SLUMP SALE AND ITS TAXABILITY

MEANING OF “SLUMP SALE” AND “UNDERTAKING”

The scheme of taxation of a “slump sale” is provided under section 2(42C) r. w. section 50B of the Act.

Section 2(42C) defines slump sale to mean a transfer of one or more undertakings for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sales. The term “undertaking” is defined in Explanation 1 to clause (19AA) of section 2 of the Act.

The Finance Act 2021, has amended the definition of “slump sale” to provide that all types of ‘transfer’ as defined under section 2(47) shall be included within the scope of slump sale. The effect of this amendment is that all types of slump transfers, including slump exchange, are now governed by section 50B of the Act. By virtue of this amendment the decision of the Bombay High Court in case of Bharat Bijilee Ltd 46 taxmann.com 257(Bom) got nullified.

However, the conclusive words “in such sales” were inadvertently retained in the definition of slump sale u/s. 2(42C). Therefore, Finance Act, 2022 has substituted the word “sales” with the word “transfer” retrospectively w.e.f April 1, 2021.

The term “undertaking” has been defined to include a business activity and it also includes part of the undertaking. Any bunch of assets and liabilities not constituting a business activity shall not satisfy the definition of “undertaking”.

COMPUTATION OF CAPITAL GAINS ARISING ON SLUMP SALE U/S 50B OF THE ACT

The computation of capital gains under a slump sale is made in accordance with the provisions of section 50B of the Act. Since slump sale is governed by a ‘special provision’, this section overrides all other provisions of the Act. The section provides that the profits and gains arising on transfer of an undertaking
under a “slump sale” would be chargeable as capital gains arising from transfer of long term capital assets in the year in which such transfer takes place. Further, until AY 2020-21 the capital gains arising under a slump sale were computed as the difference between lump sum consideration received on transfer
and the cost of acquisition (net worth) of the undertaking.

The Finance Act, 2021 has amended the provisions to state that the fair market value of the capital asset (i.e. undertaking or division transferred), shall be deemed to be the full value of consideration received or accruing as a result of such transfer. Further, it is has been stated that the method to determine
the fair market value of the capital asset transferred under a slump sale would be as per the prescribed Rule 11UAE (Refer Annexure A below).

Further, a new clause in Explanation 2 has been inserted to provide that the value of capital asset being goodwill, which has not been acquired by the assessee by purchase from previous owner and capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, shall be taken as nil while computing net worth.

Some of the vital aspects of section 50B may be summarized are as under:-

Particulars	Gist of the provision
Cost of acquisition	The net-worth of the undertaking or division transferred is deemed to be the cost of acquisition
Period of holding	Undertaking transferred under a slump sale if owned and held for not more than 36 months on the date of transfer, is regarded as short term capital asset
Benefit of Indexation	The indexation benefit provided in second proviso to section 48 is not available while computing capital gains.
Net-worth	Aggregate value of the total asset of the undertaking as reduced by the liabilities of such undertaking as appearing in the books of account
Aggregate value of total assets	Depreciable assets- the WDV of the block as determined u/s 43(6)(c)(i)(C); Goodwill (other than purchased goodwill) – Nil Capital assets- where entire expenditure is allowed u/s 35AD – Nil; and Other assets- book value of such assets
Revaluation of assets	Ignored for the purposes of computing the net-worth
Full Value of Consideration	Fair Market Value (‘FMV’) of the undertaking calculated in the manner as prescribed by Rule 11UAE (Refer Annexure A below)
Reporting requirement	Report of accountant to be furnished in form 3CEA alongwith the Return of Income within the date specified in section 44AB of the Act, indicating and certifying the amount of net worth of undertaking or division has been correctly derived in accordance with the provisions of the section