SLUMP SALE BY ER. AVINASH KULKARNI

Saturday Brain Storming Thought (189) 23/09/2023

SLUMP SALE

When a firm sells a part or whole of its property to a another entity for a lump sump amount, it is known as Slump Sale

In a Slump Sale process, the ownership of assets, debts, intellectual property, contracts, staff and debtors are transferred to the buyer

The seller is liable to pay taxes, if it realises a profit from the sale under section 50B(1) of the income tax act

Income tax on Slump Sale

Slump Sale is recognised as a lawful activity under section 2(42C) of the income tax act 1961

1) the capital gain of a slump sale can be calculated by deducting the total acquisition cost from the net value of the business

2) all the transactions done under slump sale are considered as capital gain and are taxed as per provisions of section 50B of the income tax act 1961

3) in case, the undertaking is not retained for a period of fewer than three years, the gains from the assets shall be categorised under short term capital gains and will be taxed at the rate of 30%

4) if time period is equal to or more than 3 years, 20% corporate tax in imposed on the gain

5) the transaction listed under slump sale are exempted from the GST regulations

Basic parameters of Slump Sale

1) Acquisition

The acquier gets the whole business in single deal

2) Valuation

During a slump sale deal, the valuation is done for the whole business or section of the business that is acquired

3) Rights and Liabilities

The acquier becomes the sole owner of the rights and liabilities associated with the acquired assets

4) Tax breaks

The new owner of the business becomes the legal owner of all types of all types of tax breaks and the advantages enjoyed by the company

5) GST applicability

GST is not applicable to this sale if the business will be operational in its parent industry even after the acquisition

6) Capital Gains

Ownership of business more than three years – 20% gain tax, if less than three years – 30% gain tax

7) Stamp Duty

All the provisions enlisted under section 50C of the internal revenue code and stamp duty are not applicable

8) Gift Tax

Any obligation or provision under section 56(2) is not applicable to slump sale transactions

Key Takeaways of Slump Sale

1) Slump Sale is lawful under section 2(42C) of the income tax act 1961

2) it is deal for big business eyeing to expand but does not want to be involved in lengthy tax implications

3) Transactions made under slump sale are considered as capital gain and are taxed as per provisions of section 50B of the income tax act 1961

Slump Sale meaning

A Slump Sale is a process of transferring assets and liabilities of a business against a lump sump amount

Objectives of Slump Sale

The objective of slump sale is to realise tax gains and regulatory benefits while strengthening the business’s performance

Slump Sale between related parties

A slump sale means the transfer of an undertaking by way of a sale for a lump sump amount consideration on a going concern basis, and as is where basis with no values to the individual assets and liabilities being assigned

Employees in Slump Sale

In a Slump Sale acquisition, the employees are transferred without any break in service and acquier assumes obligations in respect of all accurued employees benefits, such as gratuity, pensions, leave and other rights for the period of employment with the target or transferor entity

Losses transfer in Slump Sale

Transferor shall be allowed to carry forward the unabsorbed losses and depreciation with respect to transferred undertaking in future years

In case of Slump Sale, the transferee entity will not get benefits of tax losses of the transferor

Undertaking in Slump Sale

It shall mean an undertaking in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year

Net Worth in Slump Sale (section 2(57))

It means tfe aggregate value of the following terms as per the audited balance sheet

Add

Paid of share capital
All reserves created out of profit
Securities premium account
Credit balance of P&L account

Less

Accumulated losses
Deferred & Misc expenditures not written off
Debit balance of P&L account

It excludes revaluation reserve, write back of depreciation and amalgamation

Sections primarily dealing with Slump Sale

1) Section 180

Restrictions on powers of Board

2) Section 232

Merger and amalgamation of companies

3) Section 233

Merger and amalgamation of certain companies (Fast Track Merger)

4) Section 180(1)

The Board of Directors of a company shall not sell, lease or otherwise dispose of

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 such undertakings

Unless consent from the members is obtained by way of passing special resolution in the general meeting

Net Worth in Slump Sale

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

2) in case of depreciable assets under the income tax act, thee Written Down Value of such assets as per the act shall be considered

3) in case of assets on which 100% deduction has been allowed under section 35AD (specified business), the value of such assets will not be considered

4) in case of any other asset, value as appearing in the books of accounts shall be considered

5) 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

6) transfer asa going concern would roughly mean that the current business asa whole will be carried out by a different person or that there isa change in the ownership of the business

There will be no indexation benefit available in the computation of the capital gains in Slump Sale

TDS applicability in Slump Sale

No requirement of deducting TDS shall arise under section 194/A in case of Slump Sale

Stamp duty in Slump Sale

The Stamp Duty and registration charges are typically calculated as a percentage of the sale consideration or the market value of the assets transferred, whichever is higher

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