Slump sale

&
Slump exchange

CA Raamanathan K
Slump sale
Slump sale - Meaning
• A slump sale‘ is one of the methods available to effect transfer
of a unit or division or undertaking from one taxpayer to
another taxpayer.

• Chapter IV-E of the Income-tax Act, 1961 titled Computation

of Total income – Capital gains‘ contains provisions for
computation of capital gains in case of a slump sale‘.

• An essential requirement of slump sale is that the assets and

liabilities of the undertaking/ unit are transferred for a lump
sum‘ consideration without assigning values to the
individual assets and liabilities of that undertaking.
Taxability prior to introduction of
Section 50B
• The Supreme Court (SC) in the case of PNB Finance Ltd (307
ITR 75) relying on another SC judgement in case of CIT vs B.C.
Srinivasa Shetty (128 ITR 294) held that transfer of an
undertaking for a slump consideration did not trigger capital
gains tax as the cost of acquisition of an undertaking is not
capable of being quantified. Since computation provisions are
integral part of charging provisions, in absence of cost of
acquisition, charge was regarded as failing.
Taxability prior to introduction of
Section 50B
Amendment with effect from 1 April 2000
• The Income Tax Act was amended with effect from 1 April
2000 by introduction of section 50B to specifically include
provisions to levy tax on transfer of a business undertaking by
way of slump sale.

• The SC in PNB Finance (supra) held that provisions of section

50B apply only prospectively from 1 April 2000.
Taxability of Slump sale
Section 50B was introduced vide Finance Act, 1999. The Memorandum
explaining the provisions of Finance Bill, 1999, to the extent relevant, is
reproduced below:

“With a view to recognise demergers, slump sales and to rationalise

the existing provisions of amalgamation, a number of amendments
have been proposed on the basis of the following broad principles:
…………
In the cases of slump sales, law should have clarity that the gains
arising from such sales would be taxed under the head ―capital
gains and there should be no ambiguity with regard to the mode of
computation of such profits and gains”.
Overview of applicable sections
Section 2(42C)
Section 2(42C) defines Slump sale. Paraphrasing section 2(42C), the following
cumulative conditions emerge before a transaction can qualify to be slump
sale:

• There should be a transfer of one or more undertakings. The concept of

undertaking as applicable to demerger is as equally applicable to the
Slump sale.
• Transfer should be as a result of sale
• Transfer should be for a lump sum consideration
• Values should not be assigned to individual assets and liabilities in such
sales
• Determination of value of an asset or liability solely for the purpose of
payment of stamp duty, registration fees or other similar taxes or fees is
not regarded as assignment of values to individual assets or liabilities.
Overview of applicable sections
Section 50B
While slump sale is defined in section 2(42C) of the Act,
computation mechanism is provided in section 50B of the Act.
The following provides a snapshot of dissection of section 50B
w.r.t. certain parameters of relevance:

1. Chargeability
Gains arising on slump sale is chargeable as long term capital
gains if the undertaking is owned and held by the assessee for
more than 36 months preceding the date of transfer. Else, gain is
chargeable as short term capital gains
Overview of applicable sections
Section 50B
2. Computation of capital gains

Sale consideration (minus) cost of acquisition/ improvement of undertaking/

division forms chargeable capital gains.

3. Cost of acquisition/Indexation benefit

Net worth of the undertaking is regarded as the cost of acquisition/

improvement. Indexation benefit is not available

Net worth

Aggregate book value of total assets of the undertaking (-) Book value of
liabilities of the undertaking

Any change in value of assets on account of revaluation of assets is ignored for

the purposes of computing the net worth
Overview of applicable sections
Section 50B
4. Value of assets

Depreciable assets – WDV of block of assets as per section 43(6)(c)(i)(C).

35AD assets – NIL

Other assets – Book Value

5. Compliance

Report from an accountant which certifies the computation of net worth is to

be furnished in a prescribed form (i.e. Form 3CEA read with Rule 6H).
Issues in Slump sale
1. Differences between and implications of itemized sale versus a slump
sale

2. Will the transaction be regarded as a slump sale if certain assets or

liabilities are not taken over by the purchaser?

3. Impact of negative net worth in computation of capital gains in case

of slump sale

4. Will provisions of section 50C of the Act (stamp duty value being
deemed consideration) are attracted on transfer of an undertaking
under slump sale?

5. Whether prepaid expenses be considered as an Asset for the

calculation of net worth?
Issues in Slump sale
6. Where an undertaking which has claimed weighted deduction u/s
35(2AB) in respect of capital expenditure is required to exclude book
value of the assets while computing net worth?

