Brief on Slump Sale

Vikram Sirohi , Last updated: 04 June 2020
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SLUMP SALE

S.No	Particulars	Under the Companies Act, 2013	Under the Income Tax Act, 1961
1.	Sections deal with Slump sale	180(1)(a)	2(42C) & 50B
2.	Definition	Slump sale is not defined under the Companies Act, 2013. Though, it is defined under the Income Tax Act, 1961.	-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 liability in such sale Note: value can be assigned for the sole purposes of determining the payment of stamp duty, registration fees or such other taxes.
3.	Capital Gain provisions	NA	CG shall be taxable in the previous year in which slump sale is affected. Nature of CG is depending upon the period of holding of Undertaking transferred No profit under the PGBP shall arise even if stock is transferred in slump sale. CG = slump sale consideration – Net worth of the undertaking Note: Net worth = aggregate value of the total assets – value of Liabilities of the undertaking. No indexation benefits available Revaluation of assets shall not be considered while computing the "Net Worth" Non-depreciable assets are to be taken at their Book Values Depreciable assets are to be taken at their WDV The assets on which deduction under Section 35AD has been allowed & if that assets are transferred then value shall be taken as "NIL". The slump sale consideration is generally based on a business valuation report
4.	Resolution required	Special resolution required under section 180(1)(a) but Private Companies are exempted from the applicability of Section 180 vide Notification No. F.No. 1/1/2014-CL.V dated 05th June, 2015. Conclusion: In case of Private Company, no Special Resolution is required under Section 180 of CA, 2013.	NA
5.	Stamp-duty	Stamp duty shall be payable on Business Transfer Agreement (BTA)	NA
6.	Compliances under Companies Act, 2013	Checklist for Transferor Company: Ensure that the MOA of transferor Company contain the power to sell undertaking / Business Audited Balance sheet of the preceding year of Transferor Company Decide upon the Slump Sale consideration & its mode of payment Draft the Slump Sale Agreement while keeping in mind the provisions of Income Tax and Stamp duty respectively. Checklist for Transferee Company: The object clause of transferee Company contain the provision to carry such business in its MOA	NA

Slump Sale through BTA: A slump sale is mainly affected by the way of Business Transfer Agreement ("BTA"). BTA’s are typically subject to negotiations.

Duration for BTA: the BTA is effectively executed within 1-2 months of conceiving the Slump Sale.

Slump Sale through Scheme of Arrangement:

A slump sale can also be given effect by way of scheme of Arrangement under Section 230-232 of Companies Act, 2013 which requires the following approval:

National Company Law Tribunal
The Regional Director
Income Tax Authorities
Registrar of Companies
Shareholders
Creditors
Board of Directors of the transferor entity

Duration for Scheme of Arrangements: this entire process takes around 6 months for unlisted entity.

STAMP DUTY CHARGEABLE ON BTA:

Stamp duty is payable upon the execution of certain Instruments or documents specified in the Indian Stamp Act, 1899 or the relevant state Act. In the absence of state Stamp legislation, the Indian Stamp Act applies. The general principal with regard to stamp duty is that duty has to be determined with reference to an Instrument not in reference to transaction.

Therefore, to understand the Stamp duty liability for a specific transaction, it is important understand the instruments involved in the transaction and the subject matter of the Instrument.

or It is common practice for BTA to be structured as an "Agreement to sale". In such cases, the agreement provides a general framework pursuant to which the business undertaking is transferred on the closing date. BTA in itself may not contemplate any transfer and can mandate the execution of a deed of "conveyance" on or before the closing date to effectuate the transfer. However, there are the instances where the Agreement contain recitals with respect to the payment of consideration, handing over the possession of the property along with title deeds of such property. In such cases, the BTA assumes the colour of "Conveyance" and stamp duty is levied accordingly. Since the transfer envisaged under the agreement is the sale of a business undertaking as a whole, it can’t be specifically equated with the sale of movable or immovable property. The Indian Stamp Act and State Stamp Act do not contain specific provisions levying duty on an agreement relating to the transfer of "business" as such. Therefore, it is imperative that each asset proposed to be transferred to the purchaser vide a BTA is individually identified for the purpose of stamp duty as movable or immovable. The levy of Stamp duty depends upon the state in which the Agreement is executed.

For better clarity, let us examine the stamp duty implications on a BTA under Central and certain State legislations.

On perusal of the definition of "conveyance" under the Indian Stamp Act, it is understood that no distinction is made between moveable and immovable property. Tangible moveable property can be sold by delivery to the purchaser on receipt of the price without an actual conveyance, but if a conveyance in writing comes into existence, it is chargeable to duty as such. Intangible movable property such as actionable debt or goodwill has to necessarily be transferred under a written instrument and chargeable as conveyance. Whereas land/buildings are immovable property, machinery installed in a factory premises (fixed to the ground) can be considered as an immovable property, depending on the degree and permanency of the attachment, and the purpose of installing and attaching the machinery. For instance, the sale of a fertilizer plant as part of a slump sale along with land and building, would be considered as immovable property if it was always intended that the plant remains permanently affixed to the land and building being transferred.

Article 5 to the schedule of Indian Stamp Act prescribe the Stamp duty chargeable on an "Agreement or Memorandum of Agreement"

Article 5 further sub classifies several categories on the basis of the subject matter of an Agreement prescribing specific duty applicable to a particular instrument.

A residuary provision is provided under Article 5(c) wherein all such agreements not specifically provided for are classified and duty payable is separately prescribed.

If a contract does not intend to operate as an immediate transfer of the sale of property, such instrument is required to be stamped as an agreement rather than a conveyance. An agreement to sell a business undertaking with its assets including goodwill, would not amount to conveyance but would be merely a contract to sell, although the parties intended that when the transaction was completed, it should take effect from the date of the agreement and although in order to effect the contemplated sale, no actual deed of conveyance was prepared subsequently with regard to goodwill and movables (a sale deed being executed only in respect of immovable property).

Therefore, under the Indian Stamp Act, a BTA not evidencing a transfer of property shall be duly stamped as an agreement under Article 5(c), thereby requiring deed of conveyance to be executed on or before the Closing Date. Whereas the execution of a conveyance deed for the purpose of immovable property is absolutely necessary to establish title and ownership, transfer of ownership of movable property can be made by delivery of such property. In the event the BTA records the transfer of both movable and immovable property without the requirement of executing a conveyance deed, the BTA shall be construed as a conveyance and stamp duty as prescribed under Article 23 would be leviable on the said instrument.