CA Vinay V. Kawdia has explained the entire law, relating to the taxation of a slump sale under sections 2(42C) and 50B of the Income-tax Act, 1961, in the format of a FAQ. He has answered all conceivable questions and also referred to all the important judgements on the subject. The implications under the GST have also been briefly referred to
1) What is slump sale under The Income Tax Act?
The concept of slump sale was incorporated in the Income Tax Act [The IT Act] by the Finance Act, 1999 by way of section 50B. Section 2(42C) was also inserted defining the term ‘Slump Sale’ as 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.
Special provision for computation of capital gains in case of slump sale.
Section 50B. (1) 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 :
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) 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.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form[a report of an accountant as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB] indicating the computation of the net worth of the undertaking or division, as the case may be, 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.
Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account :
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.
Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,—
in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;
in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and
in the case of other assets, the book value of such assets.
Section 2(42C):"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.
Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 1 to S. 2(19AA)— "undertaking" shall 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 individual assets or liabilities or any combination thereof not constituting a business activity.
2) Computation of Capital gain, Period of holding and nature of capital gain under slump sale:
The gain or loss resulting from slump sale shall be a Capital Gain/Loss under the Income Tax Act as follows:
Full value of Consideration
Less: Expenses in relation to transfer
Less: Cost of acquisition i.e. Net Worth of the Undertaking
CAPITAL GAIN/(LOSS)
The capital gain or loss computed as above will be either long term capital gain (LTCG) or short term capital gain (STCG) depending upon the period for which the undertaking is held. If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term and if it is held for less than 36 months, the resulting capital gain or loss shall be short term.
3) Cost of acquisition of an undertaking under slump sale:
‘Net worth’ of an undertaking is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. Net worth is defined in Explanation 1 to section 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 its books of accounts’.
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 to be noted that, for computing the net worth, the assets on which deduction has been allowed under section 35AD and if such assets are transferred under slump sale, the value of such assets shall be taken as NIL.
4) Benefit of indexation under slump sale and Tax applicable:
There will be no indexation benefit available in the computation of the capital gains due to slump sale. By extending the benefit of lower rate of taxation on long term capital gain as provided u/s 112 (@20%) to the undertaking as a whole notwithstanding the fact that there may be several assets held by the assessee for a period of not more than 36 months, the legislature thought it to curtail the benefit of indexation to the cost of acquisition and cost of improvement. Normal tax rates shall be applicable in case of Short Term Capital Gain arising from Slump Sale.
5) Year of taxability under slump sale:
Taxability shall arise in the year of transfer of undertaking by way of sale.
6) Whether deeming provisions of section 50C are applicable to the sale of undertaking as slump sale u/s 50B?
Section 50C is not applicable to all the capital assets but only to a capital asset which is land or building or both. Explanation 2 to section 2(42C) defining `slump sale’ has made it clear that the determination of the value of asset or liability for the purposes of payment of stamp duty etc. shall not be regarded as assignment of values to the individual assets or liabilities. It is, therefore, manifest that even if the assets of the undertaking, which is subject matter of transfer, include land or building or both, the stamp value shall be ignored insofar as the computation of full value of consideration of the undertaking as a whole is concerned. (DCIT vs. M/s. Summit Securities Ltd., ITA No.4977/Mum/2009, Cyfast Enterprises Pvt. Ltd. vs. DCIT – ITA No. 1878/Mum/2015, etc.)
Accordingly, since capital asset that is subject matter of section 50B is ‘Undertaking’ and not ‘Land/Building or both’, deeming provisions of section 50C are NOT applicable to the sale of undertaking as slump sale u/s 50B.
7) Whether deeming provisions of section 56(2)(x) are applicable to the buyer of undertaking under slump sale u/s 50B?
Deeming fiction of section 56(2)(x) is applicable to sum of money, capital asset being immovable property or property other than immovable property. ‘Property’ is exhaustively defined under section 56(2) and the term ‘undertaking’ is not included in the said definition of ‘Property’ under Section 56(2)(x) of the Act. Therefore, deeming provisions of section 56(2)(x) shall not be applicable to the buyer of an undertaking under slump sale u/s 50B, even if the buyer has received any land/building as a part of undertaking.
