A single entity could have separate segments or undertakings with its own set of assets and liabilities each focused on a different business. Therefore, when the need arises, the entity can sell off a segment or the undertaking. This is called a slump sale.
A slump sale for income tax purposes would be one where an undertaking is sold without considering the individual values of the assets or liabilities contained within the undertaking.
It may be important to note here that finding out individual values may be of relevance only for the purpose of determining stamp duty or any other similar taxes.
(Applicable in case of Land & Building transferred along with the respective undertaking)
Tax Effect in a Slump Sale
The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act.
(In the hands of the seller)
The computation has been prescribed as follows:
The capital gain or loss as computed above will be either long-term or short-term 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.
Further, there will be no indexation benefit available in the computation of the capital gains.
Net worth: In computing the net worth of the entity, the following points need to be considered:
The value of net worth should not take into account any change in the value of the asset or liability resulting from the revaluation of such asset or liability.
In case of depreciable assets under the Income Tax Act, the Written Down Value of such assets as per the Act shall be considered.
In the case of assets on which 100% deduction has been allowed u/s 35AD (specified business), the value of such assets will not be considered.
In the case of any other asset, value as appearing in the books of accounts shall be considered.
After considering the above points, if the resulting net worth is negative, then the cost of acquisition shall be taken as nil for the purpose of computation of capital gains.
Tax rates: The rates of tax applicable to the capital gain in a slump sale are as follows:
Short Term Capital Gain: Normal Rates of taxation
Long Term Capital Gain: 20%
Reporting Formality: The Company has to furnish a report by a Chartered Accountant as per Form 3CEA.
Taxation under GST: The basis of taxation under the Goods and Services Tax Act revolves around ‘supply’. A slump sale would also be a supply and hence fall under the purview of GST. The supply would be in the nature of ‘transfer as a going concern’ and such a transfer attracts a nil rate of GST.
Transfer as a going concern would roughly mean that the current business as a whole will be carried on by a different person or that there is a change in the ownership of the business.
In order to really appreciate the benefit of transferring an undertaking via a slump sale, let us take a look at the alternative, i.e. Itemised sale. This is where every asset would be separately valued and sold, each having its own separate consideration. The same can be analyzed as follows:
Depreciable assets: Assuming that since an entire business/undertaking is being transferred, all the assets within a particular block are sold off. In such a case, the following amount shall be chargeable to tax as short-term capital gain/(loss):
Net Sale consideration – WDV of the block = Capital Gain / (Loss)
Irrespective of the period of holding, depreciable assets will always result in a short-term gain or loss. As already mentioned earlier, a short-term capital gain would result in being taxed at the normal rates applicable to the company (say 30%).
However, if such depreciable assets are sold as a part of a slump sale, they may attract long-term capital gains tax at a lower rate of 20% if the undertaking as a whole has been held for more than 3 years.
Other assets: Similar to the above, when other short-term capital assets are transferred, the capital gains tax is attracted at the rates as applicable to the company. It will be advantageous to transfer the same through a slump sale where the undertaking is held for more than 3 years which would attract long-term capital gain taxable at 20%.
However, in the case of transfer of business (not being a slump sale), the gain on transfer of such non-depreciable assets would be chargeable to tax as business profits (under the head ‘profits and gains of business or profession’). Such business profits would be taxable at the normal rates applicable to the company.
In the case of a loss-making company that has brought forward business losses, transfer of business using the itemized sale methodology might be more preferable since the resulting business profits can be set off against the brought forward business losses thereby reducing their tax liability
Summary of the case: The assessee was engaged in the business of manufacturing sheet metal components. This undertaking was held by the assessee for more than 6 years. It transferred its entire business in one go with all its assets and liabilities to another company for consideration.
The assessee, in its return of income, treated such sale as a slump sale of the going concern and paid tax on such long-term capital gains. The assessing officer was of the opinion that since the transfer involved the sale of depreciable assets, it was covered u/s 50(2) (STCG on the transfer of depreciable assets) and short term capital gains tax needs to be paid thereon.
The Supreme Court ultimately was of the view that Section 50(2) (STCG on the transfer of depreciable assets) may apply to a case where the assessee transfers one or more block of assets which were used by the assessee in the running of his business but where the entire business with is assets and liabilities is sold by the assessee as a running concern, the gain on such transfer cannot be considered as a short term capital gain. The above case covers one of the basic direct tax considerations in a slump sale.
However, there is also an Advance Ruling by the AAR, Karnataka in the case of Rajashri Foods (P) Ltd. where the following conclusions can be drawn from indirect tax (GST) perspective: The slump sale amounts to ‘supply’ under the CGST Act, and Such a supply would be a nil rated supply.
A slump sale can have multiple implications other than those already discussed. The following points are noteworthy:
(Important) Where a person receives any property for inadequate consideration, the difference between the fair market value (FMV) and the actual consideration paid for such property will be chargeable to tax under the head ‘Income from Other Sources’ subject to certain conditions.
However, where an entire undertaking is transferred as part of a slump sale (including the immovable property), this provision will not apply. It is not necessary that all the assets need to be transferred to qualify for a slump sale.
However, the assets that are transferred should be able to form an undertaking by themselves. 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.
In simple words, ‘slump sale is nothing but the transfer of a whole or part of business concern as a going concern; lock, stock, and barrel. As per section 2(42C) of the 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 the value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as the assignment of values to individual assets and liabilities. Thus, if the 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:
Business is sold off as a whole and as a going concern
Sale for a lump sum consideration
Materials available on record do not indicate the item-wise value of the assets transferred
Analysis of the above definitions
The subject matter of slump sale shall be an undertaking of an assessee.
An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm.
Slump sale may be of a single undertaking or even more than one undertaking.
The undertaking has to be transferred as a result of the sale.
The consideration for the 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 the Transferor Company.
Possibility of identification of price attributable to individual items (plant, machinery, and deadstock) 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 the 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).
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:
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.
Capital gains arising on the 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.
Capital gains arising on slump sales 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.
As per section 50B, no indexation benefit is available on the cost of acquisition, i.e., net worth.
In case of a slump sale of more than one undertaking, the computation should be done separately for each undertaking.
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:
WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets.
The book value in the 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 the undertaking.
subash chandra pandey 19 Aug, 2021