Forms of Business AcquisitionBackgroundThere are two common forms of Business Acquisition: - Slump Sale Itemised Sale Slump SaleIn 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 S. 2(42C), introduced by the Finance Act, 1999, ‘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 S. 2(19AA) defining ‘demerger’. Explanation 2 to S. 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 not cease to be a slump sale. LegalTax implicationA business undertaking can be treated as a capital asset under the domestic tax law. Therefore, a sale of the undertaking would attract capital gains tax. The income chargeable under the head "capital gains" is to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts, namely: -· The cost of acquisition of the asset; · The cost of any improvement thereto; and · Expenditure incurred wholly and exclusively in connection with such transfer. Computing Capital GainsIn the case of a slump sale, the sale is chargeable under the head "capital gains". It has to be computed by deducting the following amounts from the full value of the sale consideration: - · The net worth of the undertaking; and · Expenditure incurred wholly and exclusively in connection with such transfer. The net worth of the undertaking is the aggregate value of the 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. For this purpose, in the case of depreciable assets, the written down value of the block of assets and in the case of other assets, the book value of such assets, has to be considered.The methodology of computing capital gains in the case of a slump sale of an undertaking is as under: (As per section 50B of the Income-tax Act.) Particulars Rs. Lump-sum sale consideration (A) XXXXX Less: Net worth of the undertaking (B) (XXXXX) Less: Expenditure incurred in connection with the sale of the undertaking (C) (XXXXX) Short-term/long-term capital gains (A) - (B) - (C) XXXXX
The net worth of the undertaking is to be computed as under: Particulars Rs. Tax WDV of the depreciable assets of the undertaking (A) XXXXX Add: Book value of the assets other than depreciable assets (excluding the value of revaluation, if any) (B) XXXXX Less: Book value of liabilities (C) (XXXXX) Net worth of the undertaking (A) + (B) - (C) XXXXX
Successor’s position in respect of claims of predecessor Where the predecessor is enjoying the benefits of S. 10A or S. 10B, the benefit for the unexpired period may be available to the successor, even though there is no specific provision for the same. The rationale being that these Sections provide for availability of the benefit qua ‘an undertaking’ and not qua ‘an assessee’. Just as in the case of amalgamation/demerger of an undertaking, where benefit is available to the amalgamated or the resulting company subsequent to re-organisation, in case of slump sale, too, the benefit is available to the successor for the unexpired period. This view is supported by the deletion of Ss.(9) and Ss.(9A) of both Sections w.e.f. A.Y. 2004-05.Where the predecessor is denied deduction u/s.43B on the ground of non-payment of dues, and the dues are paid by the successor, the benefit of deduction u/s.43B should be available even to the successor. Although S. 43B applies qua ‘an assessee’, It is believed that where an undertaking is transferred lock, stock and barrel, the benefits, claims, debts and contingencies of the undertaking are transferred with it.Where claims for export incentives and cash assistance formed part of assets of the undertaking acquired by way of slump sale, and the amount of the claim was received by the successor, the amount so received was held to be capital receipts. This was because the claims for export incentives and cash assistance were actionable claims purchased by the assessee for a consideration ACIT v. HYT Engg. Co. (P.) Ltd., [92 ITD 202 (TM) (Pune)].In the absence of any specific provisions for computation of WDV of assets acquired upon slump sale in the books of the successor, a view could be taken that apportionment of slump consideration on the basis of fair values of various assets is possible.Accountant's ReportThe transferor should furnish in the prescribed form (Rule 6H and Form No. 3CEA). along with the return of income, a report of an accountant(Section 288(2) of the Act) certifying that the net worth of the undertaking or the division, as the case may be, has been correctly arrived at in accordance with the provisions of the Act.Company LawUnder the Company law provisions, a slump sale of an undertaking can be affected with the shareholders' approval (Section 293(1)(a) of the Companies Act, 1956..It should be ensured that the Memorandum and Articles of Association of the transferor company contain enabling provisions to affect such a sale.STAMP DUTYAlthough individual values cannot be assigned to the various assets for purposes of the transaction in a slump sale, appropriate values have to be considered for purposes of stamp duties. Under the Indian Stamp Act, 1899, stamp duty is payable in relation to transfer of immovable properties. Generally, anything embedded in, or attached to, the earth (such as land or buildings) is considered immovable property and any transfer of the same can attract significant stamp duties. So, in any business transfer arrangement that seeks to transfer plant and machinery together with the land, and such plant and machinery is embedded in, or attached to, the earth, the same will be treated as immovable property and its transfer will be stampable accordingly.While land/buildings are considered immovable property, whether machinery that has been installed becomes immovable property depends on the degree and permanency of the attachment, and the purpose of installing and attaching the machinery. For instance, the Supreme Court has held that a fertilizer plant, sold as part of a slump sale along with land and building, is immovable property as it was always intended that the plant remains permanently affixed to the land and building being transferred. However, this finding was specific to the facts of that case (Duncans Industries Ltd vs State of UP, AIR 2000 SC 355). VAT ACT Another important consideration is that of indirect taxes. A view has been taken that there is no sales tax payable on the transfer of a business as a going concern, including the transfer of a whole unit or division of any business under the value-added tax laws or the local sales tax laws. This is based on the rationale that the sale of an entire business cannot be equated with the sale of movable goods, the latter being subject to sales tax. The prevalent view in relation to sales tax in the case of a slump sale is that such sale would not attract sales tax since a business is not considered to be “goods” under sales tax laws.For exemption under APVAT, please see that you comply with Rule 36 for AP Value Added Tax Rules – 2005. Trade-off between itemised sale and slump sale :An assessee has to choose what is best suitable for him — an itemised sale or a slump sale. This is done by evaluating the advantages and disadvantages of slump sale.Advantages:If the undertaking is owned and held for more than 36 months, the long-term capital gains are taxable @ 20% (plus surcharge and education cess), even though there may be some assets held only for a few months. Further, long-term capital gains are eligible for deduction u/s.54EC and u/s.54F [ACIT v. Raka Food Products, 277 ITR 261 (Mad)]. Since S. 50B overrides the Sections which provide the mode of computation of capital gains on sale of an asset, S. 50C, providing for substitution of sale consideration of land/building by its value as per valuation of stamp valuation authority, is not applicable where land/building is part of the undertaking. Thus, the effective rate of long-term gains may turn out to be much lower than 20%.Disadvantages:No indexation benefit is available. Also, where the undertaking comprises plots of land acquired prior to 1-4-1981, whose value has appreciated, cost cannot be substituted by the FMV as on 1-4-1981. In case the undertaking is a short-term capital asset, capital gains made on slump sale are taxable at normal rates of tax, without availability of exemption.