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Slump sale

Subject : Income Tax Law

Month-Year: Sep 2006

Author/s : Urvi KajariaChartered Accountant

Topic : Slump sale

Article Details :

Introduction :

The process of integration of the Indian economy with the worldeconomy has compelled the corporate world to restructure itsoperations so as to gain benefits from large-scale operations,weed out unprofitable areas and focus on core competencies.Consequently, mergers, demergers and other forms ofrestructuring have become very common. Before A.Y. 2000-01,capital gains made on sale of an ‘undertaking’ were chargeable totax u/s.45 of the Income-tax Act, 1961 (hereinafter referred to as‘the Act’). Though it was difficult to determine the cost ofacquisition, cost of improvement and date of acquisition of the‘undertaking’, as required u/s.48, gain on sale of undertaking waschargeable to tax under the head capital gain as held by theSupreme Court in CIT v. Electric Control Gear Manufacturing Co.,227 ITR 278. However, S. 50B was introduced w.e.f. A.Y. 2000-01,which lays down a special provision for computation of capitalgains in case of slump sale. Yet, there is scope for tax planning,which is, inter alia, discussed here.

Meaning of ‘slump sale’ :

In simple words, ‘slump sale’ is nothing but transfer of a whole orpart of business concern as a going concern; lock, stock andbarrel. As per S. 2(42C), introduced by the Finance Act, 1999,‘slump sale’ means the transfer of one or more undertakings as aresult of the sale for a lump sum consideration without valuesbeing assigned to the individual assets and liabilities in suchsales. ‘Undertaking’ has the same meaning as in Explanation 1 toS. 2(19AA) defining ‘demerger’. Explanation2 to S. 2(42C) clarifies that the determination of value of an assetor liability for the payment of stamp duty, registration fees,similar taxes, etc. shall not be regarded as assignment of valuesto individual assets and liabilities. Thus, if value is assigned toland for stamp duty purposes, the transaction will not cease to bea slump sale.

Meaning of ‘undertaking’ :

As per Explanation 1 to S. 2(19AA), ‘undertaking’ shall include anypart of an undertaking or a unit or division of an undertaking or abusiness activity taken as a whole, but does not include individualassets or liabilities or any combination thereof not constituting abusiness activity.

Analysis of the above definitions :

1. The subject matter of slump sale shall be an undertaking of anassessee. ‘Undertaking’ is defined as per Explanation 1 to S.2(19AA), which includes a division. S. 50B provides forcomputation of capital gains on slump sale of ‘undertaking ordivision’. The word ‘division’ is nowhere defined in the slump saleprovisions. Thus, the significance of the word ‘division’ is notapparent. Also, it is not clear as to how a ‘division’ is distinct froman ‘undertaking’ and how important is that distinction for thepurpose of S. 50B.

2. An ‘undertaking’ may be owned by a corporate entity or anon-corporate entity, including a professional firm. This is onaccount of the following :

(a) S. 50B refers to ‘assessee’ without any specificexclusion of a non-corporate entity.

(b) In the case of Industrial Machinery Associates v. CIT,[81 ITD 482 (Ahd.)], sale of entire business undertaking by

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a firm to a company as a going concern was held to be aslump sale.

(c) As per the Dictionary of Accounting, Oxford UniversityPress, ‘undertaking’ is defined as ‘a body corporate,partnership or an unincorporated association carrying ontrade or business with a view to making profit’.

3. Slump sale may be of a single undertaking or even more thanone undertaking.

4. The undertaking has to be transferred as a result of sale. If anundertaking is transferred otherwise than by way of sale, say, byway of exchange, compulsory acquisition, extinguishment,inheritance by will, etc., the transaction may not be covered by S.2(42C). This is because the definition of ‘transfer’ in S. 2(47)specifically lays down the different modes which shall be regardedas transfer. ‘Sale’ is just one of them. Slump sale is restricted onlyto ‘transfer . . . . . . as a result of sale’.

5. The consideration for transfer is a lump sum consideration. Thisconsideration should be arrived at without assigning values toindividual assets and liabilities.

