As per the definition of slump sale u/s 2(42C) of the Income Tax Act, 1961, transfer of one or more undertakings for a lump-sum consideration without assigning the separate value to the individual assets and liabilities. This is the most preferred way of business structuring in Indian tax and corporate law.
- Undertaking - It includes any part of an undertaking, or a unit or division of an undertaking, or a business activity taken as a whole.
- Lump-sum consideration - The consideration should be lump-sum, should not be assigned to individual assets and liabilities.
COMPUTATION OF CAPITAL GAIN IN THE HANDS OF THE SELLER
The transfer of an undertaking through a slump sale would be treated as a transfer, and capital gain tax would be applicable.
Nature of Capital Gain:
|
Sr. No. |
Holding period |
Taxability |
|
1 |
More than 36 Months |
LTCG |
|
2 |
Less than 36 Months |
STCG |
Computation of capital gain under Slump Sale
Sale Consideration: In case of a slump sale of Undertaking (capital assets) which is sold by way of Slump sale, the sale consideration of capital assets would be the Fair market value of the capital assets (FMV).
FMV of capital assets would be the higher of FMV 1 and FMV 2, as per Rule 11UAE, as calculated below:
FMV -1
|
Book value of the assets appearing in the books of accounts (Other than jewellary, artistic work, shares and securities, immovable assets) |
XXX |
|
Market value of jewellery and artistic work based on a registered valuer's report. |
XXX |
|
FMV of shares and securities as per Rule 11UA |
XXX |
|
The value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property |
XXX |
|
Total - A |
XXX |
|
Book value of liabilities as appearing in the books of account of the undertaking or the division transferred by way of slump sale |
XXX |
|
Less: |
|
|
Capital balances |
XXX |
|
Provision for taxation |
XXX |
|
Any amount representing provisions made for meeting liabilities |
XXX |
|
Total - B |
XXX |
|
FMV - 1 (A-B) |
XXX |
FMV -2
|
Value of the monetary consideration received or accruing as a result of the transfer |
XXX |
|
Value of the non-monetary consideration received or accruing as a result of the transfer determined in the manner as provided in sub-rule 1 of Rule 11UA |
XXX |
|
In case non-monetary consideration received in the form of Immovable property, the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property |
XXX |
|
FMV - 2 |
XXX |
Cost of acquisition
In case of a slump sale of the undertaking (capital assets), the "Net worth" of the undertaking shall be taken as the cost of acquisition and improvement.
- The benefit of indexation will not be available even though it is an LTCG.
- Increase/decrease in the book value of assets due to revaluation of assets shall be ignored for calculating FMV.
IMPLICATION IN THE HANDS OF THE BUYER
- Depreciation in the year of the slump sale: Depreciation is to be apportioned based on the number of days for which the seller and the buyer use the assets.
- Accumulated business losses/unabsorbed depreciation: Accumulated business losses/unabsorbed depreciation shall not be transferred to the buyer. The seller will carry forward and set off the losses even in case the business is discontinued.
- Cost of the assets acquired: The cost of the assets acquired through a slump sale is to be apportioned based on the allocation report from a valuer.
- Succession of business: As per the provision of section 170 of the Income Tax Act, 1961, slump sales would be treated as a succession of business, and in the event that the seller is unable to discharge the dues, the same can be recovered from the buyer.
- Impact u/s 56(2)(x) of the Income Tax Act on receipt of capital assets: The provisions of section 56(2)(x) of the IT Act per se should not apply. In any case, as the transaction is intended to be undertaken at fair value, there should not be any adverse implications under section 56(2)(x) of the IT Act
IMPLICATION IN THE HANDS OF THE SELLER
- Depreciation in the year of the slump sale: Depreciation is to be apportioned based on the number of days for which the seller and the buyer use the assets.
- Capital Gain Tax: On a slump sale transaction, the capital gain tax would be applicable. The rate of tax depends on the LTCG or STCG.
- Claim of deduction u/s 43B of the Income Tax Act on transferred liabilitie: Claim of deduction u/s 43B may not be available since transfer of such liabilities as part of a slump sale does not tantamount to payment to employees/funds - hence prone to litigation.
- Implication under GST Law: A slump sale would also be a supply under GST. However, such a supply would be like 'transfer as a going concern' and such a transfer attracts nil rate of GST. Transfer as a going concern solely means that the current business as a whole is transferred and will be carried on by the purchaser.
- Reporting compliance: The Company has to furnish a report by a Chartered Accountant as per Form 3CEA on or before the due date referred in section 44AB, i.e., one month prior to the due date of filing ITR, indicating the computation of net worth and certifying that the computation of net worth is correct.
- Requirement under the Companies Act, 2013: Section 180 of the Companies Act, 2013 imposes restrictions on the Board of Directors to sell, lease, or dispose of the whole or substantially the whole undertaking. Therefore, in case of a slump sale, a special resolution is required to be passed at the meeting of the shareholders as per the provisions of section 180.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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