Slump Sale

• Meaning: As per section 2(42C) of Income-tax Act 1961, ‘slump sale’ means 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.
• Quick Test: A sale in order to constitute a slump sale must satisfy the following quick test:

1. Business is sold off as a whole and as a going concern
2. Sale for a lump sum consideration
3. Materials available on record do not indicate item-wise value of the assets transferred

• Conditions:

• An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm.
• Slump sale may be of a single undertaking or even more than one undertaking.
• The undertaking has to be transferred as a result of sale.
• Transfer of assets without transfer of liabilities is not a slump sale

• Consideration:

• The consideration for such transfer would be a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. The consideration may be discharged in cash or by issuing shares of Transferor Company.

• Taxability:
  • Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale — CIT vs. Artex Manufacturing Co., [227 ITR 260 (SC)]. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected in the light of Explanation 2 to section 2(42C).
  • Capital Gains arising on transfer of an undertaking are deemed to be long-term capital gains. However, if the undertaking is ‘owned and held’ for not more than 36 months immediately before the date of transfer, gains shall be treated as short-term capital gains.
  • Taxability arises in the year of transfer of the undertaking.
  • Capital Gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act.
  • As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.
  • In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking.
• 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.’

Therefore, in case of slump sale, section 180 shall get attracted and a special resolution of the members shall be required.