This article is written by Dr Mathivanan Dakshinamoorthi. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
One of the preferred ways of business transfer is through a slump sale. Slump sale, in simple terms, is a transfer of a business, either in whole or in part, from one entity to another, for a lump sum. Wherein the lump sum is arrived at without attaching any specific values to individual assets and liabilities. In the recent amendment to Finance Act 2021, the definition of Slump sale was widened. Computation of income tax liability also got amended and was given retrospective effect from 01 April 2020. This article analyses the recent changes and culls out three crucial points for easy understanding of all the stakeholders.
Change in the definition of slump sale
Table 1: Comparison of Section 2(42C) of the Income Tax Act 1961
|Section 2(42C) of the Income Tax Act 1961|
|Pre amendment – Finance Act 2021||Post amendment – Finance Act 2021|
|2(42C) “slump sale” means the transfer of one or more 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 the assignment of values to individual assets or liabilities.||2(42C) “slump sale” means the transfer of one or more undertakings, 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 is seen from Table 1, in pre-amendment times, the term ‘transfer’ covered the only transfer of a business undertaking through ‘sale’. In comparison, the amended definition includes transfer by any means and nullifies various courts’ decisions – namely, the recent decision of the Madras High Court in Areva v CIT.
Areva v. CIT, 2020
It was argued before the Court that the term ‘sale’ is not defined in the Income Tax Act 1961 (IT Act); one could rely on the Transfer of Property Act 1882 (TP Act). Per Section 54 of the TP Act, ‘Sale’ means a transfer of ownership for a price paid or promised or part-paid and part-promised.
However, the term ‘price’ is not defined either in the IT Act or TP Act. On the other hand, the term ‘price’ is defined in the Sale of Goods Act, 1930 (SG Act). Section 2 (10) of the SG Act states that “price” means the money consideration for a sale of goods. Madras High Court observed that since there is no monetary consideration, it is not a sale by way of transfer of ownership for a price paid or promised or part paid and part-promised.
The Court has further observed that the transaction between the Areva subsidiaries can at best be treated as an exchange as defined in Section 118 of the TP Act. Therefore, the Court held that the transaction undertaken between the subsidiaries of Areva is not within the definition of Slump sale. Further held that mere use of the expression’ consideration for transfer’ in the scheme of arrangement between the parties can never be taken as a sale. Consequently, the application Section 50B of the IT Act has no relevance and effect on the transaction between Areva subsidiaries.
Applicability of the decision of the Bombay High Court in CIT v Bharat Bijlee was also discussed in detail by the Court in Areva v CIT 2020.
CIT v. Bharat Bijlee (2014) 365 ITR 258
It is an appeal by the Revenue against the Tribunal order on transfer of business by way of exchange through preference shares is not a slump sale but an exchange. The Court affirmed the Tribunal’s findings and held that the transfer of business through the issuance of bonds or shares was not a sale but an exchange. Hence, the transaction cannot be treated as a slump sale but only a slump exchange. It does not come under the purview of Section 2(42C) read with Section 50(B) of the IT Act.
Slump sale as amended by the Finance Act 2021
The amendment by way of the Finance Act 2021changed the status-quo of Slump sale. The present amendment, on Section 2(42C) of the IT Act, widened the definition of Slump sale by adding the four words “undertaking, by any means” (Refer Table 1).
The present amendment also inserted an Explanation 3. It states that for the purposes of this Clause, ‘transfer’ shall have the meaning assigned to it in Clause (47) of Section 2 of the IT Act.
Section 2(47) of the IT Act enumerates the following kind of transactions:
- Sale, exchange or relinquishment of the asset;
- Extinguishment of any rights concerning a capital asset;
- Compulsory acquisition of an asset;
- Conversion of capital asset into stock-in-trade;
- Maturity or redemption of a zero-coupon bond;
- Allowing possession of immovable properties to the buyer in part performance of the contract;
- Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or
- Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.
As is seen from the above provision, almost all the transfers are brought within the ambit of Slump sale.
Thereby, the said amendment nullified the effect of earlier rulings of Madras HC and Bombay HC. The shield of Courts’ precedents on Slump sale has been torn. Banking on those decisions is not applicable anymore. This is the first key point to remember on the Slump sale.
