Slump Sale

Prepared by Sanjay Kumar

Income Tax Act, 1961

Slump sale means transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities except for the purpose of payment of stamp duty, registration fees or other similar taxes or fees.

Undertaking includes any part of an undertaking, or a unit or division of an undertaking or a business activity acquired in entirety but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

Procedural Aspects

1.Chargeability – Any profits or gains arising from the slump sale of one or more undertakings shall be chargeable to income-tax as capital gains and deemed to be the income of the previous year in which such transfer takes place.

Held > 36 months           –>          Long Term Capital Gains

Held < 36 months           –>          Short Term Capital Gains

2.Cost of acquisition and cost of improvement – The net worth of the undertaking or the division shall be deemed to be the cost of acquisition and the cost of improvement in relation to capital assets of such undertaking or division transferred.

No indexation benefit would be available, even if the slump sale has taken place of an undertaking held for more than 36 months, resulting in a long-term capital gain.

3.Deemed full value of consideration – Fair market value (‘FMV’) of the capital assets as on the date of transfer, calculated as per Rule 11UAE, shall be deemed to be the full value of the consideration received or accruing because of the transfer of such capital asset.

The FMV of the capital assets shall be FMV1 or FMV2, whichever is higher. Such FMV shall be determined on the date of slump sale which shall also be considered the valuation date.

• FMV1 = FMV of the capital assets transferred by way of slump sale determined in accordance with the below formula:

A + B + C + D – L, where,

A = Book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale as reduced by the following amount which relate to such undertaking or the division, —

• • any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
  • any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

B = The price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer;

C = FMV of shares and securities as determined in the manner provided in Rule 11UA (1);

D = The value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property;

L = Book value of liabilities as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale, but not including the following amounts which relates to such undertaking or division, namely: –

• • the paid-up capital in respect of equity shares;
  • the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at company general meeting;
  • reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
  • any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
  • any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
  • any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares
• FMV2 = FMV of the consideration received or accruing because of transfer by way of slump sale determined in accordance with the formula –

E + F + G + H, where,

E = value of the monetary consideration received or accruing as a result of the transfer;

F = FMV of non-monetary consideration received or accruing as a result of the transfer represented by property referred to in Rule 11UA (1) determined in the manner provided;

G = the price which the non-monetary consideration received or accruing as a result of the transfer represented by property, other than immovable property, which is not referred to in Rule 11UA (1) would fetch, if sold in the open market on the basis of the valuation report obtained from a registered valuer, in respect of property;

H = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property (i.e., Stamp duty value) in case the non-monetary consideration received or accruing as a result of the transfer is represented by the immovable property.

Note – Values to be considered for Assets

• • Depreciable assets – WDV as per Income tax
  • Self-generated goodwill – Nil
  • Capital assets where entire expenditure has been allowed u/s 35AD – Nil
  • Other Assets – Book value

4.Report of a Chartered Accountant – Every assessee in the case of slump sale shall furnish the Form No. 3CEA before one month prior to the due date for filing return of income under Section 139(1). Such form is the report of a Chartered Accountant indicating the computation of net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division has been correctly arrived at in accordance with Income Tax provisions.

Companies Act, 2013

• Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions is ‘to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.’
• For the purpose of this section, ‘undertaking’ shall mean an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income. ‘Substantially the whole of the undertaking’ shall mean 20% or more of the value of undertaking.
• Subject to above undertaking criteria being satisfied, Section 180 shall get attracted and a special resolution (three-fourth majority) of the members should be passed in the general meeting.
• On passing the resolution, the board may authorize any person to finalise and execute on necessary documents including definitive agreements, business transfer agreements, deeds of assignment /conveyance and other ancillary documents.
• Form MGT-14 along with resolution and notice given under Section 102 must be filed with the ROC within 30 days along with the prescribed fees.
• If the above stated undertaking criteria is not satisfied, then there is no need of passing special resolution. The Company shall execute the sale without any hassles.

Central Goods and Services Act, 2017

Under GST, supply includes the supply of all types of goods and services such as sale, transfer, lease, rental, license, barter or disposal made for a consideration by one person to another in course of furtherance of business. It is an inclusive definition. Thus, the scope goes beyond the course of furtherance of business. So, from the above definition, we can say that slump sale shall be considered as supply under GST.

Clause 4 (C) of Schedule II of CGST Act 2017, provides “Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of business immediately before he ceases to be a taxable person unless,

• the business is transferred as a going concern to another person or
• the business is carried on by a Personal Representative who is deemed to be a taxable person.

Considering the above provision, Slump-Sales is excluded from the list of supply of goods. Hence, it is obvious that transfer of business as a going concern shall be considered a supply of service, as clearly stated in the Notification No.12/2017–Central Tax (Rate). As per this notification, services by way of transfer of going concern as a whole or an independent part thereof is exempt from GST – nil rated supply.

From above, we can interpret the below:

• Transfer of business assets – Supply of goods.
• Transfer of business – Supply of services.
• Transfer of business as a going concern – Supply of services, however exempt from GST as per above mentioned notification.

Further, on slump sale of an undertaking, the transferee is eligible for transfer of unutilized Input Tax Credits lying in the electronic credit ledger of the transferor in pursuance to change in the entity constitution due to sale, merger, demerger, amalgamation, transfer of business etc., subject to conditions/restrictions by filing Form ITC-02. Apart from the above-mentioned points, legacy of ambiguity continues as there is no clarity on reversal of credit claimed in past years.