Slump sale

Income Tax Act, 1961 - Slump sale

1. 1. Definition of SLUMP SALE? [Section 2(42C)]

1. “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 sale.
2. 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.
3. 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.
4. The Supreme Court, in CIT Vs Artex Manufacturing Co (1997 227 ITR 260), held that in order to constitute a slump sale there must be a sale of an on going concern as a whole and, accordingly, where individual items cannot be bifurcated in respect of the entire consideration, the question of slump sale and the provisions of Section 41(2) of the Act will not apply.

Meaning of Undertaking

1. “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. Further, it may be owned by a corporate entity or a non-corporate entity, including a professional firm. 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 organization consisting of all property, movable or immovable, and the totality of undertaking is one concept which is not divisible into components or ingredients

Exceptions:

Following transactions will not be considered as Slump Sale:

1. 1. • 1. Sale of Individual assets of an undertaking
        2. Transfer by way of exchange
        3. Compulsory Acquisition
        4. Extinguishment
        5. Inheritance by will, etc.
   2. Charging Section:
      Under Section 50, the company transferring the undertaking is liable to pay capital gain tax.Tax Liability on Company under Slump Sale
      Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking.

      COST OF ACQUISITION

      • • • 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.
          • As per Explanation 1 to S. 50B, "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. 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.
      • • Any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

      Networth on what date shall be the cost of acquisition
      

      • • Neither S. 50B, nor Form 3CEA lays down the date as on which the net worth is to be determined. However, 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 benefit of indexation is NOT AVAILABLE in case of slump sale.
          • 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.

      Q. What will be the mode of computation of capital gains where net worth of an undertaking is negative?
      

      • • A. The answer is not clearly spelt out in the law. So two views are possible-
      • • • 1. Networth represents cost of acquisition and ‘cost’ cannot be negative. Further, S. 48 provides that capital gains shall be computed by ‘deducting’ cost of acquisition from the consideration. So there cannot be an addition to the amount of consideration. 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.
            2. 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.
      • • In our view second view is more appropriate having regard to the reasons expressed thereunder.

      SHORT TERM OR LONG TREM 

      • • 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 implied as a Short Term Capital Gain and that for more than thirty-six months shall be implied as Long Term Capital Gain.

      Some Specific points:

      • • • 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 Section 50 B read with Article 13 (Capital Gains) of the UN/ OECD Model Convention on Double Taxation Avoidance Agreement.
          • Besides, if the successor company violates the conditions 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 Section 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.

      Tax Liability in the Hands of shareholders
      There shall be no effect on the shareholders of the company as the consideration receivable by the transfer of the undertaking goes to the company.

      In the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of the shares or debentures. The capital gains so computed in such foreign currency shall be reconverted into Indian currency, so that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale, of, shares in, or debentures of, an Indian company.

   3. Procedure:

1. Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288 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.

1. 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.

1. 1. Allowance

1. 1. • • Carry forward and set off of business loss
          For transferor-
          Under section 72 it is made that a loss sustained in a business will be allowed to be carried forward and set off against the income from business in future years, provided the business for which loss was originally computed continued to be carried on in the year of set off. Thus any loss pertaining to an undertaking will not be allowed to be set off if the company ceases to carry on the same business carried on by undertaking. However, even after the transfer of undertaking, if the transferor company is engaged in the business that of the undertaking, it will be able to carry forward ad set off this business loss in the future years.For transferee- The transferee company is not allowed to carry forward the accumulated losses of the undertaking acquired by way of a slump sale.
        • Carry forward and set off of unabsorbed depreciation
          For transferor-
          The transferor company will be able to carry forward and set off the unabsorbed depreciation with respect to the undertaking.For transferee-
          The transferee company is not allowed to carry forward and set off the unabsorbed depreciation of the undertaking acquired by way of a slump sale.

1. Miscellaneous:
   Transfer of Stock in trade
   The Transferor Company can transfer the stock in trade above the cost, even at the market price to the Transferee Company. Since the consideration is received on a lump sum basis, the Transferor Company will not be chargeable to tax under the profit and gains from business but will be directly charged to Capital Gains.
2. Landmark Cases
   CIT v. Artex Manufacturing Co. [1997] 227 ITR 260
   CIT v. Electric Control Gear Manufacturing Co., 227 ITR 278.