A slump sale for income tax purposes would be one where an undertaking is sold without considering the individual values of the assets or liabilities contained within the undertaking.

Tax Effect in Slump Sale

The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act. The computation has been prescribed as follows:

Particulars Rs
Full Value of Consideration XXX
(-) Expenses for transfer XXX
Net Consideration XXX
(-) Cost of Acquisition/ Net Worth XXX
Capital Gain/(Loss) XXX

The capital gain or loss as computed above will be either long term or short-term depending upon the period for which the undertaking is held.

If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term and if it is held for less than 36 months, the resulting capital gain or loss shall be short term.

Further, there will be no indexation benefit available in the computation of the capital gains.

 Points to be considered while computing Net Worth of an Entity:

  • The value of net worth should not take into account any change in the value of the asset or liability resulting from revaluation of such asset 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.

Slump Sale and Its Taxation

  • 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.

Tax Rate for Capital Gain:

  • Short Term Capital Gain: Normal Rates of taxation
  • Long Term Capital Gain: 20%

Reporting Formality: The Company has to furnish a report by a Chartered Accountant as per Form 3CEA.

Taxation under GST: The basis of taxation under the Goods and Services Tax Act revolves around ‘supply’. A slump sale would also be a supply and hence fall under the purview of GST. The supply would be in the nature of ‘transfer as a going concern’ and such a transfer attracts nil rate of GST.

Companies Act implications

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 a special resolution of the members shall be required.

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 undertaking.

Author Bio

Qualification: CA in Practice
Company: Oswal & Heda Chartered Accountants
Location: Pune, Maharashtra, India
Member Since: 27 Mar 2021 | Total Posts: 18
Anubhav has over 5 years of professional experience in handling Audit & Assurance of various entities, Direct & Indirect Tax Advisory services, Project financing, Litigation Services, RERA, Preparation and Finalization of Income Tax returns, Monthly Compliance which includes GST, TDS and oth View Full Profile

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February 2024