Even otherwise, since under slump sale no value is possible to be assigned to individual assets, computation mechanism u/s 56(2) shall fail.
8) Whether deeming provisions of section 50 are applicable to the sale of depreciable assets under slump sale?
No. Section 50 (2) applies to a case where any block of assets are transferred by the assessee but where the entire running business with assets and liabilities is sold by the assessee in one go, such sale, in our view, cannot be considered as “short-term capital assets”. In other words, if an undertaking is sold as a running business with all assets and liabilities for a slump price, no part of the consideration can be attributed to depreciable assets and assessed as a short-term capital gain u/s 50(2). If the undertaking is held for more than three years, it constitutes a "long-term capital asset" and the gains are assessable as a long-term capital gain.(CIT vs. Equinox Solutions Pvt. Ltd. – Civil Appeal No. 4399 of 2017 (SC)]
9) Sale of undertaking while retaining certain assets/liabilities of business – is it a slump sale?
It is not necessary that all the assets need to be transferred to qualify for a slump sale. However, the assets/liabilities that are transferred should be able to form an undertaking or part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole by themselves. It does not include individual assets or liabilities or any combination thereof not constituting a business activity.
‘Although various ingredients go to make up an undertaking, the term describes not the ingredients, but the completed work from which the earning arise’ – Karnataka High Court in Syndicate Bank’s case [1985] 155 ITR 681.
Tribunal having found that all assets and liabilities relating to the undertaking have been transferred leaving out only the bank balance and the outstanding insurance claim, the conclusion reached by the Tribunal that it is a case of slump sale of the undertaking as a going concern is a plausible view warranting no interference; since the assets of the undertaking included intangibles like goodwill, intellectual property, etc., their cost of acquisition could not be determined and therefore, no capital gain is chargeable under s. 45. [CIT vs. Akzo Noble India Ltd. (2019) 310 CTR 255 (Cal.)]
Assessee-company, under slump sale agreement, transferred its business undertakings as a going concern and declared corresponding income as long-term capital gain under section 50B. In a case of slump sale if certain defunct assets or properties are left out because they would cause inconvenience or lead to some kind of trouble for buyer, it is well within right of seller to exclude such asset from list and such sale would qualify for treatment under section 50B.[Triune Projects P. Ltd. vs. DCIT (2017) 77 taxmann.com 40 (Delhi)]
In the case of CIT v. Max India Ltd. [2009] 319 ITR 68 (Punj. &Har.), it was held by the Punjab & Haryana High Court that it is not necessary that all the assets are transferred for a transaction to qualify as a slump sale. However, it is essential that the assets being transferred are an undertaking in itself, and can function without any interruption. In this case, Assessing Officer rejected assessee’s claim of Long Term Capital Loss under slump sale holding that sale of said division was not a slump sale as technical know-how was separately sold on a later date and, therefore, by virtue of provisions of sections 50 and 50A, excess of sale consideration over written down value of block assets was liable to be taxed as short-term capital gain – On appeal, assessee’s claim was allowed holding that when it was a sale of going concern, sale was slump sale even if right to use technical know-how developed by assessee was granted by assessee to transferee against payment of a separate consideration and, therefore, section 50 was not applicable.
Purchaser of the manufacturing unit was already in the same business and wanted to sell the products manufactured from the said unit after the closing date in their own name and brand and so they were not keen to buy the name/trade name/logos/trademark/product name, etc. of the assessee, and thus, the assessee excluded the same from the transaction. So, therefore, exclusion of the said intangibles cannot in any way affect the slump sale of the manufacturing unit as a going concern in the facts and circumstances of this case. [Ambo Agro Products vs. CIT (2017) 187 TTJ 648 (Kol.)]
