Slump Sale – Meaning
A Slump Sale is a sale of one or more undertakings by a seller as a going concern to an acquirer, for a lump sum consideration, without specific values being assigned to individual assets.
The concept of Slump Sale was introduced in the income tax law through section 2(42C) [definition of Slump Sale] and section 50B in AY 2000-01 after a lot of litigation and ambiguity on the taxability of slump sale.
Prior to the insertion of Section 50B, there was no specific provision to levy a tax on capital gains on income arising out of slump sale of an undertaking. Thus, the sellers were taking benefit of the language of the law to conclude that if the cost of acquisition or cost of the improvement is not ascertainable, then the question of capital gains would not arise – There are multiple judicial precedents that supported the argument that the cost of an undertaking is unascertainable and hence, the computation machinery fails.
Post insertion of section2(42C) and section 50B, there is no scope of taking the above stand of failure of computation machinery.
Computation of capital gains
Capital Gain = Slump Sale Consideration minus Net Worth of undertaking or division, where,
Net Worth = Aggregate value of total assets of undertaking or division transferred minus value of liabilities of the undertaking or division as appearing in the books
Given the above, let’s look at a few issues related to Slump Sale and its taxability, along with the relevant case laws.
Undertaking test for Slump Sale – Cherry Picking under Slump Sale – Allowed or Not?
Various courts, on multiple occasions, held that any sort of cherry-picking would be inconsistent with the concept of ‘slump sale’ as defined under the Income Tax Act, 1961 and hence not permissible.
In the case of Mahindra Sintered Products Ltd. it was held that where the price was fixed beforehand in respect of identifiable assets of the undertaking and no liabilities were transferred to the buyer, transfer of undertaking would not be regarded as a slump sale. Similarly, in the case of Weikfield Products Co., sale of the business was not considered to be a Slump Sale because there was a transfer of only assets without liabilities.
However, in the case of Triune Projects Pvt. Ltd the Delhi High Court held that for a sale to be termed a ‘slump sale’, it is not necessary to transfer all assets and liabilities. However, the core elements of the business must be transferred fora lumpsum price, and the transferee must be able to continue the business ongoing concern basis without the assets that have not been transferred.
The Mumbai Tribunal also in the case of Rohan Software (P.) Ltd. held that the applicability of Section 50B of the Act cannot be avoided merely because certain assets were excluded as long as the business was transferred as a whole.
Would it be correct to add the negative net worth of the undertaking to the consideration received for determining capital gains on that sale?
In case of Zuari Industries (ITAT Mumbai) and Paper Base Co. Ltd. (ITAT Delhi) held that if the net worth of the undertaking is negative, the same should be considered as zero, for the purposes of computing capital gains under Section 50B of the Act.
However, the above decisions were negated by the Special Bench of ITAT Mumbai, in the case of Summit Securities Ltd., wherein it was held that negative net worth of an undertaking should not be ignored/disregarded for determining the capital gains on a slump sale. The ITAT opined that net worth, when it is a negative figure, cannot be equated to zero and the same should be added to the sale consideration to arrive at capital gains.
Whether transfer of undertaking for a consideration other than money be regarded as a Slump Sale?
It has been held in the following rulings that where consideration in a transaction is other than money, it would be a case of Slump Exchange and not Slump Sale.
The Bombay High Court in the case of Bharat Bijlee Ltd. reaffirmed the difference between a Slump Sale and a Slump Exchange. The Court has held that the transfer where consideration is other than cash shall be regarded as a slump exchange. Such a transaction would not liable to capital gains tax under Section 2(42C) and section 50B as the slump consideration (i.e. consideration other than cash) cannot be allocated to individual items of assets and liabilities forming part of the undertaking and the cost of acquisition/ improvement of the undertaking cannot be ascertained.
Slump Sale is an attractive option for transferring business. However, a slump sale can have multiple implications other than those already discussed.
Written by Saili Kulkarni, Product Manager (Tax) @ Riverus