7. What are the norms of allocation purchase price in the books and
assessment proceedings of the purchaser?
Issues in Slump sale

Differences between and implications

of itemized sale versus a slump sale
Itemized sale Vs Slump sale
In principle, in case of an itemized sale, each asset is sold for a separate value.
For tax purposes, each item is considered separately. Sales tax, VAT and stamp
duty is paid accordingly.

In case of a slump sale, the entire undertaking is sold for a lump sum
consideration without assigning values to individual assets or liabilities.
Income is computed on global basis and is taxed as short term or long term
capital gains as per the age of the undertaking.

Generally, from tax perspective, itemized sale may be more advantageous:

• If appreciation is absorbed by indexation of a non-depreciable asset or

benefit of fair market value substitution is likely to be meaningful .

• If carried forward loss is available which can be set off against business
income
Itemized sale Vs Slump sale
Generally, from tax perspective, slump sale may be more advantageous:

• If rigor of section 50C is to be avoided.

• If age of undertaking is more than 3 years whereas the age of valuable

assets within it is less than 3 years.

• If balance sheet has certain non-depreciable assets which have lost

value and are not likely to fetch any price, but can nevertheless form
part of ―net worth‖ as cost of acquisition.

• The composition of available carried forward losses is largely comprised

of long term capital loss or depreciation which can be set off even
against long term capital gain.

Onus of proving the transaction to be that of slump sale/ itemized sale lies
on the assessee (CIT vs Accelerated Freeze Drying Co Ltd (337 ITR 440)) –
Kerala HC
Issues in Slump sale

Will the transaction be regarded as a

slump sale if certain assets or
liabilities are not taken over by the
purchaser?
Certain assets not taken over by purchaser
Once tests of going concern and continuity of transferred business are
satisfied, non transfer of certain assets and liabilities should not vitiate the
nature of the transaction to be regarded as a slump sale‘.

Reliance can be placed on following decisions rendered in the context of

slump sale, where it was held that non transfer of select assets/liabilities was
not fatal to slump sale given that the undertaking includes part of the
undertaking

• Deputy Commissioner of Income-tax vs. Mahalasa Gases & Chemicals (P)

LTD. (84 TTJ 0992)(Bang)
• Rohan Software (P) LTD. vs. Income-tax Officer (115 ITD 302)(Mum)
• CIT vs Max India Ltd (112 TTJ 726)(Asr)
• CIT vs I.C.I (India) Ltd (23 SOT 58)(Kol)
Issues in Slump sale

Impact of negative net worth in

computation of capital gains in case
of slump sale
Negative net worth
The balance sheet of the undertaking is as follows:

Liabilities Amount Assets Amount

Capital 10 Assets 300
Liabilities 500 Accumulated 210
loss
Total 510 Total 510

The consideration is Rs 100.

Whether the capital gains will be Rs 300 [100-(-200)] or Rs 100 (net worth is
considered as NIL)?
Negative net worth
According to my view, capital gains shall be limited to Rs 100 based on the
following rationale:

• In the scheme of law, it is not envisaged that capital gains amount can
exceed the gross sale consideration. In other words, capital gain is always
a portion of sale consideration and, therefore, portion can never be higher
than the whole.

• As a concept, cost of acquisition is a concept which connotes an amount

which, for capital gains computation purposes, is ordinarily indexed or an
amount with reference to which depreciation is admissible.

• Section 48 requires the cost of acquisition and cost of improvement of the

capital asset to be deducted from the full value of the consideration
received or accruing from the transfer of the capital asset.
Negative net worth
• Reliance in this regard can be placed on the following rulings wherein it
has been held that in case of slump sale, where value of liabilities are
more than the value of assets, the net worth has to be taken at NIL and
only the entire sale consideration is liable to capital gains tax and thus the
AO was not justified in computing capital gains at a figure higher than the
sale consideration:

• Zuari Industries Ltd vs ACIT (108 TTJ 140)(Mum)

• Paperbase Co Ltd vs CIT (19 SOT 163)(Del)

Issues in Slump sale

Will provisions of section 50C of the

Act (stamp duty value being deemed
consideration) are attracted on
transfer of an undertaking under
slump sale?
Section 50C applicability
In my view, provisions of section 50B of the Act should override the provisions
of section 50C of the Act based on the following reasoning:

• In section 50B, capital asset which is chargeable to tax is Undertaking.

Whereas section 50C applies specifically in the scenario of transfer of a
capital asset being land or building or both. Reliance in this regard can be
placed on the apex court ruling in the case of CIT v Mugneeram Bangur
(57 ITR 299) (SC)

• Explanation 2 to section 2(42C) provides that merely because value has

been assigned to an asset by the stamp duty valuation authority, the same
does not constitute the assignment of value to the individual asset for the
purpose of accomplishing a slump sale. This would further strengthen the
view that section 50C would not be applicable to a slump sale scenario.

