This article is written by Milendra Jain.
Table of Contents
Acquisition of business plays a pivotal role in the growth of the business, as it is a process of corporate restructuring undertaken by business enterprise wherein the structure of the business changes. Therefore, slump sale is the tool for corporate restructuring where the company transfers its business to the acquirer company. When business is transferred/acquired on a going concern basis is referred to as a ‘slump sale’ for a lump sum consideration with an objective to improve the performance of the business, strengthen the financial position, tax benefit and make a strategic investment. The article also tends to bring out some future considerations pertaining to the slump sale from the Finance Bill 2021-2022 and its implications.
Therefore, the choice for the tools of the corporate restructuring becomes important as to fulfill the objectives associated with such tools and such mode of the restructuring includes several implications pertaining to taxation, legal compliances, successor liability, stamp duty, etc. which needs to be complied for a successful closure.
Concept of Slump Sale
Slump Sale is a mere tool of corporate restructuring, which is inserted through the Financial Act, 1999 through section 2(42C) and section 50B to the Income Tax Act, 1961(ITA). The ITA 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”. The slump sale is a purely a tax concept, as where the seller company sell its entire business which is in going concern basis with all its assets and liabilities in a transaction without attributing separate costs in a lump sum consideration, the Hon’ble Supreme Court that such transaction is a slump sale and provisions under section 50B will be applicable on such transaction.
Constituents of Slump Sale
- Transfer of the business through sale: As the current definition of the slump sale suggests that there should be a transfer of the undertaking(s) through sale. Therefore, any transfer of the undertaking otherwise then as a result of sale will not qualify as a slump sale. Thus, it is essential that the transfer is through the sale of such unit/undertaking.
The term sale is not defined in the ITA but the definition of the term ‘sale’ can be inferred from the Sales of Goods Act, 1930. Further, any transfer for non-monetary consideration as in transfer of business in lieu of issuance of shares by the transferee as a consideration does not qualify as a sale or a slump sale as per ITA. Also, any transfer of property in lieu of consideration other than monetary consideration is not a sale and is an exchange.
Therefore, to fall within the ambit of the slump sale there should be monetary consideration as it is an essential element to a transaction of sale.
But the Finance Bill 2021-2022 juxtaposed the concept of sale and exchange in order to determine the scope of the Slump Sale, wherein in Financial Bill 2021-2022 it is proposed to amend the definition of slump sale in order to widen the scope by including the term transfer i.e. Slump Exchange, which will have the same meaning as per Section 2(47) of ITA which will be in effect from April 1st, 2021 and applicable for assessment year (AY) 2021-2022 and subsequent AYs.
- Transfer of one or more undertakings: Another important factor which determines a transaction as a slump sale is transfer of one or more undertakings of the sellers. The ‘undertaking’ includes any part of undertaking or a unit or a division or a business activity taken as a whole, which does not include individuals’ assets or liabilities or any combination of such business activity. Therefore, it is one of the most important subject matter of the slump sale and such transfer of the undertaking has to meet the requirements under the ITA.
- Going Concern Concept: The undertaking so transferred must be a ‘going concern’ after the closing of the transaction. The concept of the going concern is an assumption that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations or there shall be no break nor cessation in the activity/operations of the undertaking. Therefore, the undertaking/unit in the transaction must be in the nature of slump sale of a going concern as a whole.
- Sale for a lump sum consideration: To close the transaction of the slump sale, it is essential that consideration aligned to such sale shall be in lump sum consideration without attributing individuals’ assets and liabilities forming part of such unit/undertaking i.e., sale of itemized assets/liabilities. Post April 1st, 2021 any transfer of the undertaking for a lump sum consideration or by any means will be considered as a slump sale transaction. Therefore, all slump sale transactions will be taxable.
Capital Gain Tax on Slump Sale
Corporate Restructuring through slump sale is subject to the implication of the capital gain tax implication under ITA. The following points are necessary in order to calculate the capital gain or loss on a slump sale transaction:
- Subject matter of the slump sale must include capital asset(s).
- There must be transfer of such capital asset(s).
The capital gain or loss on the slump sale transaction is computed on the basis of long term and short-term period for which the undertaking is held. Therefore, in the case where such undertaking is held for not more than 36 months from the date of slump sale then such transaction shall be termed as a short term, upon which short-term capital gain or loss will be calculated, wherein such undertaking is held for more than 36 months, such gain or loss will be computed on long term basis. Further, normal rate of tax is applicable to short term capital gain i.e., at the rate of 30% and rate of tax of 20% is applicable to long term capital gain. For the calculation of the capital gain, the ‘Net Worth’ of the undertaking shall be deemed to be the cost of acquisition and the cost of improvement for the purpose of section 48 & section 49 of the ITA and no indexation benefit is available for the calculation of capital gain under such transaction.