Retrospective effect of the amendments on slump sale
The Amendments are given retrospective effect from 01 April 2020 by the Finance Act 2021. Therefore, any transactions that happened after 01 April 2020 shall take into account the changed scenario. Those transactions shall be revisited and recomputed for their tax liabilities. This is the second key point to remember on the Slump sale.
Change in the computation of capital gains
The Slump sale transactions are subject to long term or short term capital gains as per Section 50(B) of the IT Act.
Prior to the amendment, capital gains on the net worth is computed for the capital gains.
Table 2: Sample Computation – Before the Amendment 2021
|Particulars||Amount in Rupees|
|1||Value of consideration in full||xxx.xx|
|2||(Less) Expenses related to the transfer||-xxx.xx|
|3||(Less) Cost of acquisition / Net worth (Book Value)||xxx.xx|
|Capital Gain (or Loss)||xxx.xx|
The computed capital gains are again classified as either long term or short term. If the assets are held over 36 months, the gain or loss are considered long-term capital gains and attract a lower tax bracket. Otherwise, it shall be classified as short term capital gains and taxed accordingly. In the Slump sales, indexation is not allowed. Indexation is the process to adjust for the cost of inflation.
If the sale consideration is less than the net worth, then the transfer becomes tax-free.
For slump sale transactions comes under nil rate GST. Therefore, there are no indirect taxes such as GST.
There is no change in the Indirect tax for the slump sale transaction.
The amendment under the Finance Act 2021
Section 50B(2) is substituted with an amended provision vide the Finance Act 2021.
Table 3: Comparison of Section 50B(2)
|Section 50B: Special provision for computation of capital gains in case of Slump sale|
|Pre amendment||Post amendment|
|Section 50B(2) In relation to capital assets being an undertaking or division transferred by way of such sale, 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.||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.|
As is seen, the concept of fair market value (FMV) was brought in through the recent amendment. Furthermore, the Central Board of Direct Taxes (CBDT) has issued a Notification 68/2021 (can be accessed here) dated 24 May 2021 for computation of FMV.
To this effect, a new Rule 11 UAE, “Computation of Fair Market Value of Capital Assets for the purposes of section 50B of the Income-tax Act”, is inserted in the Income Tax Rules 1962 and given retrospective effect to get applied from 01 April 2020.
The FMV shall be computed in two modes FMV1 and FMV2, and whichever is higher shall be given effect.
FMV1, in simple terms, is the book value of the assets less the book value of liabilities.
FMV2, is nothing but the consideration received or accruing. It includes monetary considerations, non-monetary considerations and the value of stamp duty.
The date of the Slump sale is the date on which the FMVs need to be computed and determined.
(Detailed computation process is explained, for both FMV1 and FMV2, vide Rule 11UAE of Income Tax Rules 1962)
In short, the concept of ‘gains/losses’ is replaced with FMV, and it is taxed. This is the third important key point that needs to be addressed in all the Slump sales from 01 April 2020.
The Finance Act, 2021 brought in a significant change in corporate restructuring. The very focused amendments towards Slump sale nullifies Court made law and related litigations. The Corporates need to think not only for the future but also for the acts they did in the past. It is required that whatever arbitrage they enjoy presently may be given a go using legislative tools like retrospective effect.
Even after the said amendments, the Slump sale transfers are still attractive and have many advantages. It is one of the attractive routes for corporate restructuring. Still, it has the advantages of shorter time and effective transfer method to transfer an undertaking as a going concern.
Three essential considerations need to be addressed in the Slump Sale transfers. Firstly, the landscape of the Slump sale is widened via the Finance Act 2021. The Slump sale now includes transfer by any means. The meaning of the ‘transfer’ comes under the ambit of Section 2(47), which provides for almost all kinds of transfer. Secondly, the amendments are given retrospective effect from 01 April 2020.
The tax advantages enjoyed hitherto by the Slump sale transfers are almost taken away. Consequently, there is a likelihood of an increase in the cost of acquisition and related inertia in such transfers.
Thirdly, irrespective of capital gain or loss, the transaction is taxed. It is effected through the introduction of the concept of Fair market value. Now, no transaction can escape from the tax net. The only consolation is in the unchanged indirect taxation. The slump sale still comes under the NIL rate of GST.
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