The assessee has sold the windmills and claimed it as a separate undertaking. Separate undertaking is one which can be separated from the business unit and both the business units of the assessee should be run separately, independent of each and they should not be dependent on each other. The definition of undertaking is given in s. 2(42C) and s. 2(19), wherein undertaking is defined as any part of an undertaking or unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting the business activity. From the definition of IT Act, the windmills satisfy all the conditions for treating it as a separate undertaking. Similarly, since the assessee has sold the windmills along with assets and all the liabilities, it also falls in the definition of slump sale under s. 2(42C). Though the assessee has not separately maintained the books of accounts, separate ledger accounts are maintained and claiming deduction under s. 80-IA separately for the income generated from the individual units each year. As per the P&L a/c, the assessee is computing profits separately from windmills and in a position to ascertain the income and expenditure separately for the windmills as well as for the assessee’s business. Therefore, windmills constitute separate undertaking and the CIT(A) has rightly directed the AO to compute the capital gains as a slump sale under s. 50B(2) and no interference is called for.[ACIT vs. Devi Sea Foods Ltd. (2020) 34 NYPTTJ 365 (Vishaka)dt. 19.06.2020]
10) Assignment of values to individual assets of the undertaking by stamp duty authorities – implications under slump sale u/s 50B:
Explanation 2 below S. 2(42C).—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities ;
11) Slump sale vs. Slump Exchange:
The consideration for a slump sale has to be in cash – if the consideration is in the form of shares, bonds, debentures, etc., the transaction will be called an ‘exchange’ and not a sale.
Section 50B applies to ‘Slump Sale’ as defined u/s 2(42C). According to which, only a sale of an undertaking that too for a lump-sum consideration can be regarded as slump sale and in case where there is no sale or there is an exchange, relinquishment, etc. [as per definition of transfer u/s 2(47) of the Act], the same is not a ‘Slump Sale’ within the meaning of the IT Act.
Essence of slump sale transaction is a lump-sum monetary consideration. Where the transfer of undertaking takes place not against monetary consideration, but against other assets, it amounts to ‘Exchange’ and not sale. Such exchange transaction does not fall within the ambit of slump sale, which necessitates a sale transaction at the first place. [CIT v. Bharat Bijlee Ltd.[2014] 46 taxmann.com 257 (Bombay)]
12) Taxability of Slump Exchange:
Hon’ble Mumbai ITAT in case of Bennett Coleman & Co. Ltd vs. ACIT [2018] 89 taxmann.com 415has held that transfer of undertaking on a going concern basis in consideration of equity shares and debentures shall not attract capital gains tax. The Hon’ble ITAT observed that under the facts of the case the undertaking was transferred by the assessee on a going concern basis and no cost of acquisition is possible to be attributed to individual assets in that undertaking and, therefore, the charging provisions of capital gains under section 45 fails. The ITAT further held that the provisions of section 50B are not applicable to this case as it is a case of slump exchange and not a slump sale. [Also refer: IGFT Ltd. vs. ITO – 158 TTJ 572 (Mumbai)]
13) Transfer of stock in trade under slump sale:
It will not have any separate tax treatment under the head PGBP and will be merged in the LTCG/STCG arising out of Slump sale of an undertaking as a whole.
14) Impact of revaluation of assets before slump sale of an undertaking:
Any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth i.e. effect of Revaluation of assets shall not be considered while computing the “net worth” i.e. cost of acquisition of the undertaking.
15) Negative Net worth and cost of acquisition of undertaking under slump sale:
In the case of Zuari Industries Ltd. [(2007) 105 ITD 569 (Mumbai)] and Paper Base Co. Ltd. [(2008) 19 SOT 163 (Delhi)] it was held that if the net worth of the undertaking is negative, the same should be considered as zero and should be disregarded for the purposes of computing capital gains under Section 50B of the Act. However, the Special Bench of ITAT Mumbai in case of Summit Securities Ltd. [2012] 19 taxmann.com 102 (Mum.) (SB), dissented from the above decisions. The Hon’ble Special Bench opined that the negative net worth of an undertaking cannot be equated to zero and the same should be added to the sale consideration to arrive at capital gains. In the case before Special Bench, sale consideration of the business was Rs. 143 crore and there was negative ‘net worth’ of Rs. 157 crore as per section 50B. It was held that, negative figure of net worth of Rs. 157 crore could not be ignored and, thus, capital gain chargeable to tax in case of slump sale would be Rs. 300 crore (i.e., Rs. 143 crore plus Rs. 157 core) and not Rs. 143 crore only as declared by assessee.
