Slump Sale: Key Considerations

Introduction

Slump sale is a concept that plays a critical role in the restructuring and consolidation of businesses. Under the Income-tax Act, 1961 (‘the Act’), a slump sale involves the transfer of one or more undertakings as a going concern, where the consideration for the transfer is in the form of a lump sum, without values being assigned to individual assets and liabilities. This article explores the key provisions associated with slump sale.

Meaning of “slump sale”

Section 2(42C) of the Act defines a “slump sale” to mean the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer.

Therefore, the following parameters are relevant for a transaction to be regarded as a slump sale:

• 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.

Meaning of “undertaking”

Explanation 1 to section 2(42C) states that “undertaking” shall have the meaning assigned to it in Explanation 1 to 2(19AA) of the Act.

Explanation 1 to section 2(19AA) provides that “undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

Whether the assets and liabilities transferred satisfy the requirement of being an ‘undertaking’ has been the subject matter of controversy in various cases. The principles emerged from various judicial precedents are provided below:

• It should be a distinct and a separate business activity, i.e., collection of individual assets or liabilities or any combination thereof, constituting a business activity;
• It should be carried on, with a view to earn profits;
• It has the same meaning as business;
• The undertaking should be an integrated unit capable of producing goods and/or services independently;
• It should be capable of being owned and transferred.

Whether all assets and liabilities are required to be transferred?

In situations where not all the assets and liabilities of a business undertaking are transferred, tax authorities might challenge the classification of the transaction as a ‘slump sale’. This matter has been examined in several judicial precedents.

The following principles emerge from those judicial precedents:

• Even if some assets are retained by the transferor, the sale would not lose the character of a slump sale if the transfer is of a going concern and the transferee is in a position to carry on the business without any interruption.
• If the assets and liabilities being transferred constitute a business activity capable of being run independently, such assets and liabilities could constitute a ‘business undertaking’.
• To ensure that the undertaking is a going concern, the tax authorities can certainly examine whether essential and integral assets like plant, machinery and manpower have been transferred.

Test of “lumpsum consideration”

One of the key condition for a transaction to be regarded as a slump sale is that the transfer should be for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale.

Explanation 2 to section 2(42C) of the Act 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.

To determine whether a particular transaction can be regarded as a slump sale, Courts have majorly relied on the method applied for determination of the sale consideration. Where there is evidence which indicates determination of sale consideration on the basis of itemized value, such transaction may not be regarded as a slump sale. The evidence need not be available in the sale agreement. Existence of supporting documents which show the values of individual items, and which has influenced the determination of the sale consideration may result in the tax authorities considering the sale transaction as an itemized sale, instead of slump sale.

Conclusion

Slump sale offer a strategic avenue for businesses to restructure and realign their operations. Understanding the provisions and tax implications of slump sale is essential for both buyers and sellers to navigate the complexities involved. With proper planning and execution, slump sale can be an effective tool for achieving business objectives and optimizing tax outcomes.