• In Li Taka Pharmaceuticals Ltd v State of Maharashtra (8 SCL 102), the

Bombay High Court has pointed out that when a going concern is
transferred, assets and liabilities are not separately transferred.
Issues in Slump sale

Whether prepaid expenses be

considered as an Asset for the
calculation of net worth?
Prepaid expense for calculation of net worth
Meaning of Asset

• An asset is a resource controlled by the enterprise as a result of past

events from which future economic benefits are expected to flow to the
enterprise.

• As per ICAI guidance note on terms used in Financial Statements, asset

means tangible objects or intangible rights owned by an enterprise and
carrying probable future benefits

Meaning of prepaid expense

• As per ICAI guidance note on terms used in Financial Statements, prepaid

expense means payment for expense in an accounting period, the benefit
for which will accrue in the subsequent accounting periods.
Prepaid expense for calculation of net worth
Based on my view, prepaid expenses can be considered for net worth
calculation based on the following rationale:

• Prepaid expenses are generally reflected as part of current asset, loans

and advances. They represent the pro-rata part of the expense paid in
advance which pertains to the period falling after the balance sheet date.

• They also satisfy the tests relevant to ‘assets‘ as discussed earlier as they
represent an expenditure incurred in past which gives rise to contractual
right (control) for the enterprise and expectancy of future economic
benefits.
Issues in Slump sale

Where an undertaking which has

claimed weighted deduction u/s
35(2AB) in respect of capital
expenditure is required to exclude
book value of the assets while
computing net worth?
35(2AB) – Net worth
Meaning of Asset

• Capital expenditure on R&D assets has been claimed under section

35(2AB) of the Act and no depreciation has been claimed on R&D assets
under section 32. Hence, a view may be taken that they have neither been
depreciated nor are forming part of any block of assets under section
43(6)(c). Accordingly, they are not covered under Explanation 2(a) to
Section 50B but under Explanation 2(c).

• The definition of net worth has been amended by Finance Act 2009 to
provide that capital asset in respect of which tax deduction is admitted
under section 35AD is to be taken as NIL. However, Explanation 2 is not
amended to include the capital asset in respect of which tax deduction is
admitted under section 35.

Based on the above, as per Explanation 2(c), it is the book value as

appearing in books of account which must be considered for the purposes
of computing net worth.
Issues in Slump sale

What are the norms of allocation

purchase price in the books and
assessment proceedings of the
purchaser?
Allocation by the purchaser
• For accounting and tax purposes, the purchaser will need to recognize
each individual asset (or, group of assets) as also, the liabilities which are
taken over by him.

• While this can be done by the internal team of the purchaser, the external
valuer/s can be approached for lending greater credence and acceptability
to the whole exercise.

• The scope of valuation may cover a variety of assets and the team of
valuers may hence comprise of different faculties such as accountants,
architects, business advisors and the like.
Slump Exchange
Slump Exchange
• As per section 2(42C) of the Act, 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.

• A question arises as to whether transfer of undertaking as a result of

‘exchange‘ (say for consideration in the form of shares of the transferee)
and not ‘sale‘ can be regarded as liable to capital gains tax under section
45 of the Act and, if yes, whether capital gains is to be computed as per
section 50B of the Act.
Slump Exchange
According to my view, section 50B is not applicable for slump exchange and
accordingly no capital gains based on the following arguments:

• Section 2(47) of the Act defines ‘transfer‘ in a wider sense to include ‘sale‘,
‘exchange‘, ‘relinquishment‘, etc

• There is no reason to presume that the legislature which is aware of the

wide canvass of the definition of transfer‖, would have picked up only one
of the limbs of the definition. The Memorandum to the Finance Bill does
also make reference to providing methodology in respect of gains arising
from such sales‖.

• It has been held in the following rulings that where consideration in a

transaction is other than money, it would be a case of exchange and not
sale
• CIT vs Motors and General Stores P. Ltd. (66 ITR 692)
• CIT Vs. Ramkrishna Pillai (66 ITR 725)
Slump Exchange
Bombay High Court in the case of COMMISSIONER OF INCOME TAX
vs.BHARAT BIJLEE LTD (365 ITR 258) has held that the transfer by way of
slump exchange is not liable to capital gains tax under Section 50B as well as
under the general provisions of the Act since the slump consideration cannot
be allocated to individual items of assets and liabilities forming part of the
undertaking and the cost of acquisition/ improvement of the undertaking
cannot be ascertained.
Questions???
Thank You!!!
Raamanathan K
Partner – V Radhakrishnan and Associates,
Chartered Accountants,
A 301-Malles Arcadia
Chokkalingam Nagar, Velachery
Chennai – 600 042
Mobile: 9884402332
Mail id: raamanathan@vrkassociates.com