Slump Sale (Section 50B of Income Tax Act, 1961)

-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.

-Slump sale is one of the most preferred ways of carrying out mergers & acquisitions deals.

-Transfer of all assets and liabilities is not necessary in slump sale. However, the assets and liabilities that are being transferred should be able to form an undertaking.

1. Computation of Capital Gain under Slump Sale:  

• Indexation benefit would not be available in the computation of the capital gain (not even in case of LTCG)
• Revaluation of asset, if any shall be ignored
• No profit under business/profession shall arise even if stock is transferred along with undertaking.

2. Computation of Full value of consideration (As per rule 11UAE of Income Tax Act, 1961): FVOC shall be calculated as higher of FMV-1 and FMV-2

• FMV-1: It shall be calculated as:

•  FMV-2: It shall be calculated as:

3. Computation of Net Worth of undertaking (As per rule 11UAE of Income Tax Act, 1961):

• If Net worth comes to be negative then cost of acquisition shall be taken as zero.
• In case of assets on which 100% deduction has been taken u/s 35AD (specified business) and self-generated goodwill, the value of assets shall be taken as nil.

4. Tax Implication for Seller:

• The gain or loss resulting out of a slump sale shall be a capital gain/loss under the Income Tax Act.
• If the undertaking is held for more than 36 months, the resulting capital gain/loss shall be long-termand if it is held for less than 36 months, the resulting capital gain/loss shall be short term.
• Short Term Capital Gain chargeable as per normal rate of taxation
• Long Term Capital Gain chargeable u/s 112 @ 20%
• Exemption from LTCG can be availed subject to section 54F and 54EC of Income Tax Act.
• No tax shall be applicable in case the undertaking is transferred after acquiring 100% shares of transferee or transferred by way of demerger.
• Provision of set off and carry forward of losses shall apply.
• Section 50C also not applicable in case slump sale.

5. Tax Implication for Purchaser:

• As per section 56(2)(x) where a person receives immovable property for inadequate consideration, the difference between FMV and actual consideration is chargeable under the head ‘income from other sources’.
• However, section 56(2)(x) shall not be applicable as slump sale consist of transfer of undertaking, hence no tax in hands of purchaser even if value of property received against inadequate consideration.
• The recording of assets received shall be done as per value determined by registered valuer and difference shall be recorded as goodwill or capital reserve as the case may be. (Other views are also available)

6. Reporting by CA

• The Company has to furnish a report by a Chartered Accountant as per Form 3CEA on or before due date referred in section 44AB ie. one month prior to due date of filing ITR indicating the computation of net worth and certifying that the computation of net worth is correct.

7. TDS on slump sale

• No requirement of deducting TDS shall arise under section 194IA in case of slump sale.

8. Taxation under GST:

• A slump sale would also be a supply under GST. However, such supply would be in the nature of ‘transfer as a going concern’ and such a transfer attracts nil rate of GST.
• Transfer as a going concern solely means that the current business as a whole is transferred and will be carried on by the purchaser.

9. Requirement under Companies Act, 2013

• Section 180 of the Act imposes restrictions on the powers of board of directors to sell, lease or dispose the whole or substantially the whole of undertaking.
• Therefore, in case of slump sale section 180 requires special resolution to be passed at the general meeting of shareholders.
• Here, substantially the whole of undertaking means 20% or more of the value of undertaking is sold by the company.