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As per section 2(42C) of the 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.

For understanding the term ‘Slump Sale’, it is significant to delve into the definition of ‘Undertaking”

‘Undertaking’ has the same meaning as in Explanation 1 to section 2(19AA) 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) clarifies that the determination of the value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as an assignment of values to individual assets and liabilities. Thus, if the value is assigned for stamp duty purposes, then also the transaction would still qualify as slump sale under section 2(42C).

For the purpose of this section, ‘undertaking’ shall mean an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.

‘Substantially the whole of the undertaking’ shall mean 20% or more of the value of the undertaking.

Taxability of gains arising on a slump sale

Section 50B of the Income-tax Act, 1961 provides the mechanism for computation of capital gains arising on slump sale. On a plain reading of the section, some basic points which arise are:

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 the cost of acquisition, i.e., net worth.

Since net worth is indispensable in determining the taxability of gain, it is advisable to comprehend the calculation of ‘Net worth’ for better clarity.

Net worth calculation:

In computing the net worth of the entity, the following points need to be considered:

  • The value of net worth should not take into account any change in the value of the asset or liability resulting from the revaluation of such assets or liability.
  • In case of depreciable assets under the Income Tax Act, the Written Down Value of such assets as per the Act shall be considered.
  • In case of assets on which 100% deduction has been allowed u/s 35AD (specified business), the value of such assets will not be considered.
  • In case of any other asset, value as appearing in the books of accounts shall be considered.

After considering the above points, if the resulting net worth is negative, then the cost of acquisition shall be taken as Nil for the purpose of computation of capital gains. 

Compliances under Companies Act 2013

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 the Concerned Company would be required to pass a special resolution in the general meeting of the Company for undertaking the Slump Sale Transaction.

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May 2024