Which is better- Slump Sale or Asset Purchase ?

SLUMP SALE

Slump sale is a sale of an undertaking as a going concern. 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.

The main elements of a slump sale are  :

1. Sale of an undertaking[1];

2. As a Going Concern[2]

3. For a lump sum consideration; and

4. No separate values are assigned to individual assets and liabilities

 It is important that there is transfer of all rights and liabilities from transferor to transferee. Further, unlike in a demerger, the consideration for the slump sale is paid to the transferor company and not to its shareholders directly.

Stamp Duty Applicability on Slup Sale

Slump sale will also be subject to stamp duty. It differs from state to state as per their respective laws. To understand the stamp duty implication on a transaction, it is advised to read Section 5[3] and 6[4] of the Indian Stamp Act, 1889

Here explanation 2 to section 2(42C) clarifies that the determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities.

Whether GST applies to Slump Sale ?

Schedule II of the CGST Act talks about activities to be treated as a supply of good or supply of service wherein Clause 4, transfer of business assets has been considered as supply of goods.

In Clause 4(c) transfer of business as a going concern does not constitute as supply of goods[5]. Since such business is excluded from the list of supply of goods. it becomes very obvious that transfer of business as a going concern is considered to be a supply of service.[6]

Therefore the transaction of transfer of whole business as a going concern amounts to supply of service. But Ministry of Finance vide its notification has also excluded “Business as a going concern” from applicability of GST under supply of intra state services.[7] Therefore the GST provision as of now does not apply to Slump Sale.

Taxability: Capital Gain tax in case of Slump Sale

Section 50B of Income Tax Act, 1961[8] deals with capital gain in the case of slump sale. Where the undertaking being transferred was held for more than 36 months prior to the date of the slump sale, the gains from such a sale would qualify as long-term capital gains, and the effective rate of tax would be 20%. If the undertaking had been held for 36 months or any period lesser than that, prior to the date of slump sale, then the income would be taxable as short-term capital gains, the effective rate of which is currently 30%.

Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. For the purpose of computing capital gains, “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.[9] No indexation is required since even cost of acquisition or improvement shall not been considered for the computation of Net worth. Thus, we can draw the following concept from above :

• Net Sale consideration – Net worth of the undertaking = Capital Gain / (Loss)
• Cost of acquisition = Net worth of the undertaking
• Net Worth = Aggregate value of assets – Book value of liabilities
• Aggregate value of assets is written down value[10] of depreciable assets and book value of other assets

Procedure for Transfer of Business/Undertaking through Slump Sale (For Public Company)

The transfer of undertaking of company by way of sale, lease or otherwise dispose of, is governed by Section 180 of the Companies Act, 2013.Here the Board of Directors can through a Special Resolution[11] 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.[12] But this provision is applicable only to public limited company[13]

When Slump sale may not require approval under Section 180(1)(a)

All Slump sale may not require approval under Section 180(1)(a), if

a) Not fall under the definition of undertaking or substantially the whole of the undertaking defined under section;

b) Ordinary business of the company consists of, or comprises the sale or lease of any property

Procedure for Slump Sale

A. Check whether undertaking fall under the criteria under section 180(1)(a) w.r.t. Audited Balance sheet of the preceding financial year.

B. Board of directors of every listed companies and all public companies – i) with paid-up capital of Rs. 10 crores or more; (ii) having a turnover of Rs. 100 crores or more; (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 crores or more will refer to the Audit Committee for valuation of the undertaking and assets of a company.[14]

C. Send Notice calling Board Meeting at least 7 days before the meeting.[15]

D. Convene Board Meeting and pass Board Resolution for approval to sell, lease or otherwise dispose of undertaking.[16]

E. Send a notice of postal ballot to all the shareholders, along with a draft resolution and explanatory statement[17] and requesting them to send their assent or dissent in writing on a postal ballot within a period of 30 daysfrom the date of dispatch of the notice.[18]

F. An advertisement shall be published at least once in a vernacular and English newspaper having wide circulation in the place of company’s registered office; specifying the matter to be transacted, important statements, contact details of persons for grievance redressal and the complete timeline of postal ballot voting process.[19]

G. Notice of postal ballot to be placed on the company’s website after the notice being send to the shareholders.[20]

H. Appoint a Scrutinizer who shall conduct the postal ballot voting process and submit a report within 7 days of receipt of postal ballot from shareholders.[21]

I. The results shall be placed along with the scrutinizer’s report, on the website of the company

J. File E-Form MGT-14 along with the explanatory statement under section 102 within 30 days from the date of passing of Special Resolution with required fees with the Registrar of Companies.[22]

K. Execute necessary agreements, conveyance/ assignment deed as per Business Transfer Agreement.(BTA)

Table I- Important Cases on Slump Sale

ASSET PURCHASE

Asset purchase is also known as Asset sale or Itemized Sale[23]. As compared to slump sale discussed above, an asset sale/purchase is an itemized sale of the assets of company or a piece meal sale of the assets of the company.

Determination of Capital Gain Taxability in case of Asset Purchase

Gains arising on sale of capital assets taxed as Long/ short term capital gains depending on period of holding. Here the asset to be transferred will considered Long term Capital Gain if held for more than 3 years and Short term capital gain if held for less than 3 years

I. Non-depreciable Assets

If there is sale of assets not being depreciable assets, capital gains are calculated as per Sections 45 and 48 of the ITA, i.e., the amount by which the sale consideration of the asset exceeds its cost of acquisition.

