Section 2(42C) Income Tax: Slump Sale – Meaning & Tax Treatment

Slump sale basically means 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. The evolution of phrase ‘slump sale’ under Income Tax relates to frequent mergers, demergers and other forms of restructuring in the corporate world. Before AY 2000-01, capital gains made on sale of an ‘undertaking’ were chargeable to tax under Section 45 of the Income-tax. Though it was difficult to determine the cost of acquisition / improvement and date of acquisition of the ‘undertaking’, as required u/s 48, however gain on sale of undertaking was chargeable to tax under the head capital gains. From AY 2000-01 onwards, new Section 50B of Income Tax was introduced which lays down special provisions for computation of capital gains in the case of a slump sale.

Definition of ‘Slump Sale’: Section 2(42C) Income Tax

As per Section 2(42C) of Income Tax Act, 1961, unless the context otherwise requires, the term “slump sale” means the transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer.

Explanations:

1. For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).

2. For the removal of doubts, it is hereby declared 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.

3. For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47).

Computation of Capital Gains from Slump Sale

Special provisions relating to computation of capital gains from ‘Slump Sale’ u/s 50B of the Income Tax Act, 1961, are as under:

(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place:

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(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 manner48, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form a report of an accountant as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

Explanation 1.- For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account:

Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

Explanation 2.- For computing the net worth, the aggregate value of total assets shall be,-

(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;

(aa) in the case of capital asset being goodwill of a business or profession, which has not been acquired by the assessee by purchase from a previous owner, nil.

Form of report of an Accountant u/s 50B(3)

In relation to form of report of an accountant relating slump sale transaction, the Rule 6H of Income Tax Rules, 1962 provides as under:

The report of an accountant which is required to be furnished by every assessee along with the return of income, in case of slump sale, under sub-section (3) of section 50B shall be in Form No. 3CEA.