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Slump Sale

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 section 2(42C) of 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.

‘Undertaking’ has the same meaning as in Explanation 1 to section 2(19AA) defining ‘demerger’. As per Explanation 1 to section 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.

Explanation 2 to section 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 be a qualifying slump sale under section 2(42C)

A sale in order to constitute a slump sale must satisfy the following quick test:

  1. Business is sold off as a whole and as a going concern

  2. Sale for a lump sum consideration

  3. Materials available on record do not indicate item-wise value of the assets transferred

Analysis of the above definitions

  1. The subject matter of slump sale shall be an undertaking of an assessee.

  2. An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm.

  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.

  5. The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. The consideration may be discharged in cash or by issuing shares of Transferor Company.

  6. 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 vs. 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 section 2(42C).

  7. Transfer of assets without transfer of liabilities is not a slump sale

Taxability of gains arising on slump sale

Section 50B of the Income-tax Act, 1961 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. Section 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.

  3. Taxability arises in the year of transfer of the undertaking.

  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 section 48 and section 49 of the Act.

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

  6. In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking.

‘Net Worth’

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 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.

Companies Act implications

Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions 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, in case of slump sale, section 180 shall get attracted and a special resolution of the members shall be required.

For the purpose of this section, ‘undertaking’ shall mean an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.

‘Substantially the whole of the undertaking’ shall mean 20% or more of the value of undertaking.

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