UNDERSTANDING TAX ON SLUMP SALE WITH LATEST CASE LAWS

Slump sale is transfer of one or more business undertakings for a lump sum consideration, without assigning individual values to the each assets and liabilities to be transferred. It is not sale of assets which on its own cannot produce sustainable revenue.

Under Indian Income tax Act, 1961, "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. Therefore transferor is not required to assign value to each "assets and liabilities" of "business undertaking" to be transferred.

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.

Conclusion

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 the above definitions :

1. The subject matter of slump sale shall be an undertaking of an assessee. ‘Undertaking’ is defined as per Explanation 1 to S. 2(19AA), which includes a division. S. 50B provides for computation of capital gains on slump sale of ‘undertaking or division’. The word ‘division’ is nowhere defined in the slump sale provisions. Thus, the significance of the word ‘division’ is not apparent. Also, it is not clear as to how a ‘division’ is distinct from an ‘undertaking’ and how important is that distinction for the purpose of S. 50B.

2. An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm. This is on account of the following :

(a) S. 50B refers to ‘assessee’ without any specific exclusion of a non-corporate entity.

(b) In the case of Industrial Machinery Associates v. CIT, [81 ITD 482 (Ahd.)], sale of entire business undertaking by a firm to a company as a going concern was held to be a slump sale.

(c) As per the Dictionary of Accounting, Oxford University Press, ‘undertaking’ is defined as ‘a body corporate, partnership or an unincorporated association carrying on trade or business with a view to making profit’.

3. Slump sale may be of a single undertaking or even more than one undertaking.

4. The undertaking has to be transferred as a result of sale. If an undertaking is transferred otherwise than by way of sale, say, by way of exchange, compulsory acquisition, extinguishment, inheritance by will, etc., the transaction may not be covered by S. 2(42C). This is because the definition of ‘transfer’ in S. 2(47) specifically lays down the different modes which shall be regarded as transfer. ‘Sale’ is just one of them. Slump sale is restricted only to ‘transfer . . . . . . as a result of sale’.

5. The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities.

6. The following is an illustrative list of cases where sale of an undertaking was held to be a slump sale :

(a) Land development business — CIT v. Mugneeram Bangur & Co., [57 ITR 299 (SC)]

(b) Sale of cement unit, which was transferred as a functional productive unit — Coromandel Fertilisers v. DCIT, [90 ITD 344 (Hyd.)]

(c) Sale of branch — CIT v. Narkeshari Prakashan Ltd., [196 ITR 438 (Bom.)]

7. Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale — CIT v. Artex Manufacturing Co., [227 ITR 260 (SC)]. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected in the light of Explanation 2 to S. 2(42C).

Where the sale deed mentioned ‘sale deed in respect of sale of movable properties’ and separate prices were agreed for different assets, the transaction was not treated as a slump sale — Jayantilal Bhogilal Desai [130 ITR 655 (Guj.)]

8. An issue arises as to whether S. 50B applies to sale of an undertaking which has discontinued its business or is not a going concern at the time of sale. There are two views possible :

One, that there has to be sale of an undertaking as a going concern. This is evident from the following :

(a) When slump sale provisions were introduced, the Memorandum to the Finance Bill, 1999 provided that tax benefits to business reorganisations should be limited to transfer of business as a going concern and not to transfer of assets without business reorganisation.

(b) The definition of ‘undertaking’ is in the context of demerger. One of the conditions of demerger is that the transfer of the undertaking is on a going concern basis [S. 2(19AA)(vi)].

(c) S. 176(3A) of the Act requires that where a business is discontinued, ‘any sum’ received after discontinuance shall be taxable in the hands of the person who carried on the business as if the sum has been received prior to discontinuance.

(d) The Webster’s dictionary defines ‘undertaking’ as ‘something that is undertaken or a business work or project which one engages in or attempts, or an enterprise’.

(e) Dictionary of Accounting (above) uses the words ‘carrying on trade or business’.

The above-mentioned points clearly lay down that the ‘undertaking’ should be a going concern at the time of sale. However, in the absence of any specific provision in S. 50B restricting its applicability to an undertaking whose business is discontinued or which is no longer a going concern; the other view is also possible that the undertaking need not be a going concern. Since there is a provision that is specifically applicable in case of slump sale, this provision would override all other general provisions of the Act. Besides, where two views are possible, the benefit of doubt should be given to the assessee. Hence, the second view holding that slump sale provisions apply even to a discontinued business can be taken.

Transfer of assets without transfer of liabilities — whether 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 :

1. Definition of ‘undertaking’ in Explanation to S. 2(19AA) : ‘include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole,.’.