Valuation/Computation of Net Worth Slump Sale
‘Net Worth’ has been defined under section 50B of the ITA as it shall be the aggregate value of the total assets of the undertaking as reduced by the values of the liabilities of such undertaking or division as appearing in the books of account of such undertaking and the aggregate value of total assets is the sum total of the written down value of depreciable assets as determined in accordance with Section 43(6) of ITA (in case of depreciable assets) and book value of the other assets (excluding any revaluation of such assets). Such net worth should be verified by a chartered accountant.
Carry Forward of Tax Losses/Unabsorbed Depreciation and MAT Credit
Normally, tax losses do not transfer to the buyer of such undertaking in the slump sale, as the seller retains them. Generally, tax losses consist of normal business losses and unabsorbed depreciation. Similarly, carry forward of Minimum Alternate Tax Credit is not allowed in a slump sale transaction.
Applicability of GST
The concept of the indirect tax is based on the supply of goods and services as per the definition in the act goods means every kind of movable property other than money and securities, therefore the slump is not a ‘good’ but a ‘business’. Hence, GST is not applicable on sale of business as a slump sale.
Executing Slump Sale
The slump sale can be executed in two way as follows:
- Executing Business Transfer Agreement (BTA): The BTA is entered between the parties when they want to go ahead with the slump sale for a lump sum consideration. The BTA can be executed in two ways i.e., ‘agreement to sell’ and ‘sale/conveyance deed’, wherein the former one provides that in what manner the undertaking will be sold to the buyer and the latter one provides the sale and payment of the consideration against the undertaking. Therefore, agreement to sell denotes an intention to get into such a transaction and sale/conveyance deed results into closure of the transaction. Further, agreement to sale would not be subject to payment of stamp duty which is payable on a sale deed.
Steps to Slump Sale – BTA
- Developing acquisition strategy – Term Sheet
- Signing Non-disclosure Agreement
- Due Diligence
- Making Offer
- Signing agreement – Business Transfer Agreement or Business Purchase Agreement or Conveyance/Sale Deed
- Closing the transaction
- Making an Application to NCLT: Pursuant to Section 230-232 and Companies (Compromises, Arrangements and Amalgamation) Rules, 2016, an application can be made to NCLT for sanctioning of a scheme of compromise or an arrangement so proposed, involving takeover of the undertaking through slump sale.
For a company which is registered under the Companies Act, 2013 or any previous company law, must pass a Special Resolution in order to sell or dispose whole of the undertaking of the company wherein as per Section 180 of the Companies Act, 2013 the term ‘undertaking’ means an investment of the company exceeds 20% of its net worth of the company in last audited balance sheet in preceding financial year or income from such undertaking is 20% of the total income of the company in the previous financial year in accordance with. This process of slump sale involves more cost and time in order to close the transaction.
Finance Bill 2021-2022 – Slump Sale
The Finance Bill 2021-2022, tends to increase the scope of the slump sale by amending the definition of the slump sale under Section 2(42C) of the ITA, as to mean transfer of one or more undertakings, by any means, for lump sum consideration without value being assigned to individual assets and liabilities in such sales. Therefore, “transfer by any means” will include transfer in relation to capital as defined under Section 2(47) of the ITA, which will take effect from April 1st, 2021 and will apply from AY 2021-2022 and subsequent AYs.
Need of such amendment was required because certain judicial authorities in few cases such as Bharat Bijili Ltd., Avaya Global Connect Ltd., Areva T&D Ltd. etc. held that, if there had been transfer otherwise than sale or such business transfer for non-monetary consideration does not qualifies the requirements of slump sale and thus provision of Section 2(42C) read with Section 50B of ITA is not applicable on such transfer/sale without monetary consideration. Further, there were also certain cases such as Virtual Software Training (P.) Ltd., SERI Infrastructure Finance Ltd., wherein certain judicial authority held that, when the transfer of the assets is in lieu of the another assets which is non-monetary, it can be said to be transfer by way of sale as the transfer must be given a wider import and that it can not be restricted to cover ‘sale’. Therefore, in order to clarify the intention of the legislature and to put halt to the conflict of opinion between various Hon’ble High Courts on the issue whether slump exchange is covered by the definition of slump sale and this amendment will have the effect of over ruling several judicial precedents.
The Slump Sale as a tool for corporate restructuring is useful when the acquirer desires to buy the business on a going concern basis for a lump sum consideration in order to achieve various strategic goals, which would not be feasible to go through other modes of corporate restructuring. Further, time taken to close such a transaction is substantially less than several other forms of restructuring. The Finance Bill 2021-2022, will change the definition of the “slump sale” as it will include any form of transfer of the undertaking/business will be taxable under the provisions of ITA, therefore clarifying the intention of the legislature and putting halt on conflict of judicial opinion.
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