6. The following is an illustrative list of cases where sale of anundertaking was held to be a slump sale :

(a) Land development business — CIT v. MugneeramBangur & Co., [57 ITR 299 (SC)]

(b) Sale of cement unit, which was transferred as afunctional productive unit — Coromandel Fertilisers v. DCIT,[90 ITD 344 (Hyd.)]

(c) Sale of branch — CIT v. Narkeshari Prakashan Ltd., [196ITR 438 (Bom.)]

7. Possibility of identification of price attributable to individualitems (plant, machinery and dead stock) which are sold as part ofslump sale, may not entitle a transaction to be qualified as slumpsale — CIT v. Artex Manufacturing Co., [227 ITR 260 (SC)].However, in case of slump sale which includes land/buildingwhere separate value is assigned to it under the relevant stampduty legislation, the slump sale will not be adversely affected inthe light of Explanation 2 to S. 2(42C).

Where the sale deed mentioned ‘sale deed in respect of sale ofmovable properties’ and separate prices were agreed for differentassets, the transaction was not treated as a slump sale —Jayantilal Bhogilal Desai [130 ITR 655 (Guj.)]

8. An issue arises as to whether S. 50B applies to sale of anundertaking which has discontinued its business or is not a goingconcern at the time of sale. There are two views possible :

One, that there has to be sale of an undertaking as a goingconcern. This is evident from the following :

(a) When slump sale provisions were introduced, theMemorandum to the Finance Bill, 1999 provided that taxbenefits to business reorganisations should be limited totransfer of business as a going concern and not to transferof assets without business reorganisation.

(b) The definition of ‘undertaking’ is in the context ofdemerger. One of the conditions of demerger is that thetransfer of the undertaking is on a going concern basis [S.2(19AA)(vi)].

(c) S. 176(3A) of the Act requires that where a business isdiscontinued, ‘any sum’ received after discontinuance shallbe taxable in the hands of the person who carried on thebusiness as if the sum has been received prior todiscontinuance.

(d) The Webster’s dictionary defines ‘undertaking’ as‘something that is undertaken or a business work or projectwhich one engages in or attempts, or an enterprise’.

(e) Dictionary of Accounting (above) uses the words‘carrying on trade or business’.

The above-mentioned points clearly lay down that the‘undertaking’ should be a going concern at the time of sale.


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However, in the absence of any specific provision in S. 50Brestricting its applicability to an undertaking whose business isdiscontinued or which is no longer a going concern; the otherview is also possible that the undertaking need not be a goingconcern. Since there is a provision that is specifically applicable incase of slump sale, this provision would override all other generalprovisions of the Act. Besides, where two views are possible, thebenefit of doubt should be given to the assessee. Hence, thesecond view holding that slump sale provisions apply even to adiscontinued business can be taken.

Transfer of assets without transfer of liabilities — whetherslump sale :

Slump sale provisions do not apply where assets of anundertaking are transferred without transfer of liabilities. This isclear from the following :

1. Definition of ‘undertaking’ in Explanation to S. 2(19AA) :‘include any part of an undertaking or a unit or division ofan undertaking or a business activity taken as a whole,.’.

2. As per Explanation 1 to S. 50B, net worth is thedifference between ‘aggregate value of total assets of theundertaking or division’ and ‘value of liabilities of suchundertaking or division’.

3. Where price was fixed beforehand in respectof identifiable assets of the undertaking and no liabilitywas transferred to the buyer, transfer of undertaking wouldnot be regarded as a slump sale — Mahindra SinteredProducts Ltd. v. DCIT, [95 ITD 380 (Mum.)]

4. Sale of chemical unit was not regarded as slump sale,because there was transfer of assets without transfer ofliabilities. — Weikfield Products Co. (I) (P.) Ltd. v. DCIT, [71TTJ 518 (Pune)]. The Tribunal observed that :

‘In our opinion, the transfer of a going concern meanstransfer by lock, stock and barrel, where nothing is left withthe vendor. It includes not only the transfer of each asset,tangible or intangible, but also the transfer of each debtand liability including any obligation.’

5. In R. C. Cooper v. UOI, (1970) 40 Com Cas 325 (SC), itwas observed that ‘undertaking relates to the entirebusiness although there may be separate ingredients oritems of work or assets in the undertaking. Theundertaking will therefore be the entire integratedorganisation consisting of all property, movable orimmovable, and the totality of undertaking is one conceptwhich is not divisible into components or ingredients.’