16) Reporting formalities in case of slump sale u/s 50B:
As per Section 50B(3), every assessee, in the case of slump sale, shall furnish a report in form 3CEA (Rule 6H of I.T. Rules) from an accountant before the specified date referred to in section 44AB[i.e. date one month prior to the due date for filing ROI u/s 139(1)] indicating the computation of the net worth of the undertaking or division, as the case may be, 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.
17) Allocation of consideration for slump sale & depriciation on the component of goodwill:
Section 32 of the Income-tax Act, 1961 – Depreciation – Assessee vide a slump sale agreement acquired as a going concern, ‘transmission and distribution business’ of transferor-company. Payment over and above book value of net tangible assets, was allocated by assessee towards acquisition of bundle of business and commercial rights, compendiously termed as ‘goodwill’ in books of account, which comprised of business claim, business information, business records, contracts, skilled employees and know-how. Assessee claimed depreciation on amount paid for acquisition of above mentioned intangible assets termed as goodwill. Specified intangible assets acquired under slump sale agreement were in nature of ‘business or commercial rights of similar nature’ specified in section 32(1)(ii) and were accordingly, eligible for depreciation under that section.[Areva T & D India Ltd. vs. DCIT – 20 taxmann.com 29 (Delhi)]
Where assessee purchased business as going concern in slump sale, consideration paid in excess of value of tangible assets was classifiable as goodwill eligible for depreciation and, therefore, further exercise to value goodwill was not warranted.[Triune Energy Services vs. DCIT (2016) 65 taxmann.com 288 (Delhi)]
18) Successor’s Position after slump sale:
19) Set off of brought forward/current year losses from capital gain arising out of slump sale:
As a general rule, STCL can be set off from STCG or LTCG whereas LTCL can be set off only against LTCG. Current year’s business loss can be set off against any income except income under the head salary. However, brought forward business loss can be set off only against current year’s business income, if any.
However, Hon’ble Kolkata ITAT, in case of Gouranga Cement Pvt. Ltd. vs. DCIT (Kolkata) held that, the assessee has the earned the long term capital gain by way of transfer of the business assets such as factory building, Plant & Machinery, electric installation under the head slump sale. Thus the nature of LTCG is in the nature of business profit & gains which is liable to be taxed under the head capital gain by virtue of deeming provisions of law. But the nature of LTCG is business only and accordingly, brought forward business loss can be set off against LTCG arising out of slump sale.
While holding as above, ITAT relied on decision of Supreme Court In the case of CIT v. CocanadaRadhaswami Bank Ltd. [1965]57 ITR 306 (SC), wherein it was held that as long as the profits and gains are in the nature of business profits and gains, and even if these profits are liable to be taxed under a head other than income from business and profession, the loss carried forward can be set of against such profits of the assessee.
20) Can exemption from capital gains be availed by assessee in case of LTCG arising from slump sale by reinvesting the amount in some specified securities/Assets (section 54F/54EC, etc.)?
Yes, subject to conditions stipulated in the exemption provisions such as Section 54F/54EC etc.
21) Is it mandatory to deduct depreciation allowance from block of assets, if not claimed by the assessee, in computing the net worth for calculating capital gains from a slump sale?
