Analysis of Amendments in Provision of Slump Sale

♦ Introduction

The Finance Act 2021 has amended the provisions related to slump sale. It has amended the scope of the definition of the term slump sale by amending the provision of clause (42)(C) of section 2 of the Act so that all types of transfer as defined in clause (47) of section 2 of the Act are included within its scope. It has also amended the Section 50B (2) to provide the FMV of the capital assets as on the date of transfer shall be calculated in the prescribed manner. In this article we will analyse the changes made by such amendments and rational behind such changes.

♦ Insertion of section 50B and 2(42)(C)

• Prior to Finance 1^stApril 2000, there was no specific here was no specific provision in the Income-tax Act, 196 that’s specifically dealt with taxation of slump sales. Finance Act ,1999 inserted the Section 50B and Section 2(42)(C) in the act, and made applicable from 1^st April,2000.
• Section 50B contains special provision for computation of capital gains in case of slump sale, whereas Section 2(42)(C) defines the “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.

♦ Section2(42)(C): Prior to Amendment

• As the definition of slump sale include the transfer only by sale, so whether other means of transfer listed in sub-section (47) of section 2 of the Act, in relation to capital asset like exchange, relinquishment etc, are excluded?
• Hon’ble Madras High court in case of Areva T & D Ltd. v. CIT, [2020] made following observations:
  • In order to draw distinction between the term ‘sale’ and ‘exchange’, Hon’ble Madras HC referred to the definition provided in Transfer of Property Act, 1882 and Sale of Goods Act, 1930.
  • As per Sec. 54 of the Transfer of Property Act, 1882, ‘Sale’ is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Further, as per Sec. 2(10) of the Sale of Goods Act, 1930, ‘price’ means the money consideration for sale of goods. Also, as per Sec. 118 of Transfer of Property Act, 1882, ‘exchange’ means mutual transfer of ownership of one thing for the ownership of another between two persons, neither thing nor both things being money only.
  • Based on the above definition the court held that that slump sale u/s 2(42)(C) of the Act shall arise only if there is a transfer of an undertaking as a result of the sale, for a lump sum consideration. If there is no monetary consideration involved in the transaction, then it would be held that not possible for the Revenue to bring the transaction done by the assessee within the definition of the term ‘slump sale’ as defined u/s 2(42)(C) of the Act.
  • Court has also placed reliance on the decision of Hon’ble Bombay HC in Bharat Bijlee (supra), wherein the Bombay HC held that the definition of slump sale under Section 2(42)(C) is only restricted to transfer resulting from ‘sale’ and does not include other ‘transfers’ as given under Section 2(47) of the Act.

♦ Section2(42)(C): After Amendment

• As per the amended Section 2(42)(C),  “slump sale” means 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 sales.
• Also inserted Explanation 3,that for the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47) of section 2 of the Act;
• By amending the provision of clause (42)(C) of section 2 of the Act all types of transfer as defined in clause (47) of section 2 of the Act are included within its scope.
• Its also overrule the Madras HC and Bombay HC judgment as stated above, where only transfer by sale were covered by the slum sale and not other form of transfer as defied u/s 2(47).

♦ Section50B (2): Prior to Amendment

• Section 50B (2) provides that 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 and no indexation shall be available if the slump sale treated as long term capital gain.
• Explanation 1 to Section 50B, net worth = aggregate value of total assets of the undertaking (Ignoring Revaluation) less value of liabilities of such undertaking as appearing in its books of account.
• Explanation 2 to Section 50B provides that for computation of net worth depreciable assets shall be taken at written down value of the block whereas non- depreciable assets at book value. In case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, value shall be taken as nil.
• The capital gain = Sales consideration less Cost of Acquisition (i. e.Net worth). As section 50B (2) prescribe the cost of acquisition but does not contain any provision for computation of the full value of consideration.

♦ Section50B (2): After Amendment

• The finance act has amended the section 50B (2) of the act to provide that Fair market valueof 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.
• In Explanation 2a new clause has been inserted to provide while calculation net worth, that value of capital asset being goodwill, which has not been acquired by the assessee by purchase from previous owner, shall be taken as nil.
• The department via notification no 68/2021 dt 24^thMay, 2021 notified the Rule 11UAE for Computation of Fair Market Value of Capital Assets for the purposes of section 50B of the Income-tax Act. As per the rule the, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher.
• FMV1 shall be the fair market value of the capital assets transferred by way of slumpsale determined in accordance with the formula –

 A+B+C+D – L, where,

• • • A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale as reduced by the following amount which relate to such undertaking or the division, —

(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and

(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

• • • B = the price which the jewellery and artistic workwould fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer;
    • C = fair market value of shares and securitiesas determined in the manner provided in sub-rule (1) of rule 11UA;
    • D = the value adopted or assessed orassessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property;
    • L= book value of liabilities as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale, but not including the following amounts which relates to such undertaking or division, namely: —

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

• FMV2shall be the fair market value of the consideration received or accruing as a result of transfer by way of slump sale determined in accordance with the formula-

E+F+G+H, where,

• • • E = value of the monetary consideration received or accruing as a result of the transfer;
    • F = fair market value of non-monetary considerationreceived or accruing as a result of the transfer represented by property referred to in sub-rule (1) of rule 11UA determined in the manner provided in sub-rule (1) of rule 11UA for the property covered in that sub-rule;
    • G = the price which the non-monetary considerationreceived or accruing as a result of the transfer represented by property, other than immovable property, which is not referred to in sub-rule (1) of rule 11UA would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer, in respect of property;
    • H = the value adopted or assessed or assessable by any authorityof the Government for the purpose of payment of stamp duty in respect of the immovable property in case the non-monetary consideration received or accruing as a result of the transfer is represented by the immovable property.
    • The fair market value of the capital assets under sub-rule (2) and sub-rule (3) shall be determined on the date of slump saleand for this purpose valuation date referred to in rule 11UA shall also mean the date of slump sale.

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Author: CA. Ajit Kumar, Chartered Accountant in Practice from Patna and can be contacted at [email protected].