Slump Sale: Non-transfer of receivables shown as consideration due did not violate slump sale conditions
In the case of slump sale, meticulous drafting of business transfer agreements is crucial. Substance over form prevails in tax treatment. Proper use of Form 3CEA is key—but does not override the slump sale nature. A well-structured deal and compliant documentation can significantly impact tax liability in business restructuring scenarios.
In a notable decision (ITA No. 5048/MUM/2024), the Income Tax Appellate Tribunal (ITAT), Mumbai Bench ruled in favour of Digital Insight India Products Pvt. Ltd., holding that the transfer of its business qualifies as a ‘slump sale’ under Section 2(42C) of the Income-tax Act, 1961, and is taxable under Section 50B as capital gains, not business income.
Key Facts of the Case:
– Assessee: Digital Insight India Products Pvt. Ltd., a subsidiary of Digital Insight Corp, USA
– Business Transfer Agreement with NCR Corporation India Pvt. Ltd. on 24.03.2017
– Consideration for business transfer: ₹22.40 Crores
– Reflected as “Trade Receivable” in balance sheets of FY 2016-17 (₹22.40 Cr) and FY 2017-18 (₹22.01 Cr)
– Declared Long-Term Capital Gains of ₹7.99 Cr in revised return for AY 2017-18
– AO treated the entire ₹22.40 Cr as business income under Section 28(ii), rejecting the slump sale claim
– CIT(A) partially allowed relief, taxed net gain of ₹7.99 Cr as business income (not capital gains)
Tribunal’s Key Observations:
Agreement explicitly mentioned transfer of business as a going concern on a lump sum basis.
Form 3CEA was for certifying net worth-not for assigning individual asset values.
Buyer assumed assets, liabilities, employees, and contracts-indicating a complete business transfer.
Held that non-transfer of receivables (shown as consideration due) did not violate slump sale conditions.
Final Verdict:
– Transaction qualifies as slump sale under Sec. 2(42C)
– Taxable as capital gains under Section 50B, not business income
– Assessee’s appeal allowed, Revenue’s appeal dismissed
The copy of the order is as under:
