PWC Slump Sale Article

March 27th, 2012

Background
Slump Sale is one of the widely accepted ways of conducting business transfers. In general
parlance, Slump Sale refers to a transfer of whole or part (capable of carrying out operations
independently) of a business undertaking as a going concern - lock, stock and barrel. It includes
transfer of not only tangible and intangible assets, but also debts, obligations and liabilities.
The Income- tax Act, 1961 (IT Act) defines Slump Sale as 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.
Prior to FY 1999-2000, there was ambiguity on the taxability of Slump Sale, as sellers contested
that due to lack of a specific provision in the IT Act, the cost of acquisition could not be
ascertained. Thus, the computation mechanism failed and no Capital Gains tax implications
were triggered on account of Slump Sale.
To put to rest the ambiguity surrounding Slump Sale and plug the scope for any tax planning,
the Finance Act, 1999 inserted Section 2(42C) and Section 50B, with effect from April 01, 2000,
which specifically brought Slump Sale under the tax net.
Key characteristic features of Slump Sale
Sale of an undertaking:
For any sale to constitute as Slump Sale there should be a sale of business. Transfer of an
undertaking by any other mode (like exchange, relinquishment, extinguishment, compulsory
acquisition, etc) other than sale would not qualify as Slump Sale transaction.
Going concern basis:
A significant test to fall within the ambit of Slump Sale is the ability of the buyer to continue the
business post acquisition.
Lump sum consideration without assigning separate values to assets:
Consideration should not be assigned/ allocated to individual assets and liabilities. However, if
the consideration is made in instalments, this would also be construed as lump sum
consideration.
Taxability
On insertion of Section 50B of the IT Act, the profits or gains arising from Slump Sale are
chargeable under the head Capital Gains.
Profit or gains on Slump Sale shall be regarded as long term if the undertaking is owned and
held for a period in excess of 36 months, immediately preceding the date of transfer; otherwise
this would be chargeable as short term.
Capital Gains = Full value of consideration less tax net worth of the undertaking;
Where the net worth of the undertaking is the aggregate value of assets as reduced by the
aggregate value of liabilities appearing in the books of accounts and no indexation benefit can
be availed.
Key Issues
Although the chargeability in the case of Slump Sale became clear after the amendment to the
IT Act, certain new issues surrounding its execution became apparent and the same are
analysed below:
Transfer of all assets and liabilities pertaining to undertaking:
An important requirement to qualify as Slump Sale is transfer of all assets and liabilities of the
undertaking. There are controversies surrounding what constitutes all.
In the case of Rohan Software Pvt Ltd v ITO[1], the assessee had transferred its business
including intellectual property, codes, formulae and designs, along with all the rights to IPRs.
However, it did not transfer all assets and liabilities pertaining to the undertaking. The Income
Tax Appellate Tribunal (Tribunal), Mumbai held that if the purchaser could carry on the
business, which was carried by the seller prior to the business transfer, without acquiring all
assets and liabilities of the undertaking, plea of the revenue that the seller has not sold the
undertaking as a whole, is difficult to accept.
Essentially, as long as the buyer can continue the business as is, it does not vitiate the concept
of Slump Sale even if certain assets and liabilities are not taken over.
Date of determination of net worth:
The IT Act provisions do not explicitly provide the date on which the net worth of the undertaking
has to be computed; but the same has been captured in the Form 3CEA of the IT Act.
The Hyderabad Tribunal in the case of Coromandel Fertilisers v DCIT[2] clarified that the net
worth of the undertaking on the date of transfer has to be considered to determine the cost of
acquisition.
No consideration:
One of the key requirements to qualify as Slump Sale is sale of an undertaking for a lump sum
consideration.
In Avaya Global Connect Ltd v ACIT[3], the assessee had transferred an undertaking under a
Scheme of Arrangement without any consideration, as the amount of liabilities exceeded the
assets of the undertaking. The Mumbai Tribunal held that in the absence of consideration, the
transaction could not be treated as sale.
In the given case, as no consideration was paid by the acquirer it did not amount to sale and
hence, was not taxable under Section 50B of the IT Act.
Slump exchange:
There has been uncertainty if transfer of an undertaking in exchange/ barter for other assets
would be taxable under Section 45 read with Section 48 or Section 50B.
In the case of Bharat Bijlee Limited v ACIT[4], it was held that where the consideration for
transfer of an undertaking is by way of exchange and no monetary consideration was received,
the transaction does not amount to Slump Sale.
The Mumbai Tribunal held that the given transaction was a case of exchange and not sale.
In Finance Act 2012, Section 50D has been proposed to be inserted, where in, if the
consideration received or accruing on transfer of a capital asset by an assessee is not
ascertainable or cannot be determined, then for the purpose of computing income chargeable to
tax as Capital Gains, the fair market value of the said asset on the date of transfer shall be
deemed to be the full value of the consideration received or accrued.
This proposed amendment to the IT Act may bring under its realm various transactions such as
slump exchange within the tax net.
Negative net worth:
Where the value of liabilities is greater than the value of assets, there are practical hurdles in
determining the net worth. There are views both in favour of and against the addition of negative
net worth to the sale consideration.
The Mumbai Tribunal in the case of Zuari Industries[5], clearly distinguished the case of Atili N.
Rao[6](where the Apex Court held that the sale consideration would include liabilities settled out
of sale proceeds) and held that in a case where the net worth is negative, the cost of acquisition
is to be taken as zero since Capital Gains can never exceed the sale consideration. This
position was reiterated by the Delhi Tribunal in the case of Paper Base Co Ltd.[7]
However, in the recent ruling of DCIT v Summit Securities Ltd[8], the Special Bench of the ITAT,
Mumbai decided that the negative net worth of the undertaking should be added to the sale
consideration, thereby negating the views expressed in the case of Zuari Industries Ltd and
Paper Base Co Ltd.
The decision of the ITAT brings to mind the words expressed in Taparia Tools Limited v JCIT[9],
where one of the argument was Good accounting is not correct law. This quotation may be
applicable here as well and clarity may emerge in the higher forums.
Conclusion
The insertion of Slump Sale provision put to rest conflicts on computation of gains arising on
business transfers. However, it has not totally done away with the grey areas and as the law
pertaining to Slump Sale is in its nascent stages, it might undergo a further makeover. The
recent decision of the Special Bench of the Mumbai Tribunal in the case of Summit Securities
Limited reiterates this and has thrown open a totally new way of computation of Capital Gains.





[1] Rohan Software Pvt. Ltd v ITO [2008 304ITR314(Mum)]
[2] Coromandel Fertilisers v DCIT [90 ITD 344]
[3] Avaya Global Connect Ltd v ACIT (26 SOT 397)
[4] Bharat Bijlee Limited v ACIT [TS-96-ITAT-2011(Mum)]
[5] Zuari Industries Ltd v ACIT [TS-50-ITAT-2006(Mum)]
[6] Atili N Rao v CIT [(2001) 252 ITR 880]
[7] Paper Base Co. Ltd v CIT [(2008) 19 SOT 163 (Del)]
[8] DCIT v Summit Securities Limited [TS-140-ITAT-2012(Mum)]
[9] Taparia Tools Limited v JCIT 260 ITR 102 (Bom)


This Alert was contributed by Ganesh K Raju, J itendra M Kukreja and Akshika
Harikrishnan, PwC