Slump Sale: Special provision for taxation on Sale of Business
There are various provisions in the Income Tax Law which provides for taxation of a specific transactions or activity. One such provision is section 50B which provides for taxation on sale of business as a going concern, most commonly referred to as the “Slump Sale”. Less known, but it is worthwhile to explore.
When a business is sold as a going concern for a slump price, the surplus arising on sale will be taxable as “Capital Gain” and not as “Business Income”& if it is long term in nature then the tax rate would be 20% as against normal tax rate of 30% in such case. Considering the incentives attached, it can be considered as one of the most preferred way for sale of business.
What is ‘slump sale’?
“Slump sale” is nothing but transfer of one or more undertakings or part of business concern as a going concern for a lump sum consideration without values being assigned to the individual assets/liabilities in such sale. “Undertaking” includes 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.
Computing Capital Gain in case of Slump Sale:
- Capital Gain – Long Term/Short Term:
Capital gain could be either long term capital gain (LTCG) or short term capital gain (STCG) depending upon the period of holding of such undertaking. If the undertaking is held for a period of 36 months or more, capital gain shall be long-term and if it is held for less than 36 months, the resulting capital gain shall be short term. - Sale Consideration:
The lump-sum consideration received or accruing as a result of transfer of business is considered as the sale price (i.e., full value of the consideration u/s 48) - Transfer Expenses:
The expenses incurred in connection with the transfer would also be available as deduction. - Cost of Acquisition:
“Net Worth” of the undertaking or the division is deemed as the cost of acquisition and the cost of improvement. No benefit of indexation is available in case of slump sale. The “Net Worth” is the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in the books of account. Aggregate value of total assets shall be as under:
a) In the case of depreciable assets, the written down value of the block of assets.
(b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction u/s 35AD (relating to deduction in respect of expenditure on specified business and proposed to be inserted as a new section in the Income-tax Act, 1961), nil
c) in the case of other assets, the book value of such assets.
Key features & benefits of “slump sale” (as against sale of individual assets) are as under:
- Provision of section 50C which provides for levy of tax on the basis of stamp duty valuation is not at all applicable in case of slump sale. It may be noted that section 50C is applicable only on transfer of capital asset which is land or building or both & not in other assets.
- Buyer of undertaking in case of slump sale is also not affected by the fair market value of such undertaking [i.e., by section 56(2)(x)]. The deeming fiction of section 56(2)(x) is applicable to sum of money, capital asset being immovable property or property other than immovable property. ‘Property’ is exhaustively defined under section 56(2) and the term ‘undertaking’ is not included in the said definition of ‘Property’ u/s 56(2)(x).
- Though there is a specific provision for computation of capital gain u/s 50 in case of sale of depreciable assets, it is not applicable in case of “slump sale”.
- It may be noted that assignment of values to individual assets of the undertaking by stamp duty authorities for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees cannot be regarded as assignment of values to individual assets or liabilities and so the tax computation discussed above is not affected by it.
- Slump Exchange vs Slump sale:
Essence of slump sale is a lump-sum monetary consideration. Where the transfer of undertaking takes place not against monetary consideration but it is against other assets then it tantamount to ‘Exchange’ and not sale. Such exchange transaction does not fall within the ambit of slump sale – CIT v. Bharat Bijlee Ltd.[2014] 46 taxmann.com 257 (Bombay). - Transfer of stock in trade under slump sale:
Sale of stock will not have any separate tax treatment as it will be merged in the LTCG/STCG discussed above. - Impact of Revaluation of assets:
Any change in the value of assets on account of revaluation of assets is required to be ignored for the purposes of computing the net worth. In short, effect of Revaluation of assets shall not be considered while computing the “Net Worth”. - Furnishing of Report by CA:
In the case of slump sale, Taxpayer is required to furnish a report in form 3CEA under Rule 6H of I.T. Rules from a CA, one month prior to the due date of filing Income Tax Return u/s 139(1). This report indicates the net worth of the undertaking or division. - Treatment of Excess paid by the purchaser:
In case of purchaser who purchases business as going concern in slump sale, consideration paid in excess of value of tangible assets can be treated as goodwill & it will be eligible for depreciation – Triune Energy Services vs. DCIT (2016) 65 taxmann.com 288 (Delhi) - Benefit of Capital Gain Exemption:
Against LTCG arising from slump sale, Taxpayer can claim exemption under section 54F, 54EC, etc by reinvesting the amount in some specified securities or Assets
Though the route of Slump sale can be effectively used for tax planning, one must make sure that it doesn’t become the tool of tax evasion.
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