The process of
integration of the Indian economy with the world economy has compelled the
corporate world to restructure its operations so as to gain benefits from
large-scale operations, weed out unprofitable areas and focus on core
competencies. Consequently, mergers, demergers and other forms of restructuring
have become very common. Before A.Y. 2000-01, capital gains made on sale of an
‘undertaking’ were chargeable to tax u/s.45 of the Income-tax Act, 1961
(hereinafter referred to as ‘the Act’). Though it was difficult to determine the
cost of acquisition, cost of improvement and date of acquisition of the
‘undertaking’, as required u/s.48, gain on sale of undertaking was chargeable to
tax under the head capital gain as held by the Supreme Court in CIT v.
Electric Control Gear Manufacturing Co., 227 ITR 278. However, S. 50B was
introduced w.e.f. A.Y. 2000-01, which lays down a special provision for
computation of capital gains in case of slump sale. Yet, there is scope for tax
planning, which is, inter alia, discussed here.
Meaning of ‘slump sale’ :
In simple words,
‘slump sale’ is nothing but transfer of a whole or part of business concern as a
going concern; lock, stock and barrel. As per S. 2(42C), introduced by the
Finance Act, 1999, ‘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. ‘Undertaking’
has the same meaning as in Explanation 1 to S. 2(19AA) defining ‘demerger’.
Explanation 2 to S. 2(42C) clarifies that the 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. Thus, if value is assigned to land for stamp duty purposes, the
transaction will not cease to be a slump sale.
Meaning of ‘undertaking’ :
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.
Analysis of the above
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.
‘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.
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’.
consideration for transfer is a lump sum consideration. This
consideration should be arrived at without assigning values to individual assets
6. The following
is an illustrative list of cases where sale of an undertaking was held to be
a slump sale :
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.
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
(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.
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.
Webster’s dictionary defines ‘undertaking’ as ‘something that is undertaken
or a business work or project which one engages in or attempts, or an
of Accounting (above) uses the words ‘carrying on trade or business’.
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.
assets without transfer of liabilities — whether slump sale :
provisions do not apply where assets of an undertaking are transferred
without transfer of liabilities. This is clear from the following :
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 :
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.
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
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)].
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.
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
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.
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
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.
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
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
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.
principles laid down by various cases are as follows :
1. Nature of S.
Prospective, i.e., effective from A.Y. 2000-01 — Coromandel
Fertilisers v. DCIT, (supra); Industrial Machinery Associates
v. CIT, (supra); Salora International v. JCIT, [88 TTJ 53
clarificatory, not procedural, i.e., effective from A.Y. 2000-01 —
Coromandel Fertilisers v. DCIT, (supra); L. H. Sugar Factories
v. ACIT, [86 TTJ 1012 (Luc.)]
Intrinsically, a charging Section — Industrial Machinery Associates v.
2. 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).
3. 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.)].
4. 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.)
5. In case of
slump sale, the undertaking is a capital asset — Syndicate Bank Ltd. v.
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.)].
Trade-off between itemised sale
and slump sale :
An assessee has
to choose what is best suitable for him — an itemised sale or a slump sale. This
is done by evaluating the advantages and disadvantages of slump sale.
undertaking is owned and held for more than 36 months, the long-term capital
gains are taxable @ 20% (plus surcharge and education cess), even though there
may be some assets held only for a few months. Further, long-term capital gains
are eligible for deduction u/s.54EC and u/s.54F [ACIT v. Raka Food Products,
277 ITR 261 (Mad)]. Since S. 50B overrides the Sections which provide the mode
of computation of capital gains on sale of an asset, S. 50C, providing for
substitution of sale consideration of land/building by its value as per
valuation of stamp valuation authority, is not applicable where land/building is
part of the undertaking. Thus, the effective rate of long-term gains may turn
out to be much lower than 20%.
benefit is available. Also, where the undertaking comprises plots of land
acquired prior to 1-4-1981, whose value has appreciated, cost cannot be
substituted by the FMV as on 1-4-1981. In case the undertaking is a short-term
capital asset, capital gains made on slump sale are taxable at normal rates of
tax, without availability of exemption.
In view of the
above provisions, an assessee may select what is most appropriate for him — an
itemised sale or a slump sale, so as to minimise the capital gains tax
liability. 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.