II. Depreciable Assets

The provision of Section 50 shall apply in the case of sale of depreciable assets that form a part of a block of assets[24]. When an asset forms a part of a block of assets  on which depreciation is allowed as deduction under the Income tax act at the rate applicable on the block, the capital gains arising from such transfer are taxed only as short-term capital gains irrespective of the period of holding of the asset.

Applicability of GST in Asset Purchase

Transaction of itemized sale is supposed as supply under the ambit of GST and individual asset would covered under the definition of goods as per schedule II of the CGST Act. Schedule II covers the situation  if a part of business assets is disposed of.

Stamp Duty in case of an itemized sale or slump sale

Stamp duty payable on transfer of assets, whether in case of an itemized sale or slump sale, is governed by the provisions of the relevant stamp act where the document of instrument of transfer is executed / produced. In computing such duty all state stamp duty acts have to be read with section 5 and 6 of Indian Stamp Act, 1889 as discussed above.

However, it is generally advised to use an agreement to sell instead of a conveyance deed as the stamp duty is considerably lesser for an agreement compared to a conveyance deed.

Procedure for Asset Purchase

The same procedure as described for slump sale will be followed for asset purchase.

Table II-   Comparison Between Slump Sale and Asset Purchase

Conclusion

From the above discussion, we can derive that Slump Sale is a better alternative for the company if whole of the undertaking is to be disposed off. But where there are only a plant or machinery that is to be sold , then asset sale is a better option.

These two are the chief forms of business transfer by the company when it is looking to reorganize its capital structure of the company.

[1] ‘Undertaking’ has been defined to include an undertaking, or a unit or a division of an undertaking or business activity taken as a whole. However, undertaking does not mean a combination of individual assets which would not constitute a business activity in itself [ Explanation 1 to Section 2 (19AA)]

[2] Though not defined anywhere in the definition, the concept of ‘going concern’ is one of the most important conditions to be satisfied when analyzing whether a transaction can be regarded as a slump sale [Held in the cases of Premier Automobiles Ltd. vs. Income Tax Officer and Anr. [2003] 264 ITR 193 (Bom) and Commissioner of Income Tax vs. Max India Ltd. [2009] 319 ITR 68 (P&H)]

[3] Section 5 of Indian Stamp Act, 1889 : Instruments relating to several distinct matters. — Any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act

[4]Section 6 of Indian Stamp Act, 1889 : Instruments coming within several descriptions in Schedule I. — Subject to the provisions of the last preceding section, an instrument so framed as to come within two or more of the descriptions in Schedule I, shall, where the duties chargeable thereunder are different, be chargeable only with the highest of such duties: Provided that nothing in this Act contained shall render chargeable with duty exceeding one rupee a counterpart or duplicate of any instrument chargeable with duty and in respect of which the proper duty has been paid.

[5] Clause 4(c) of Schedule II of CGST Act, 2017 states that

“(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

i. the business is transferred as a going concern to another person; or

ii. the business is carried on by a personal representative who is deemed to be a taxable person.”

[6] As per the definition of services, anything other than goods is called a service[Section 2(102) of CGST Act, 2017

[7] Ministry of Finance vide its notification no 12/2017- Central Tax (Rate) dated 28th June 2017.Here “service by way of transfer of a going concern, as a whole or an independent part thereof” in serial no 2 of the said notification shall have “nil” rate of tax on such supply

[8] 50B: Special provision for computation of capital gains in case of slump sale.—

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.

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.

3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288 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.—For the purposes of this section, “net worth” means the net worth as defined in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).

[9] For competing the net worth, the aggregated value of total assets shall be-

i. 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; and

ii. in the case of other assets, the book value of such assets. (Section 50B of Income Tax Act, 1961)

[10] supra note 9

[11] As per the provisions of Section 110 of the Act read with rule 22 of the Company (Management and Administration) Rules, 2014, Special Resolution for sale of whole or substantially whole of undertaking of the company under section 180(1)(a) shall be passed only by means of voting through a postal ballot

[12] Section 180(1)(a) of Companies Act, 2013

[13] Vide notification no. F. No. 1/1 /2014-CL.V dated 05th June, 2015, Private Companies are exempted from the application of Section 180 of Companies Act, 2013

[14] Section 177(4)(vi) of the Companies Act, 2013

[15] Section 173(3) of the Companies Act, 2013

[16] Section 179 of Companies Act, 2013

[17] Pursuant to Section 102(1) of the Act read with Section 110 of the Companies Act, 2013 (“the Act”), setting out material facts and reasons for the proposed Resolution

[18] Rule22(1) of Company(Management and Administration) Rules, 2014

[19] Rule22(3) of Company(Management and Administration) Rules, 2014

[20] Rule22(4) of Company(Management and Administration) Rules, 2014

[21] Rule22(5),(6),(8) and(9) of Company(Management and Administration) Rules, 2014

[22] Section 117(1) and Section 117(3)(a) and (e) of Companies Act, 2013

[23] Where assets and liabilities of a business are transferred by way of assigning a value to each item then it is called as itemized sale. Such sale involves the disposal of key or selected business assets

[24] “block of assets” is defined in Section 2(11) of the Income Tax Act, 1961 as a group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. Such block of assets may comprise of (a) tangible assets such as buildings, machinery, plant or furniture; (b) intangible assets such as know-how, patents copyrights etc.

[25] Explanation 2 to Section 2(42C) of Income Tax Act, 1961

[26] Coromandel Fertilisers Limited vs. Dy. Commissioner of Income Tax (Assts.) (10.11.2003 – ITAT Hyderabad)(Para 24) : MANU/IH/0266/2003