Taxability of gains arising on slump sale :

S. 50B provides the mechanism for computation of capital gainsarising on slump sale. On a plain reading of the Section, somebasic points which arise are :

1. S. 50B reads as ‘Special provision for computation ofcapital gains in case of slump sale’. Since slump sale isgoverned by a ‘special provision’, this Section overrides allother provisions of the Act.

2. Capital gains arising on transfer of an undertaking aredeemed to be long-term capital gains. However, if theundertaking is ‘owned and held’ for not more than 36months immediately before the date of transfer, gains shallbe treated as short-term capital gains. It is important tonote that Circular No. 779, dated 14-9-1999, issued at thetime of introduction of S. 50B, has used the words ‘held’instead of ‘owned and held’ used in the text of S. 50B. It isnot clear whether this difference in terminology is of anysignificance.

Where an undertaking was acquired by an assessee undera will, and such an undertaking is transferred by him as aslump sale within a year, the undertaking will be classifiedas short-term or a long-term asset based on the period forwhich the previous owner ‘owned and held’ theundertaking [S. 49(1)(ii)].

3. Taxability arises in the year of transfer of the


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undertaking. The undertaking will be deemed to betransferred on execution of the agreement and registrationthereof coupled with the handing over of possession of theundertaking to the transferee. However, if the year of theagreement of the undertaking and registration thereof andthe year of its possession fall in two different previousyears, then the previous year in which the possession ofthe undertaking is handed over to the transferee will beconsidered as the year of transfer.

4. Capital gains arising on slump sale are calculated as thedifference between sale consideration and the net worth ofthe undertaking. Net worth is deemed to be the cost ofacquisition and cost of improvement for S. 48 and S. 49 ofthe Act.

5. As per S. 50B, no indexation benefit is available on costof acquisition, i.e., net worth.

6. In the year of transfer of the undertaking, the assesseehas to furnish an accountant’s report in Form 3CEA alongwith the return of income indicating the computation of networth arrived at and certifying that the figure of net worthhas been correctly arrived at. Although the certification ofcomputation is based on the information and explanationsobtained by the accountant, the essence of the form is onreporting that the computation is ‘true and correct’ ratherthan ‘true and fair’.

7. In case of slump sale of more than one undertaking, thecomputation should be done separately for eachundertaking. This is substantiated by Note 5 to Form 3CEA,which requires the computation of net worth of eachundertaking to be indicated separately.

8. In case of slump sale in the nature of succession of afirm or a proprietary concern by a company, capital gainsmade on slump sale may be entitled to exemptionu/s.47(xiii) and (xiv), respectively, provided the otherconditions of these Sections are satisfied. In case ofviolation of conditions of S. 47(xiii) or (xiv) in anysubsequent year, the benefit availed by the firm or the soleproprietor will be taxable in the hands of the successorcompany in the year in which the violation takes place asper S. 47A(3).

Besides, if the successor company violates the conditionsof S. 47(xiii) or (xiv) by transferring that undertaking undera slump sale within three years of conversion, theundertaking will be classified as a short-term capital assetas per S. 50B. Then, the company would have to pay forthe loss of tax benefit due to violation of conditions, aswell as tax on the short-term capital gains arising on theslump sale.

9. Gains made by a foreign resident from the alienation ofa permanent establishment or a fixed base in India by wayof slump sale, shall be taxable in India as per S. 50B readwith Article 13 (Capital Gains) of the UN/ OECD ModelConvention on Double Taxation Avoidance Agreement.

‘Net Worth’:

When S. 50B was originally introduced, ‘net worth’ was defined asper the Sick Industrial Companies (Special Provisions) Act, 1985to mean ‘the sum total of paid-up capital and free reserves’. Inorder to remove implemental difficulties, such as a non-corporateentity having no separate capital or reserves; non-application ofthe definition under SICA to non-corporate assesses, etc., thedefinition of net worth was amended retrospectively by FinanceAct, 2000 w.e.f. A.Y. 2000-01. Now, net worth is defined inExplanation 1 to S. 50B as the difference between ‘the aggregatevalue of total assets of the undertaking or division’ and ‘the valueof its liabilities as appearing in books of account’. Thisamendment has made it clear that the slump sale provisionsapply to a non-corporate entity also.