Yes. In computing the net worth for computing capital gains from a slump sale, depreciation on assets have to be deducted even if not claimed by the assessee.[CIT vs. DharampalSatyapal – ITA No. 1003/2011 (Delhi)]
22) Important ingredients to justify that the transaction in question was not of the nature of Slump Sale:
To qualify as a piecemeal or itemized sale, the following important factors should be considered:
23) Requirement of NOC from the tax authorities in case of Slump sale of an undertaking:
Under section 281 of the Income-tax Act, 1961, transfer of specified assetsby any mode by a taxpayer during the pendency of any proceedings under the IT Act shall be void as against any claim in respect of any tax or any other sum payable by the taxpayer as a result of the completion of the said proceeding, unlessthe transfer is for adequate consideration and without notice of the pendency of such proceedings or without notice of such tax or other sum payable by the assessee OR the taxpayer obtains a no objection certificate from the income tax authorities for the transfer.
24) Slump Sale of business – Implications under GST:
The sale of a business as a whole, on a going concern basis, entails the transfer of all assets and liabilities of the business comprising moveable and immovable property, stock-in-trade, receivables, payables, intangibles etc. for a lump-sum consideration. The transfer of a business on a going-concern basis, as a whole or an independent part thereof, has been exempted from GST. (Refer Notification No. 12/2017-Central Tax) The transfer of business, should be in such manner that it should enable the transferee to carry on the business seamlessly as a going concern. Such transfer should not be done only with respect of certain individual assets, but entire business including its employees, open contracts, credits, liabilities, etc. should also be transferred as a part of business.
Impact on unutilized credits:
Provisions under GST provide for the transfer of unutilized Input Tax Creditslying in the electronic credit ledger of the transferor to the resulting undertaking or the transferred business, pursuant to a change in the constitution on account of sale, merger, demerger, amalgamation, transfer of business etc., subject to conditions. The detailed law and procedure in this regard has been specified in Rule 41 of CGST Rules, 2017- Transfer of Credit on Sale, Merger, Amalgamation, Lease or Transfer of a Business.
25) Compliances under Companies Act:
In case of corporate assessees’, Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions u/s 180(1)(a) is ‘to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.’ Therefore, the seller needs to obtain an approval [through special resolution u/s 180(1)] from at least 75% of its shareholders for effecting a slump sale transaction.[Section 180 of the Companies Act is not applicable to Pvt. Ltd. Companies vide MCA notification dt. 05.06.15]
For the purpose of section 180(1)(a) of the Companies Act, “undertaking” shall mean an undertaking in which the investment ofthe company exceeds twenty per cent of its net worth as per the audited balancesheet of the preceding financial year or an undertaking which generates twentyper cent of the total income of the company during the previous financial year [Expln. Below S. 180(1)(a)]. However, in the context of Slump Sale under Income Tax Act, the above restrictive definition of ‘undertaking’ need not be referred and it is sufficient if the subject matter of sale is ‘undertaking’ as defined under Explanation 1 to S. 2(19AA) of the Income tax Act.
26) Slump sale arrangement and GAAR:
General Anti Avoidance Rules [GAAR] inserted in Income Tax Act- Chapter X-A vide sections 95 to S. 102 read with Rule 10U, 10UA, 10UB and 10UC of Income Tax rules are the provisions empowering the I.T. Authorities to curb efforts of tax payers to avoid payment of tax by adopting tax planning methods which are mainly aimed at obtaining tax benefits without commercial substance.
In case of Slump sale arrangement which is lacking commercial substance or ‘main purpose’ of which is to obtain tax benefitby avoiding adverse tax implications of itemized / piecemeal sale or the slump sale arrangement which is not a transfer of entire business undertaking as going concern in true sense, the authorities may invoke GAAR provisions, subject to other conditions stipulated therein.
CONCLUSION:
Some of the representative issues to be faced in case of itemized sale of various capital/business assets as against Slump Sale:
However, the option of selling an undertaking/ business as a going concern by way of slump sale or alternatively, selling the assets independently (itemized sale) is to be selected by carefully doing the cost benefit analysis of both the modes of transferring the undertaking, which may differ from case to case basis. Nevertheless, while the route of Slump sale can be effectively used for tax planning, it should not be devised for tax evasion.
| Disclaimer: 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 itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org |
