Slum Sale: A Dynamic Provision

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Slum Sale: A Dynamic Provision

Provisions relating to slum sale are given in section 50B of the Income Tax Act, 1961. Section 50B reads as ‘Special provision for computation of capital gains in case of slump sale’. Since slump sale is governed by a ‘special provision’, this section overrides all other provisions of the Act.

Meaning of ‘slump sale’

Slump sale is transfer of a whole or part of business concern as a going concern. Section 2(42C) of Income -tax Act 1961, defines slump sale as under:

“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.

Explanation 1.—For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA) i.e. undertakingshall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities;

The following is the test to satisfy a transaction as a slum sale:

  1. Business is sold off as a whole and as a going concern
  2. Sale for a lump sum consideration
  3. Materials available on record do not indicate item-wise value of the assets transferred

Analysis:

  1. The subject matter of slump sale shall be an undertaking of an assessee.
  2. An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm.
  3. Transfer of assets without transfer of liabilities is not a slump sale
  4. Slump sale may be of a single undertaking or even more than one undertaking.
  5. The undertaking has to be transferred as a result of sale.
  6. The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. The consideration may be discharged in cash or by issuing shares of Transferor Company.
  7. CIT vs. Artex Manufacturing Co., [227 ITR 260 (SC)]: Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected in the light of Explanation 2 to section 2(42C).

Taxability of gains arising on slump sale

  1. If the undertaking is ‘owned and held’ for not more than 36 months immediately before the date of transfer, gains shall be treated as short-term capital gains otherwise it shall be treated as long term.
  2. Taxability arises in the year of transfer of the undertaking.
  3. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act.
  4. Second Proviso to Section 48 shall not be available in case of slum sale i.e. as per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.
  5. In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking.

‘Net Worth’

Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. This amendment has made it clear that the slump sale provisions apply to a non-corporate entity also.

The ‘aggregate value of total assets of the undertaking or division’ is the sum total of:

  1. WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets.
  2. The book value in case of other assets.

Companies Act implications

Section 180(1) of the Companies Act 2013 reads as under:

The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:—

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
Explanation.—For the purposes of this clause,—
(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent of the total income of the company during the previous financial year;
(ii) the expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year;

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