The concept of Slump Sale was introduced in the income tax law through section 2(42C) and section 50B in AY 2000-01 consequent to a ton of litigation and ambiguity on the taxability of slump sale.
What is Slump Sale?
A Slump Sale is a sale of one or more undertakings by a seller as a going concern to an acquirer, for a lumpsum consideration, without specific values being assigned to individual assets.
Legislative Intent
Prior to the introduction of Section 50B, there was no specific provision to levy tax on capital gains on income arising out of slump sale of an undertaking.
Consequently, taking benefit of the language of the law,the sellers concluded that if cost of acquisition or cost of 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 section 2(42C) and section 50B, there is no scope of taking the above stand of failure of computation machinery.
Special provision for computation of capital gains in case of slump sale
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.
1. Undertaking test for Slump Sale – Cherry Picking under Slump Sale-Allowed or Not?
Various courts, on multiple occasions have held that any sort of cherry-picking of assets and liabilities would be inconsistent with the concept of ‘slump sale’ as defined under Income Tax Act, 1961, and hence would not be 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. (I) (P) Ltd., sale of business was not considered to be a Slump Sale because there was only a transfer of assets without liabilities.
However, in the case of Triune Projects Pvt. Ltd vs. DCIT 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 for a lump sum price, and the transferee must be able to continue the business on going 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.
2. Whether transfer of undertaking for a consideration other than money can be regarded as a Slump Sale?
The court has held 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 CIT vs. Bharat Bijlee Ltd. reaffirmed the difference between a Slump Sale and a Slump Exchange.The Court held that the transfer where consideration is other than cash shall be regarded as aSlump Exchange and not a Slump Sale. Such a transaction would not liable to capital gains tax under Section 2(42C) and section 50Bas the cost of acquisition/ improvement of the undertaking cannot be ascertained.
3. Would it be correct to add negative net worth of the undertaking to the consideration received on Slump Sale for determining capital gains?
In the case of Zuari Industries Ltd. (ITAT Mumbai)and Paper Base Co. Ltd. (ITAT Delhi) it was held that if the net worth of the undertaking is negative, the same should be considered as zero and should be disregarded for the purposes of computing capital gains under Section 50B of the Act.
However, the Special Bench of ITAT Mumbai in case of Summit Securities Ltd., negated the above decisions. The ITAT opined thatthe negative net worth of an undertaking cannot be equated to zero and the same should be added to the sale consideration to arrive at capital gains.
The option of selling a business as a going concern by way of slump sale or alternatively, selling the assets independently is to be selected by analyzing the various advantages and shortfalls in the mentioned mode of transferring the undertaking, which may differ from case to case basis.
Authored by: Saili Kulkarni
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