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

1. WDV as determined u/s.43(6)(c)(i)(C) in case ofdepreciable assets.


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2. The book value in case of other assets.

It is important to note here that neither S. 50B, nor Form 3CEAlays down the date as on which the net worth is to bedetermined. In Coromandel Fertilisers v. DCIT, (90 ITD 344) theHyderabad Tribunal has observed that ‘net worth of theundertaking on the date of transfer is deemed to be its cost ofacquisition’.

The proviso to Explanation 1 to S. 50B explicitly lays down that‘any change’ in value of assets on account of revaluation shall beignored in determining net worth. Although it is not made clearwhether revaluation refers to revaluation which might have takenplace in the year of transfer only or even in the years prior totransfer, the use of the word ‘any change’ in the proviso tiltstowards the view that revaluation of assets, even if done in theyears prior to the transfer of the undertaking, shall have to beignored for calculation of net worth.

The Act does not clearly lay down the mode of computation ofcapital gains where net worth of an undertaking is negative. Inthat case, two views are possible :

(a) One, net worth represents cost of acquisition and ‘cost’cannot be negative. It can either be positive or zero.Further, S. 48 provides that capital gains shall be computedby ‘deducting’ cost of acquisition from the consideration.‘Deduction’ means ‘reduction’; it cannot be an addition tothe amount of consideration. Also, S. 50B being a specialprovision, overrides all other provisions for computation ofcapital gains. Hence, where net worth is negative, the costof the undertaking should be taken as zero and capitalgains will be equivalent to the sale consideration.

(b) The other view is that, in addition to the consideration,the transferee also pays for the excess of liabilities overthe assets, which led to a negative net worth. Further, forthe buyer, cost of purchase is the aggregate of amountpaid to the seller plus the value of liabilities taken over, inexcess of the assets. The total consideration for the buyerand the seller cannot be different. Hence, the negative networth should be added to the sale consideration andcapital gains should be higher than the sale consideration.

Currently, this issue has not been resolved. In myhumble view, where the net worth is negative, the assesseereceives consideration in cash as well as in kind by way ofdischarge of excess liabilities. Hence, the second view seems tobe the better one.

Meaning of ‘net worth’, as defined in S. 50B is not consistentthroughout the Act. For example, in case of demerger,Explanation to S. 49(2D) states that ‘net worth’ means the sum ofpaid-up capital and general reserves. Also, in demerger, onlygeneral reserves shall be included in net worth and no otherreserves even if they are free reserves. For rationalisation of theAct, one of the important things is to bring about consistency inthe meanings of various terms used therein.

Successor’s position in respect of claims of predecessor :

1. Where the predecessor is enjoying the benefits of S. 10Aor S. 10B, the benefit for the unexpired period may beavailable to the successor, even though there is no specificprovision for the same. The rationale being that theseSections provide for availability of the benefit qua ‘anundertaking’ and not qua ‘an assessee’. Just as in the caseof amalgamation/demerger of an undertaking, wherebenefit is available to the amalgamated or the resultingcompany subsequent to re-organisation, in case of slumpsale, too, the benefit is available to the successor for theunexpired period. This view is supported by the deletion ofSs.(9) and Ss.(9A) of both Sections w.e.f. A.Y. 2004-05.

2. Where the predecessor is denied deduction u/s.43B onthe ground of non-payment of dues, and the dues are paidby the successor, the benefit of deduction u/s.43B shouldbe available even to the successor. Although S. 43B appliesqua ‘an assessee’, I believe that where an undertaking istransferred lock, stock and barrel, the benefits, claims,


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debts and contingencies of the undertaking are transferredwith it.

3. Where claims for export incentives and cash assistanceformed part of assets of the undertaking acquired by wayof slump sale, and the amount of the claim was receivedby the successor, the amount so received was held to becapital receipts. This was because the claims for exportincentives and cash assistance were actionable claimspurchased by the assessee for a consideration ACIT v. HYTEngg. Co. (P.) Ltd., [92 ITD 202 (TM) (Pune)].

