail then even the charging section fails.
In case of slump sale, there are bundle of assets (including intangible assets like goodwill) that are transferred and in absence of any specific provision like Section 50B, it is not possible to determine the cost of the said assets and thus, the computation mechanism fails and so does the charging section. Therefore, it was held that the gain from the transfer of a bundle of asset on a slump basis is not chargeable to capital gains also. Thus, the slump sale was held to be not chargeable to tax prior to insertion of Section 50B.
Understanding Slump Sale
Section 2(42C): Defining Slump Sale
- means the transfer of one or more undertakings
- as a result of the sale
- for a lump sum consideration
- without values being assigned to the individual assets and liabilities in such sales
Analysis of Slump Sale
- Exhaustive definition;
- The word ‘transfer’ is a very wide term. However, the Legislature has chosen to include only transfer as a result of “sale” within the ambit of slump sale and has expressly not covered transfers by any other means.
- Explanation 2: determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities
- Slump sale may be of a single undertaking or even more than one undertaking
- An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm;
- The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities.
Q1. What would happen if the transfer of the property in goods is not pursuant to a contract but pursuant to a Court Order?
The transfer of the property in goods pursuant to an order of a court cannot be regarded as ‘Sale’. This is quite clear from definition of “Sale” that only contractual transfer is regarded as ‘Sale’ and thus, the statutory transfers or transfer effected by orders of the court or operation of law cannot be regarded as Sale.
Q2. What if the property in the goods is transferred for a consideration other than ‘money consideration’, say for allotment of shares in Transferee Company?
The transfer of the property in goods for other than ‘money consideration’ would be regarded as ‘Exchange’ and not ‘Sale’ and therefore wouldn’t be covered in the ambit of Slump sale and consequently would not be taxable under the IT Act. Such transaction could be regarded as ‘Slump Exchange. Refer Supreme Court case in CIT vs. R. R. Ramkrishna Pillai
Q3. Whether transfer of Assets without transfer of Liabilities regarded as Slump Sale?
Slump sale provisions do not apply where assets of an undertaking are transferred without transfer of liabilities. This is clear from the following
- Definition of ‘undertaking’: ‘include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole’
- As per Explanation 1 to S. 50B: Net worth is the difference between ‘aggregate value of total assets of the undertaking or division’ and ‘value of liabilities of such undertaking or division’.
- In R. C. Cooper v. UOI, (1970) (SC), it was observed that ‘undertaking relates to the entire business although there may be separate ingredients or items of work or assets in the undertaking.
- ‘In our opinion, the transfer of a going concern means transfer by lock, stock and barrel, where nothing is left with the vendor. It includes not only the transfer of each asset, tangible or intangible, but also the transfer of each debt and liability including any obligation’.
- Sec 50B reads as ‘Special provision for computation of capital gains in case of slump sale’. Since slump sale is governed by a ‘special provision’, this Section overrides all other provisions of the Act.
- Capital gains arising on transfer of an undertaking are deemed to be long-term capital gains. However, if the undertaking is ‘owned and held’ for not more than 36 months immediately before the date of transfer, gains shall be treated as short-term capital gains.
- Taxability arises in the year of transfer of the undertaking.
- As per Sec 50B, no indexation benefit is available on cost of acquisition, i.e.net worth
- In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking
- The assessee has to furnish an accountant’s report in Form 3CEA along with the return of income indicating the computation of net worth .The essence of the form is on reporting that the computation is ‘true and correct’ rather than ‘true and fair’.
- The aggregate value of total assets, for the purpose of computation of Net Worth
Value to be considered
WDV of the block of Asset as u/s 43(6)
Capital Asset u/s 35AD
Book Value of such Asset
Note: Any change in value of assets on account of Revaluation of assets shall be ignored for the purpose of computing Net Worth
Q1 What is the mode of computation of capital gains where net worth of an undertaking is negative, i.e. liabilities is more than the assets?
As held in Zuari Industries Ltd vs CIT, the net worth in such case should not be reduced below "nil" since this would be contrary to the scheme of the section itself. The capital gain is always a portion of the consideration, and, therefore, the portion can never be higher than the whole consideration.
Q2. When shall the gain be taxable in case year of the agreement and registration and year of possession falls in two different PY’s?
The previous year in which the possession of the undertaking is handed over to the transferee will be considered as the year of transfer.
Q3. Whether Slump Sale applies to sale of an undertaking which has discontinued its business or is not a going concern at the time of sale?
Both the views are possible, However, in the absence of any specific provision in Sec 50B restricting its applicability to an undertaking whose business is discontinued or which is no longer a going concern; it is possible that the undertaking need not be a going concern. The benefit of doubt should be given to the assessee.
Stamp Duty is payable in relation to transfer of immovable properties. Although individual values cannot be assigned to the various assets for purposes of the transaction in a slump sale, appropriate values have to be considered for purposes of stamp duties.
However in case of any State jurisdiction where specific legislation have been enacted, like Karnataka Stamp Act; then such legislation shall be applicable.
A view has been taken that there is no Sales Tax payable on the transfer of a business as a going concern, including the transfer of a whole unit or division of any business under the value-added tax laws or the local sales tax laws. This is based on the rationale that the sale of an entire business cannot be equated with the sale of movable goods, the latter being subject to sales tax., i.e. Sale of “business” is not considered to be “goods” under sales tax laws.
Refer Sec 50B as Explained above
- Where the predecessor is enjoying the benefits of S. 10A or S. 10B, the benefit for the unexpired period may be available to the successor. The rationale being that these Sections provide for availability of the benefit qua ‘an undertaking’ and not qua ‘an assessee’
- Where the predecessor is denied deduction u/s.43B on the ground of non-payment of dues, and the dues are paid by the successor, the benefit of deduction u/s.43B should be available even to the successor
- Where claims for export incentives and cash assistance formed part of assets of the undertaking acquired by way of slump sale, and the amount of the claim was received by the successor, the amount so received was held to be capital receipts. Refer ACIT v. HYT Engg. Co. (P.) Ltd
- If the undertaking is in existence for more than 36 months, the gain arising on slump sale is treated as LTCG, even though few assets may be held for less than 36 months.
- No distinction is made between depreciable asset, non depreciable asset and Stock.
- In case of LTCG; assessee can enjoy following benefits
- Tax at 20% u/s 112
- Exemption u/s 54EC or 54F
- Sec 50B overrides Sec 50C, which provides the mode of computation of capital gains on sale of an asset, providing for substitution of sale consideration of land/building by its value as per valuation of stamp valuation authority. Thus, the effective rate of long-term gains may turn out to be much lower than 20%.
- An assessee may have to weigh the option of selling a business as a going concern by way of slump sale or alternatively, selling the assets independently and decide about the most advantageous mode of transferring the undertaking, keeping in view the aspects discussed above.
- Where itemised sale is more beneficial, one can simply break up the sale consideration by assigning values to individual assets and liabilities. Since sale consideration of an undertaking is expected to be sizable, determining sale consideration appropriately can save huge tax liability.
- While a slump sale is an attractive option for a business entity desirous of transferring/selling an undertaking, given the complexities involved in determination of the costs and taxes on any such arrangement for the transfer of business, it is prudent for parties to negotiate and commercially agree on the cost burden of each party at the very outset.