Slump Sale (Section 50B of Income Tax Act, 1961)
What is a Slump Sale?
According to Section 2(42C) of the Income Tax Act, 1961, a ‘slump sale’ refers to the transfer of one or more undertakings as a result of the sale for a lump sum consideration, without individual values being assigned to the assets and liabilities. This method is commonly used in mergers and acquisitions. It’s important to note that not all assets and liabilities need to be transferred; however, the assets and liabilities transferred must collectively form an undertaking.
Calculating Capital Gains in a Slump Sale
| PARTICULARS | RS. |
|---|---|
| FULL VALUE OF CONSIDERATION | XXX |
| (-) EXPENSES IN RELATION TO TRANSFER | XXX |
| NET CONSIDERATION | XXX |
| NET WORTH | XXX |
| CAPITAL GAIN OR (LOSS) | XXX |
Note:
- Indexation benefits are not available, even for long-term capital gains.
- Revaluation of assets is ignored.
- No business/professional profit arises even if stock is transferred along with the undertaking.
Determining Full Value of Consideration
As per Rule 11UAE of the Income Tax Act, 1961, FVOC is the higher of FMV-1 and FMV-2:
FMV-1: Book value of assets, open market value of jewellery and artistic work, FMV of shares and securities, and stamp duty on immovable property minus book value of liabilities.
FMV-2: Value of monetary and non-monetary consideration received, price of non-monetary consideration for movable property, and stamp duty value of immovable property received.
Net Worth Calculation
The net worth is computed as follows:
- Assets: Sum of written down value (WDV) of depreciable assets and book value of other assets.
- Liabilities: Subtract the book value of liabilities from the total assets.
If the net worth is negative, the cost of acquisition is taken as zero. For assets with a 100% deduction under Section 35AD and self-generated goodwill, their value is considered nil.
Tax Implications for the Seller
- Capital Gain/Loss: Gains or losses from a slump sale are considered capital gains or losses.
- Long-term Capital Gain (LTCG): If the undertaking is held for more than 36 months, LTCG is charged at 20% under Section 112.
- Short-term Capital Gain (STCG): If held for less than 36 months, STCG is taxed at normal rates.
- Exemptions: Possible under sections 54F and 54EC.
- Other Provisions: No tax if the undertaking is transferred after acquiring 100% shares of the transferee or through demerger. Set-off and carry-forward of losses apply, and Section 50C is not applicable.
Tax Implications for the Purchaser
- Income from Other Sources: As per Section 56(2)(x), the difference between FMV and actual consideration is taxable, but this does not apply to slump sales.
- Asset Recording: Assets received are recorded based on the valuer’s report, with differences noted as goodwill or capital reserve.
Reporting Requirements
- Chartered Accountant Report: Companies must furnish a report by a Chartered Accountant in Form 3CEA, certifying the net worth computation, on or before the due date for filing income tax returns as per Section 44AB.
TDS on Slump Sale
- No TDS deduction is required under Section 194IA for slump sales.
GST and Slump Sale
- A slump sale is considered a ‘supply’ under GST but is rated nil if transferred as a ‘going concern,’ meaning the business continues operations post-transfer.
Companies Act, 2013 Requirements
- Section 180: Board of directors must obtain a special resolution from shareholders if 20% or more of the undertaking’s value is being sold.
For more information and professional guidance on slump sales, please visit JD Shah Associates.