4. In the absence of any specific provisions forcomputation of WDV of assets acquired upon slump sale inthe books of the successor, a view could be taken thatapportionment of slump consideration on the basis of fairvalues of various assets is possible.

Cases :

Some general principles laid down by various cases are asfollows :

1. Nature of S. 50B :

(a) Prospective, i.e., effective from A.Y. 2000-01 —Coromandel Fertilisers v. DCIT, (supra); IndustrialMachinery Associates v. CIT, (supra); SaloraInternational v. JCIT, [88 TTJ 53 (Del.)]

(b) Not clarificatory, not procedural, i.e., effectivefrom A.Y. 2000-01 — Coromandel Fertilisers v. DCIT,(supra); L. H. Sugar Factories v. ACIT, [86 TTJ 1012(Luc.)]

(c) Intrinsically, a charging Section — IndustrialMachinery Associates v. CIT, (supra).

2. S. 50, in relation to depreciable assets, is applicable onlyin case of an itemised sale and not in case of slump sale,which is now covered by S. 50B. S. 50 and S. 50B aremutually exclusive — Coromandel Fertilisers v. DCIT,(supra); Salora International v. JCIT (supra).

3. Lump sum consideration received on slump sale cannotbe attributed to various individual assets for determiningcapital gains in the hands of the seller of the undertaking— Doughty v. Taxes Commissioner, (1927) AC 327 (PC);CIT v. Mugneeram Bangur & Co., (supra); Indian Bank Ltd.v. CIT, [153 ITR 282 (Mad.)]; Syndicate Bank Ltd. v. ACIT,[155 ITR 681 (Kar.)].

4. Slump sale, though chargeable u/s.45, could not betaxed, since the cost of acquisition and date of acquisitionof the undertaking cannot be ascertained. Reasons forintroduction of S. 50B, as explained in the introductionabove, laid down in : Coromandel Fertilisers v. DCIT,(supra); Syndicate Bank Ltd. v. ACIT (supra). Contrary viewin PNB Finance Ltd. v. CIT, 252 ITR 491 (Del.)

5. In case of slump sale, the undertaking is a capital asset— Syndicate Bank Ltd. v. ACIT (supra).

6. Balancing charge u/s.41(2) is not applicable where thereis a sale of the whole undertaking and the assessing officerdoes not have with him the actual cost, written down valueand sale consideration of individual assets. — CIT v.Garden Silk Weaving Factory, [279 ITR 136 (Guj.)].

Trade-off between itemised sale and slump sale :

An assessee has to choose what is best suitable for him — anitemised sale or a slump sale. This is done by evaluating theadvantages and disadvantages of slump sale.

Advantages :

If the undertaking is owned and held for more than 36 months,the long-term capital gains are taxable @ 20% (plus surchargeand education cess), even though there may be some assets heldonly for a few months. Further, long-term capital gains are eligiblefor deduction u/s.54EC and u/s.54F [ACIT v. Raka Food Products,277 ITR 261 (Mad)]. Since S. 50B overrides the Sections whichprovide the mode of computation of capital gains on sale of an


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asset, S. 50C, providing for substitution of sale consideration ofland/building by its value as per valuation of stamp valuationauthority, is not applicable where land/building is part of theundertaking. Thus, the effective rate of long-term gains may turnout to be much lower than 20%.

Disadvantages :

No indexation benefit is available. Also, where the undertakingcomprises plots of land acquired prior to 1-4-1981, whose valuehas appreciated, cost cannot be substituted by the FMV as on1-4-1981. In case the undertaking is a short-term capital asset,capital gains made on slump sale are taxable at normal rates oftax, without availability of exemption.

Conclusion :

In view of the above provisions, an assessee may select what ismost appropriate for him — an itemised sale or a slump sale, soas to minimise the capital gains tax liability. Where itemised saleis more beneficial, one can simply break up the sale considerationby assigning values to individual assets and liabilities. Since saleconsideration of an undertaking is expected to be sizable,determining sale consideration appropriately can save huge taxliability.

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slump sale basics article

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