2. 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’.

3. Where price was fixed beforehand in respect of identifiable assets of the undertaking and no liability was transferred to the buyer, transfer of undertaking would not be regarded as a slump sale — Mahindra Sintered Products Ltd. v. DCIT, [95 ITD 380 (Mum.)]

4. Sale of chemical unit was not regarded as slump sale, because there was transfer of assets without transfer of liabilities. — Weikfield Products Co. (I) (P.) Ltd. v. DCIT, [71 TTJ 518 (Pune)]. The Tribunal observed that :

‘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.’

5. In R. C. Cooper v. UOI, (1970) 40 Com Cas 325 (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. The undertaking will therefore be the entire integrated organisation consisting of all property, movable or immovable, and the totality of undertaking is one concept which is not divisible into components or ingredients.’

Taxability of gains arising on slump sale :

S. 50B provides the mechanism for computation of capital gains arising on slump sale. On a plain reading of the Section, some basic points which arise are :

1. S. 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.

2. 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. It is important to note that Circular No. 779, dated 14-9-1999, issued at the time of introduction of S. 50B, has used the words ‘held’ instead of ‘owned and held’ used in the text of S. 50B. It is not clear whether this difference in terminology is of any significance.

Where an undertaking was acquired by an assessee under a will, and such an undertaking is transferred by him as a slump sale within a year, the undertaking will be classified as short-term or a long-term asset based on the period for which the previous owner ‘owned and held’ the undertaking [S. 49(1)(ii)].

3. Taxability arises in the year of transfer of the undertaking. The undertaking will be deemed to be transferred on execution of the agreement and registration thereof coupled with the handing over of possession of the undertaking to the transferee. However, if the year of the agreement of the undertaking and registration thereof and the year of its possession fall in two different previous years, then the previous year in which the possession of the undertaking is handed over to the transferee will be considered as the year of transfer.

4. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for S. 48 and S. 49 of the Act.

5. As per S. 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.

6. In the year of transfer of the 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 arrived at and certifying that the figure of net worth has been correctly arrived at. Although the certification of computation is based on the information and explanations obtained by the accountant, the essence of the form is on reporting that the computation is ‘true and correct’ rather than ‘true and fair’.

7. In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking. This is substantiated by Note 5 to Form 3CEA, which requires the computation of net worth of each undertaking to be indicated separately.

8. In case of slump sale in the nature of succession of a firm or a proprietary concern by a company, capital gains made on slump sale may be entitled to exemption u/s.47(xiii) and (xiv), respectively, provided the other conditions of these Sections are satisfied. In case of violation of conditions of S. 47(xiii) or (xiv) in any subsequent year, the benefit availed by the firm or the sole proprietor will be taxable in the hands of the successor company in the year in which the violation takes place as per S. 47A(3).

Besides, if the successor company violates the conditions of S. 47(xiii) or (xiv) by transferring that undertaking under a slump sale within three years of conversion, the undertaking will be classified as a short-term capital asset as per S. 50B. Then, the company would have to pay for the loss of tax benefit due to violation of conditions, as well as tax on the short-term capital gains arising on the slump sale.

9. Gains made by a foreign resident from the alienation of a permanent establishment or a fixed base in India by way of slump sale, shall be taxable in India as per S. 50B read with Article 13 (Capital Gains) of the UN/ OECD Model Convention on Double Taxation Avoidance Agreement.

‘Net Worth’:

When S. 50B was originally introduced, ‘net worth’ was defined as per the Sick Industrial Companies (Special Provisions) Act, 1985 to mean ‘the sum total of paid-up capital and free reserves’. In order to remove implemental difficulties, such as a non-corporate entity having no separate capital or reserves; non-application of the definition under SICA to non-corporate assesses, etc., the definition of net worth was amended retrospectively by Finance Act, 2000 w.e.f. A.Y. 2000-01. Now, net worth is defined in Explanation 1 to S. 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. This amendment has made it clear that the slump sale provisions apply to a non-corporate entity also.

The ‘aggregate value of total assets of the undertaking or division’ is the sum total of :

1. WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets.

2. The book value in case of other assets.

It is important to note here that neither S. 50B, nor Form 3CEA lays down the date as on which the net worth is to be determined. In Coromandel Fertilisers v. DCIT, (90 ITD 344) the Hyderabad Tribunal has observed that ‘net worth of the undertaking on the date of transfer is deemed to be its cost of acquisition’.

