Applicability of deeming provisions of Section 56(2)(x) of Income Tax Act to buyer of undertaking under Slump Sale under section 50B of Income Tax Act, 1961

There were lots of controversies about taxation of such a sale of business as a going concern due to period of holding of the assets etc. To resolve the controversy regarding tax incidence upon sale of an undertaking by way of slump sale, the Finance Act, 1999 inserted sections 2(42C) and 50B and amended section 43(6). 

Meaning of ‘Slump Sale’

In simple words, ‘Slump Sale’ is nothing but transfer of a whole or part of business concern as a going concern. As per section 2(42C) of Income Tax Act, 1961 (‘IT Act’), 

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. 

‘Undertaking’ has the same meaning as in Explanation 1 to section 2(19AA) of IT Act, defining ‘demerger’. As per Explanation 1 to section 2(19AA), 

‘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. 

Explanation 2 to section 2(42C) of Income -tax Act 1961, 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. Thus, if value is assigned to land for stamp duty purposes, the transaction will be a qualifying slump sale under section 2(42C).

In view of the above, to be a slump sale-

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. 

Analysis of the above definitions- 

1. The subject matter of slump sale shall be an undertaking of an assessee.

2. An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm.

3. Slump sale may be of a single undertaking or even more than one undertaking.

4. Sale of entire business undertaking by a firm to a company as a going concern was held to be a slump sale [Industrial Machinery Associates v. CIT, [81 ITD 482 (Ahd.)]

5. The undertaking has to be transferred as a result of sale.

6. The consideration for transfer is 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.

7. Transfer of assets without transfer of liabilities is not a slump sale 

Applicability of deeming provisions of section 56(2)(x) of IT Act to the buyer of undertaking under slump sale u/s 50B. 

Deeming fiction of Section 56(2)(x) of the IT Act is applicable to sum of money, capital asset being immovable property or property other than immovable property. As per the Section 56(2)(x) of IT Act, any company that receives any property for inadequate consideration shall be subject to tax on the difference between the fair value of property received and the consideration paid.

The term “property” has been exhaustively defined to include immovable property, shares and securities, bullion, etc., and thus does not specifically cover “business undertaking” acquired pursuant to slump sale. However, in cases where the buyer has purchased the business on a slump basis for a lump sum consideration (without values being assigned to the individual assets and liabilities) and records the value in its books as per purchase price allocation, then whether the provisions of section 56(2)(x) can be invoked if the value of the property (as per the Rules) is more than the value assigned pursuant to purchase price allocation. There is no specific exemption or any kind of direction in the IT Act which takes care of such a situation.

Further, proviso to this clause makes it clear that the provision shall not be applicable if the transaction is not regarded as transfer under clause iv, i.e. transfer of capital asset by a company to its subsidiary company & vice versa and clause vi, i.e., transfer in a case of amalgamation, transfer in a scheme of demerger, transfer in a case of business reorganization in case of co-op. bank etc. 

As ‘Property’ is exhaustively defined under section 56(2) and the term ‘undertaking’ is not included in the said definition of ‘Property’ under Section 56(2)(x) of the IT Act, therefore, deeming provisions of section 56(2)(x) shall not be applicable to the buyer of an undertaking under slump sale u/s 50B, even if the buyer has received any land/building as a part of undertaking.

Even otherwise, since under slump sale no value is possible to be assigned to individual assets, computation mechanism u/s 56(2) shall fail. 

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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