SLUMP SALEUNDER INCOME TAX ACT, 1961

PREQUATE CONSULTANTS PRIVATE LIMITED

Background

� Slump Sale has been one of the widely used ways of business acquisition in India. The

concept of Slump Sale is quite old one but it gained popularity after 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 (175 Taxman 242) after considering � The Supreme Court in PNB Finance Ltd. V. CIT (175 Taxman 242) after considering

Sections 41(2), and 45, 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).

Cont….

� 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.

� Conclusion

In case of slump sale, there are bundle of assets (including intangible assets like goodwill) 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 gains 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 SaleDefining Slump Sale

Section 50B

Computation Mechanism

Section 2(42C) : Defining Slump Sale

Important Terms

• includes Sale, Exchange or relinquishment or extinguishment of right, compulsory acquisition and so on.

• include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include

• Main elements of sale:

• ‐ There must be at least two parties

• ‐ There must be a contract between the parties

• ‐ There must exist a on.

Transfer‐Section 2(47)

does not include individual assets or liabilities or any combination thereof not constituting a business activity

Undertaking –Sec12(19AA)

• ‐ There must exist a subject matter of sale,

• ‐ There must be an act of transfer of such property

• The sale must be for a price

Sale – Sale of Goods Act, 1930

� 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

Analysis of Slump Sale

� 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.

FAQ

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

FAQ

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 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.’

� Section 50B provides the mechanism for computation of capital gains arising on slump

sale.

� Any profits or gains arising from the slump sale effected in the previous year shall be

chargeable to income‐tax as capital gains arising from the transfer of long‐term capital

assets and shall be deemed to be the income of the previous year in which the transfer

took place.

� In relation to capital assets being an undertaking or division transferred by way of such

Section 50B:

SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAINS IN CASE OF SLUMP SALE.

Any profits or gains arising from the slump sale effected in the PY shall be chargeable

In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth"

Every assessee, shall furnish in the Form 3CEA along with the return of income, a report � In relation to capital assets being an undertaking or division transferred by way of such

sale, the "net worth" of the undertaking or the division, as the case may be, shall be

deemed to be the cost of acquisition and the cost of improvement for the purposes of

sections 48 and 49 and no regard shall be given to the provisions contained in the

second proviso to section 48.

in the PY shall be chargeable to income‐tax as capital gains arising from the transfer of long‐term capital assets and shall be deemed to be the income of the previous year in which the transfer took place.

of such sale, the "net worth" shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of Sec 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.

the return of income, a report of an accountant indicating the computation of the net worth and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

� 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.

Analysis of Sec 50B

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

Analysis of Sec 50B

Asset Type Value to be considered

Note: Any change in value of assets on account of Revaluation of assets shall be ignored for

the purpose of computing Net Worth

Asset Type Value to be considered

Depreciable Asset WDV of the block of Asset as u/s 43(6)

Capital Asset u/s 35AD Nil

Other Assets Book Value of such Asset

FAQ

Q1 What is the mode of computation of capital gains where net worth of an undertaking is negative, i.e. liabilities are 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.

Q2. When shall the gain be taxable in case year of the agreement and registration and 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.

Taxation

� Indian Stamp Act, 1899

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.

� Sales Tax

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.

� Income Tax Act, 1961

Refer Sec 50B as Explained above

Advantages to Transferee/Successor

� 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 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

� Carry forward of Unabsorbed Depreciation and Losses.

Advantages to Transferor/Predecessor

� 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� 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 provide 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%.

Conclusion

� 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 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.

The contents of this document are solely for informational purpose.

It does not constitute professional advice or a formal

recommendation. While due care has been taken in preparing this

document, the existence of mistakes and omissions herein is not

ruled out. Neither the author nor Prequate Mindworks and its

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