The proviso to Explanation 1 to S. 50B explicitly lays down that ‘any change’ in value of assets on account of revaluation shall be ignored in determining net worth. Although it is not made clear whether revaluation refers to revaluation which might have taken place in the year of transfer only or even in the years prior to transfer, the use of the word ‘any change’ in the proviso tilts towards the view that revaluation of assets, even if done in the years prior to the transfer of the undertaking, shall have to be ignored for calculation of net worth.

The Act does not clearly lay down the mode of computation of capital gains where net worth of an undertaking is negative. In that case, two views are possible :

(a) One, net worth represents cost of acquisition and ‘cost’ cannot be negative. It can either be positive or zero. Further, S. 48 provides that capital gains shall be computed by ‘deducting’ cost of acquisition from the consideration. ‘Deduction’ means ‘reduction’; it cannot be an addition to the amount of consideration. Also, S. 50B being a special provision, overrides all other provisions for computation of capital gains. Hence, where net worth is negative, the cost of the undertaking should be taken as zero and capital gains will be equivalent to the sale consideration.

(b) The other view is that, in addition to the consideration, the transferee also pays for the excess of liabilities over the assets, which led to a negative net worth. Further, for the buyer, cost of purchase is the aggregate of amount paid to the seller plus the value of liabilities taken over, in excess of the assets. The total consideration for the buyer and the seller cannot be different. Hence, the negative net worth should be added to the sale consideration and capital gains should be higher than the sale consideration.

Currently, this issue has not been resolved. In my humble view, where the net worth is negative, the assessee receives consideration in cash as well as in kind by way of discharge of excess liabilities. Hence, the second view seems to be the better one.

Meaning of ‘net worth’, as defined in S. 50B is not consistent throughout the Act. For example, in case of demerger, Explanation to S. 49(2D) states that ‘net worth’ means the sum of paid-up capital and general reserves. Also, in demerger, only general reserves shall be included in net worth and no other reserves even if they are free reserves. For rationalisation of the Act, one of the important things is to bring about consistency in the meanings of various terms used therein.

Successor’s position in respect of claims of predecessor :

1. 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, even though there is no specific provision for the same. The rationale being that these Sections provide for availability of the benefit qua ‘an undertaking’ and not qua ‘an assessee’. Just as in the case of amalgamation/demerger of an undertaking, where benefit is available to the amalgamated or the resulting company subsequent to re-organisation, in case of slump sale, too, the benefit is available to the successor for the unexpired period. This view is supported by the deletion of Ss.(9) and Ss.(9A) of both Sections w.e.f. A.Y. 2004-05.

2. 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. Although S. 43B applies qua ‘an assessee’, I believe that where an undertaking is transferred lock, stock and barrel, the benefits, claims, debts and contingencies of the undertaking are transferred with it.

3. 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. This was because the claims for export incentives and cash assistance were actionable claims purchased by the assessee for a consideration ACIT v. HYT Engg. Co. (P.) Ltd., [92 ITD 202 (TM) (Pune)].

4. In the absence of any specific provisions for computation of WDV of assets acquired upon slump sale in the books of the successor, a view could be taken that apportionment of slump consideration on the basis of fair values of various assets is possible.

Now let us understand the slump sale more with various decisions of the court.

·         Sale of industrial unit by the assessee firm as a “going concern”, in its entirety on “as is where is” basis for a lump sum sale consideration which was arrived at by profit capitalization method and is not allocable to individual assets was a slump sale of the business and not a case of itemized sale. Refer, J. B. Electronics vs. Jt. CIT, 38 DTR 393 (Pune) (TM) (Trib.).

·         Where itemized sale of assets and liabilities of an undertaking takes place, the nomenclature of “slump sale’’ cannot be assigned thereto and in such a case short term capital gain is to be computed in accordance with the provisions of section 50. Refer, Harvey Heart Hospitals Ltd. vs. ACIT, 130 TTJ 700 (Chennai).

·         Sale proceeds received by the from sale of a going  concern of one division of assessee, which was  slump sale and not a sale of block of assets, s. 50 was not applicable. Refer, Max India Ltd., 319 ITR 68 (P&H).

·         Assessee had sold entire undertaking with all its assets and liabilities together with licences, permits, approvals, registration, contracts employees and other contingent liabilities for a slump price, provisions of section 50B were applicable. Refer, VSAT Industries Ltd. vs. ACIT, 41 SOT 415 (Hyd.).

·         Where a business as a going concern is transferred including inventory, contract, license agreements, accounts receivables, vendor lists etc., same would fall within the definition of slump sale and is to be  considered for computation of capital gains in accordance with section 50B. Refer, Duchem Laboratories Ltd. vs. ACIT, 134 TTJ 532 (Trib.)(Mum.).

