Slump sale &

Slump exchangeCA 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 50BAmendment 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 sectionsSection 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 sectionsSection 50BWhile 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 sectionsSection 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 sectionsSection 50B4. 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 sale1. 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 sale6. 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?

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