Slump sale

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23 September 2011 what does an undertaking or division include as per sec 50B of IT act?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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25 September 2011 The term slump sale is used when an undertaking or a business is sold without attributing separate values to each of the assets which are sold. In other words, if there is a sale of an undertaking or a business for a lumpsum price it is considered to be a slump sale. Section 2(42C) of the Act defines a "slump sale" to mean the transfer of one or more undertakings as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sale . In CIT vs. Mugneeram Bangur & Co. (Land Department),57 ITR 299 (SC), the Supreme Court was concerned with a problem arising on the sale of going concern. The firm had sold the business as a going concern with its goodwill and all stock in trade, etc., to a company for a lumpsum price.
The Supreme Court held that the sale was of a whole concern and no part of the price paid was attributable to the cost of land and no part of the price was taxable. In the words of the Court at page 305 : "It seems to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of the land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale.

What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs.2,00,000 attributed to goodwill is added to the cost of land, it is nobody’s case that this represented the market value of the land. In our view, the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land. If this is so, it is clear from the decision of this court in Commissioner of Income-tax v. West Coast Chemicals & Industries Ltd., 46 ITR 135 (SC) and Doughty’s case AC 327 that no part of the slump price is taxable". The direct decision on a slump sale being not taxable is that of Syndicate Bank vs. Addl. CIT, 155 ITR 681 (Ker). In this case the business undertaking of the Syndicate Bank Ltd. was nationalised along with thirteen other like undertakings.

A lumpsum compensation was paid for the undertaking. The Court held that a business undertaking as a whole would constitute a capital asset. However, the Court referred to the decision in CIT vs. B.C. Srinivasa Setty, 128 ITR 294 (SC) which held that goodwill was not a capital asset and that if it was not possible to determine the cost of acquisition of an asset, no capital gain could result because the computation provisions would fail. In this case the Court stated that : (i) there are assets of different nature, those involving cost in their acquisition and those which could be acquired by way of production in which the cost element cannot be identified.

But none of the provisions pertaining to "capital gains" suggest that they include an asset in the acquisition of which no cost at all can be conceived. (ii) the cost of acquisition mentioned in s. 48 implies a date of acquisition. And (iii) if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then, it cannot be described as an "asset" within the meaning of s. 45 and, therefore, its transfer is not subject to income-tax under the head "Capital gain".

Thus a slump sale was held to be outside the purview of capital gains. After section 50-B was introduced, an Ahmedabad Bench of the Tribunal was seized of the issue regarding slump sale in Industrial Machinery Associates vs. CIT, 81 ITD 482 (Ahd).

Two issues were raised here, namely, whether the slump sale would attract capital gains tax for assessment year 1993-94 and secondly, whether the provisions of section 50-B are merely clarificatory and, hence, retrospective. The Tribunal held that such a slump sale would not attract capital gains tax.

With reference to retrospectivity, the Tribunal held that section 50-B essentially deals with substantial rights of the subject and imposes new burdens. It stated that it is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. In the case of section 50-B the provision has been expressly enacted by the Legislature prospectively w.e.f. 1.4.2000 and Board Circular No. 779 dated 14.9.1999 also specifically states that, inter alia, the provisions of slump sale would apply to assessment year 2000-01 and subsequent years.

They also referred to circular No. 794 dated 9.8.2000 whereby the modified definition of "net worth", by the Finance Act, 2000, was also made effective from assessment year 2000-01 onwards. The Tribunal, therefore, held that section 50-B was not merely clarificatory but substantive and was prospective with effect from assessment year 2000-01.