·         Mumbai ITAT in the case of Bharat Bijlee Limited held that in order to constitute a “slump sale” under section 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”. The presence of money consideration is an  essential element in a transaction of sale. As the undertaking was transferred in consideration of shares & bonds, it was a case of  “exchange” and not “sale” and so section 2(42C) and section 50B cannot apply. As regards taxability under section 45 & 48, 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, the computation & charging provisions of section 45 fail and the transaction cannot be assessed.    

·         Sale of an Industrial Unit by assessee with land building plant & Equipments as a going concern to another company has to be assessed  to another company has to be assessed to tax for capital gain as Slump sale under section 50B and not assessable for Capital gain as sale of depreciable assets u/s 50. Refer, CIT v Accelerated Freeze Drying Co Limited.

·         Assessee having transferred the assets and liabilities pertaining to its business as one whole unit as a going concern for a lump sum consideration without assigning any separate value to land, building /  structure, plant and machinery, office equipment, furniture and fixtures and vehicles, the sale was a slump sale and therefore, the same is not exigible to tax under the head “Capital Gains”. Refer, CIT vs. Chemical Industries Consulting Bureau, 51 DTR 283 (Karn.)(High Court).

·         When assessee transferred its entire assets by way of slump sale , depreciation for earlier assessment year which was not claimed by it cannot be notionally allowed in computing  the capital gains under section 50B , provisions of sections 43(6)(c)(i)(c) (b) have no application where the entire assets forming part of block are sold by way of slump sale.( Asst Year 2001-02). Refer, Dharmpal Satyapal Ltd v Dy CIT, 138 TTJ 74.

·         In the case of slump sale , depreciation has to be allowed on the assets sold in slump sale up to date of transfer and allowable depreciation has to be computed for all years after 1st April 1998,  for computing value of assets to be reduced from block of assets irrespective of the fact whether in the books the assessee had charged depreciation or not. ( Asst Year 2003—04). Refer, DY CIT v Warner Lambert ( India ) (P ) Ltd, 56 DTR 121 (Mumbai) (Trib).

·         Mumbai ITAT in the case of Dy. CIT v. Summit Securities Ltd. held that for computing the capital gains for section 50B “Slump Sale”, liabilities reflected in “negative net worth” cannot be treated as “consideration” but the resultant “negative net worth” has to be added to the “consideration”.

·         Transfer of unit-Undertaking transferred was a unit as a whole ,itemized earmarking would not be possible the transaction would be a slump sale and hence not liable to capital gains.(S.45). Refer, CIT v. Polychem Ltd, 205 Taxman 465.  

·         S. 50, in relation to depreciable assets, is applicable only in case of an itemised sale and not in case of slump sale, which is now covered by S. 50B. S. 50 and S. 50B are mutually exclusive — Coromandel Fertilisers v. DCIT, (supra); Salora International v. JCIT (supra).

·         Lump sum consideration received on slump sale cannot be attributed to various individual assets for determining capital gains in the hands of the seller of the undertaking — Doughty v. Taxes Commissioner, (1927) AC 327 (PC); CIT v. Mugneeram Bangur & Co., (supra); Indian Bank Ltd. v. CIT, [153 ITR 282 (Mad.)]; Syndicate Bank Ltd. v. ACIT, [155 ITR 681 (Kar.)].

·         Slump sale, though chargeable u/s.45, could not be taxed, since the cost of acquisition and date of acquisition of the undertaking cannot be ascertained. Reasons for introduction of S. 50B, as explained in the introduction above, laid down in : Coromandel Fertilisers v. DCIT, (supra); Syndicate Bank Ltd. v. ACIT (supra). Contrary view in PNB Finance Ltd. v. CIT, 252 ITR 491 (Del.)

·         In case of slump sale, the undertaking is a capital asset — Syndicate Bank Ltd. v. ACIT (supra).

·         Balancing charge u/s.41(2) is not applicable where there is a sale of the whole undertaking and the assessing officer does not have with him the actual cost, written down value and sale consideration of individual assets. — CIT v. Garden Silk Weaving Factory, [279 ITR 136 (Guj.)].

Frequently asked question:-

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’.

Section 50B: 

• 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

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

Note: Any change in value of assets on account of Revaluation of assets shall be ignored for the purpose of computing Net Worth

Frequently asked question:-

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.

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.

However in case of any State jurisdiction where specific legislation have been enacted, like Karnataka Stamp Act; then such legislation shall be applicable.

• 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 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

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

-          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%.

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 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.

In case you have any further clarification, feel free to contact me at mr_manish_ca@yahoo.com or else you can view more articles & news related to Indian tax at http://taxbymanish.blogspot.in/.