Finance Act, 2021 made several significant amendments in many fronts. One of such amendment is with respect to scope of slump sale and computation of capital gains in case of slump sale with effect from assessment year 2021-22 (FY 2020-21). Section 50B of Income Tax Act, 1961 provides the special provision for computation of capital gains in case of slump sale.
Taxability of Slump Sales:
Any profits or gains arising from slump sale are chargeable to income-tax as capital gains of the previous year in which slump sale took place.
Existing definition of Slump Sales:
Section 2(42C) of Income Tax Act, 1961 defines “slump sale” to mean the transfer of one or more undertakings as a result of sale for lump sum consideration without value being assigned to individual assets and liabilities in such sales.
Thus, there are three main ingredients to qualify as slump sale:
It has been clarified in explanation 2 to section 2(42C) that, the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.
The term undertaking has been defined in explanation to section 2(19AA) as under:
“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.
In the case of CIT v. Max India Ltd.  319 ITR 68 (Punj. &Har.), it was held by the Punjab & Haryana High Court that it is not necessary that all the assets are transferred for a transaction to qualify as a slump sale. However, it is essential that the assets being transferred are an undertaking in itself, and can function without any interruption.
Thus, in order to constitute a slump sale, the assets/liabilities that are transferred should be able to form an undertaking or part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole by themselves.
Amendment in the definition of Slump Sale by Finance Act 2021 (Applicable retrospectively from Financial Year 2020-21):
As section 2(42C) defined slump sales to mean the transfer of one or more undertakings as a result of sale, some courts have interpreted that other means of transfer given under section 2(47) in relation to capital asset like exchange, relinquishment etc. are excluded from the definition of slump sale.
Thus, in order to make the intention of law clear, the recently enacted Finance Act 2021 has amended section 2(42C) to expand the scope of the term “slump sale” so that all types of “transfer” as defined in 2(47) are included within its scope.
Accordingly in section 2(42C), for the words “undertaking as a result of the sale”, the words “undertaking, by any means,” has been substituted by clause 3(v) of the Finance Act, 2021.
Further to make the intention clear, an explanation 3 has been inserted in section 2(42C) by clause 3(v) of the Finance Act, 2021, to clarify that for the purpose of slump sale, “transfer” shall have the meaning assigned to it in section 2(47).
It may be noted that the said amendment is effective from 1st April 2021, and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.
Existing provision of calculation of Capital Gains in case of Slump Sale:
As per pre-amended provision of section 50B(2) of Income Tax Act, 1961, for the purpose of calculating capital gain in case of slump sale, the “net worth” of the undertaking or the division is deemed to be the cost of acquisition and cost of improvement for the purpose of section 48 and 49 with no indexation benefits.
However, in the pre-amended section 50B, there is no specific provision for deeming fair market value as sale consideration for the purpose of computation of capital gains on such slump sale.
|Method of Computation of Capital Gain in case of Slump Sales|
|Less: Expenses in connection with transfer||xxxxxx|
|Less: Net Worth of the undertaking (Without any Indexation)||xxxxxx|
|Capital Gain (Short Term/ Long Term)||xxxxxx|
The Capital Gain so computed 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 will be “Long Term” and if it is held for less than 36 months, the resulting capital gain shall be “Short Term”.
Amendment in the method of calculation of such Capital Gain by Finance Act 2021 (Applicable retrospectively from Financial Year 2020-21):
Clause 21 of The Finance Act, 2021 has substituted section 50B(2) of the Income Tax Act, 1961 as under:
‘(2) In relation to capital assets being an undertaking or division transferred by way of such slump sale,—
(i) the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48;
(ii) Fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.’;
Thus the “Fair Market Value” of the capital assets as on the date of transfer will be considered as sale consideration for the purpose of charging capital gain on transfer of such capital assets on slump sale.
However, the manner of calculating such fair market value will be prescribed by the government in time to come, but said amendment may certainly lead to higher tax liability in cases where the transfer of capital assets is at book value or lower than fair market value.
Although the Income Tax Act has been amended to consider the fair market value of capital assets as sale consideration, but there is no corresponding amendment in section 48(2) with respect to allowability of benefit of indexation as per second proviso to section 48 while computing net worth for those undertaking which are held for more than 36 months.
Computation of Net Worth of the undertaking:
As per Explanation 1 to section 50B, the formula for calculating net worth is as under:
Net Worth of the undertaking = aggregate value of total assets (-) value of liabilities
Explanation 2 to section 50B provides for the method of computation of “Net Worth”, as under:
|Computation of Net Worth of the undertaking transferred under slump sale|
|Type of assets||Value for computing net worth|
|In case of depreciable assets||written down value of the block of assets|
|In case of self generated goodwill
(Inserted by Finance Act 2021)
|in case of capital assets in respect of which the 100% deduction is allowed u/s 35AD||Nil|
|In case of other assets||book value of such assets|
Note (1): Finance Act, 2021 inserted a new clause to provide that the value of any self-generated goodwill of a business or profession will be considered as “Nil”, while computing the net worth of said undertaking or division transferred as a result of slump sale.
Note (2): any change in the value of assets on account of revaluation of assets is to be ignored for the purposes of computing the net worth.
CA Certificate certifying computation of “Net Worth” required:
In case of slump sale, a certificate in Form-3CEA certifying the correctness of the net worth of the undertaking by a practicing chartered accountant has to be furnished.
In past, slump sale was considered as one of the most preferred ways of carrying out mergers & acquisitions deal due to the well-defined and less complex tax implications. With the enactment of the Finance Act, 2021, although fair market value of capital assets has to be considered for the purpose of calculating capital gain on such slump sales, however there is no amendment with respect to allowability of indexation benefit for calculating net worth in case of slump sales where the undertaking is held for more than 36 months.
It may be noted that the above amendments in slump sale provisions are effective from 1st April 2021, and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.
(Disclaimer: This write up is based on the understanding and interpretation of author and the same is not intended to be a professional advice.)
[The author is a Chartered Accountant and can also be reached at [email protected]]