Introduction: In the process of integration of the Indian economy with the world economy, a number of companies are going for restructuring to gain benefits from large scale operations and focus upon its core competencies. In the restructuring exercise, certain companies sell off their unprofitable business activities and the business activity as a whole is sold along with assets and liabilities. The income from restructuring process was used to compute as capital gains and business income in respect of each asset. In this view, the concept of ‘Slump sale’ has been introduced to compute income with respect to such division or undertaking as a whole.
What is Slump Sale?
Slump Sale is a transfer of one or more undertakings for a lumpsum consideration, without values being assigned to the individual assets & liabilities.
– payment of stamp fees
– registration fees
– any other taxes, etc
The values of property may be specified in the agreement but it should be proved that such assignment of values was done for other purposes and not to compute value for transfer of such assets.
Is it necessary that undertaking should be a ‘slump’ in order to effect a ‘slump sale’ ?
‘Slump’ means dropping or falling heavily of something. It can be related to an undertaking that has suddenly declined or deteriorated or sinked heavily, being operational or financial loss.
The intention of the law maker was to introduce the concept of slump sale for those undertakings whose assets & liabilities has lost its value in the market. In these cases, assignment is not done for each asset or liability but as a whole i.e. “raddi ke bhaw mein bechna”.
But since there is no such specific condition has been stated in the law for undertaking to be necessarily a ‘slump’, the process of slump sale can be used even for transfer of profit-making company.
Therefore, it is not necessary that undertaking should be a slump to effect slump sale.
Transfer of assets without transfer of liabilities:
Slump sale do not apply where assets of an undertaking are transferred without transfer of liabilities. The base of Slump sale is the transfer of an undertaking as a whole . In a case where liabilities has not been transferred, it cannot be stated that undertaking has been transferred as a whole and therby provisions of slump sale shall not be applied.
Unabsorbed losses and depreciation:
The unabsorbed losses and depreciation with respect to transferred undertaking shall be allowed to carry forward in future years to the transferor.
COMPUTATION OF CAPITAL GAINS:
Net Profit shall be ,
Slump Sale consideration
Less: ‘Net Worth’ of the undertaking or division
Taxability: The net amount of profit out of transfer with respect to slump sale shall be taxable under the head ‘Capital Gains’. No income shall be taxable under income from business if the transfer has duly complied with the conditions being a slump sale.
Even ‘stock in trade’ of such undertaking shall not be taxable under income from business.
Taxable Year: The taxable year shall be the ‘effective year’, where effective year is the year in which transfer of undertaking has been legally made effective. The taxability shall not be dependent upon the date of actual possession of assets or actual transfer.
Effective date shall be taken as the date of agreement or effective date, if any specified therein.
Nature of Capital Gains: The nature of Capital Gains (whether short term or long term) shall be dependent upon the period of holding of the undertaking ,where such undertaking shall become long term if it has been held for more than 36 months. The nature or period of holding of assets of such undertaking shall not be considered to determine the nature of Capital Gains.
Even if all assets are short term in nature and undertaking is long term in nature, the transfer of assets shall be held as long term only & taxable as ‘Long term Capital Gains’.
COMPUTATION OF ‘NET WORTH:
No Cost of acquisition or Cost of improvement:
No actual cost of acquisition or cost of improvement shall be taken for the computation of Net worth. Net worth shall be taken on the basis of :
– Book values of assets & liabilities
– as on the date of transfer.
No indexation is required since even cost of acquisition or improvement shall not been considered for the computation of Net worth.
Revaluation of assets shall not be considered while computing the ‘Net Worth’.
♣ What if revaluation of assets has been done in current or past years?
There shall not be made any change to the value of such assets. Revaluation is not allowed as on the date of transfer but earlier revaluation won’t make any difference. Simply, existing book values shall be picked for computation of Net Worth.
♣ Whether revaluation can be done for assignment of value to the assets for other purposes?
Yes, revaluation can be done for other purposes (other than purpose of sale).
But no revaluation shall be done for computing Net Worth.
Value of Depreciable assets:
In case of depreciable assets, the written down value of such assets shall be computed as per Sec 43(6)(c)(i)(C), which computes the WDV in the following way:
Actual cost of the assets falling within the block transferred by way of slump sale as reduced by
Less: depreciation actually allowed upto AY 1987-88 in respect of the asset transferred
Less: depreciation that would have been allowable for AY 1988-89 and future AYs as if the asset was the only asset in the block of assets.
( However, the above reduction shall be limited to the written down value of Block of assets)
The law does not prescribe as to what will be the actual cost of the assets in the hands of the transferee. A logical view is that the slump consideration should be apportioned on the basis of fair market value of the assets and depreciation be allowed on such apportioned cost.
Value of Non Depreciable assets:
In case of non depreciable assets, the value of assets shall be taken at their Book Values.
Value of Assets in regard to which deduction has been provided u/s 35AD:
In such cases , the values taken shall be NIL.
This is because, since deduction in respect of such value has already been given earlier. Now adding the value of such asset for the computation of Net Worth shall give assessee the cascading benefits.
AFTER SLUMP SALE: Successor’s Position
(Author is a Licentiate Company Secretary and CA Final student of ICAI and she can be reached For any queries or suggestions, at firstname.lastname@example.org)
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