Taxation of Slump Sale – Section 50B
Slump sale is one of the method for the restructuring of the business. The term slump sale is defined in the Income tax Act as under: -
(42C) "slump sale" means the transfer of one or more undertaking, by any means for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities ;
Explanation 3.––For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47);’;
As evident from the above definition, for being a slump sale, there has to be satisfaction of two conditions, as under: -
a) transfer of one or more undertakings as a result of the sale; and
b) for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales
However, such lump sum consideration can be split into and assigned to each of the assets for stamp duty purpose.
Further, the word “Undertaking” is defined as Explanation 1 to Section 2(19AA) under: -
Explanation 1.—For the purposes of this clause, "undertaking" shall include 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.
Accordingly, for constituting an Undertaking, there must be an existence of a Business, mere the transfer of a bunch of assets / liabilities would not be categorized as “Undertaking” for slump sale purpose as well.
Taxation of Slump Sale – Section 50B
- Nature of Capital Gain – Long Term or Short Term to be determined with reference to the time gap between the date of owning of undertaking to the date of sale of undertaking. Individual assets date of acquisition to be ignored
- No indexation benefit would be available even for the long term
- Auditors report in form 3CEA to be obtained and filed online before filing the return of income
- Capital Gain would be the difference between the Net Worth of the undertaking being transferred and the amount of Lump sum Sale consideration
- In calculating the Net Worth, the value of depreciable assets to be taken as per WDV for Income Tax Purpose
After having the basic idea of the scope of Slump Sale and Taxation of Slump Sale, now we will discuss the crucial issues which have arisen over the years –
a) Whether Section 50C applicable? – Technically Section 50C would not be applicable as there is no individual item wise transfer of any particular asset and neither
b) Whether all assets of the undertaking compulsory to be transferred? – the Assessee can retain few assets from the undertaking, so long as the assets being transferred would continue to have the effect of continuity of Business of the undertaking.
c) What would be the cost of acquisition of the undertaking? It would be the value of the Net Worth of the Undertaking calculated as per definition of the Undertaking as per the explanation.
d) What would be the Capital Gain if the Net Worth of the Undertaking is in Negative – In such situations, the Capital Gain amount would be the Sale Consideration Plus the amount of Negative Net Worth. For example, the sale consideration of the Undertaking is Rs 100 and the Negative Net Worth of the Undertaking is Rs 900, then the Capital Gain would be Rs 1000..
e) Whether the undertaking would continue to avail the tax benefits u/s 10A, 80IA despite change in ownership? CBDT has clarified this aspect and stated the merely because of the change of ownership, the same would not disentitle the Assessee to tax benefits
f) What would be the tax rate – the Tax rate would be 20% for Long Term and normal rates for the short-term capital gain. Even the depreciable assets forming part of the undertaking would also be subject to concessional tax rate of Long term.
g) What would be impact of Section 56(2)(x) – This Section would not be applicable even for the cases of inadequate consideration, as the “Undertaking” is not included in the definition of the “Property”
Impact of Amendment brought in by Finance Act 2021 –
Many aggressive tax planning tactics includes the nomenclating the transaction of slump sale as slump exchange by citing the reasoning that there was no actual monetary flow and the mere exchange of two assets happened on slump exchange basis.
Many courts have upheld such planning as ruled that slump exchange is different from slump sale and is not taxable u/s 50B of the Act.
To overcome such type of tax planning, the definition of Sump Sale in section 2(42C) is proposed to be amended.
The scope of the definition of the term ―slump sale by amending the provision of clause (42C) of section 2 of the Act so that all types of ―transfer as defined in clause (47) of section 2 of the Act are included within its scope.
This is based on the concept of the substance of the transaction is more important than the name given to it by the parties to the transactions.
Applicable w.e.f. AY 2021-22 and onwards.
Concluding Remarks –
Hope our little efforts in this article would have helped the readers to have a basic idea about the concept of the slump sale and its taxation.
Readers feedback and comments are most welcome.
Please feel free to revert to us on smaloo@sunilmaloo.com for any further clarification.
Sunil Maloo, CA