Slump Sale Meaning
‘Slump sale’ meaning, relevant for Section 50B of the Income Tax Act, considers the following important aspects : –
- There is a transfer of one or more undertaking
- The transfer may be by any means (for cash consideration or through an exchange of shares/ other form of consideration)
- The transfer is for a lump sum consideration
- In making transfer, no specific values are assigned to individual assets and liabilities
In other words, Slump sale is the transfer of one, or more than one undertaking from owner of undertaking, to the buyer of the undertaking, where the payment is made on a lump sum basis for the entire undertaking, and in the agreement, there is no specific values assigned to the individual assets and liabilities which are comprised in such sale.
Slump Sale meaning as per Income Tax Act, 1961
Section 2(42C) defines a “slump sale” as “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”.
Explanation 2 to that definition clarifies 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.
Subject Matter of transfer
The slump sale meaning in section 2(42C) shows, that the capital asset which is the subject matter of consideration is the undertaking, and not the individual assets and liabilities which make up that undertaking.
How is Capital gains computed in case of Slump Sale – Section 50B of the Income Tax Act
In such a case, the capital gains are computed as under (A-B – C ) : –
FMV of capital assets transferred under slump-sale – A
Less : – Net worth of undertaking transferred under slump-sale – B
Less : – Expenditure on transfer of undertaking – C
Computation of Net Worth
The net worth of the undertaking is calculated as under : – ( B1 + B2) . Please note that it is computed only in respect of the Asset transferred .
- Written down value of the block of assets for depreciable assets = B1 – Depreciable asset may contain Building, Plant and Machinery
- Book value of non depreciable assets = B2. Non depreciable asset may contain Land, Purchased Goodwill (subject to certain conditions), self generated assets etc ;
Whether Capital gains computed is long-term or short -term
Where the undertaking transferred in slump sale is run by the assessee for more than 36 months, the gains arising from transfer are treated as long term capital gains.
However, where the undertaking transferred in slump sale is run by the assessee for less than 36 months, the gains arising from transfer are treated as short term capital gains.
What is the rate of tax on Capital gains
The tax rate that shall apply on gains arising from transfer of an undertaking under a slump sale shall be the normal tax rates, applicable on LTCG or STCG, on the respective assessee. For example, for a company, with a tax rate of 22%, the STCG may be taxable @ 22% and LTCG @ 20% (plus applicable SC and cess).
Whether GST is payable on Slump Sale Agreement ?
GST is applicable on “supply” of goods or services, which includes supply of all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made . Such a supply should be for a consideration by a person in the course or furtherance of business.
Considering the wide scope of the above definition, slump sale may be covered as a supply liable to GST. However, there are specific provisions wherein if a person ceases to be a taxable person, goods forming part of the assets of business carried on by him are deemed to be supplied by him , but with certain exceptions. The impact of such exceptions on case specific basis should be made , to analyse if its is considered within the slump sale meaning, and whether GST is applicable or covered under such exemptions.
Whether stamp duty is payable on Slump Sale Agreement ?
As per Indian Stamp Act 1899, ‘Conveyance’ includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred .
The liability to pay stamp duty arises if the instrument of transfer is executed in any State in India or if it is executed outside India it is brought in India and it relates to transfer of any property situated in India .
In such a case, depending on existence of any immovable property or otherwise, execution of slump sale agreement may attract stamp duty implications in India.
Section 50B of the Income Tax Act
Section 50B, is a special provision for computation of capital gains in case of slump sale arising on the transfer of an undertaking . Such capital gains are to be computed in the manner set out in that section.
Section 50B of the Income Tax Act, 1961 – Special provision for computation of capital gains in case of slump sale.
Charge ability Section
Section 50B (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
Computation of Net worth
Section 50B (2) In relation to capital assets being an undertaking or division transferred by way of such slump sale,—
(i) the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48;
(ii) fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.
Submission of an Accountant Report
Section 50B (3) Every assessee, in the case of slump sale, shall furnish in the prescribed form a report of an accountant as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB] indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.
Explanation 1.—For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account :
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.
Net worth computation and aggregate value of total assets
Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,—
- in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;
(aa) in the case of capital asset being goodwill of a business or profession, which has not been acquired by the assessee by purchase from a previous owner, nil;
(b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and
(c) in the case of other assets, the book value of such assets.