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Slump Sale and Related Income Tax Provisions

Admin
Anjali Goyal
Introduction: In the process of integration of the Indian economy with the world economy, a number
of companies are going for restructuring to gain benefits from large scale operations and focus upon
its core competencies. In the restructuring exercise, certain companies sell off their unprofitable
business activities and the business activity as a whole is sold along with assets and liabilities. The
income from restructuring process was used to compute as capital gains and business income in
respect of each asset. In this view, the concept of Slump sale has been introduced to compute income with respect
to such division or undertaking as a whole.
What is Slump Sale?
Slump Sale is a transfer of one or more undertakings for a lumpsum consideration, without values being assigned to
the individual assets & liabilities.
There should necessary be a sale. Sale includes transfer of an asset from one person to another for some
consideration, where consideration can be in kind or cash. Literally, consideration can be even of Rs.1 to
specify such transfer as a sale.
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.
Lumpsum consideration means consideration not being in instalments or any other basis. It should be one
time.
Also, lumpsum amount is not decided on the basis of assigning values to each asset & liability. The overall
idea is taken as to Net Worth of the transferred undertaking.But assignment of values can be done for other
purposes: payment of stamp fees
registration fees
any other taxes, etc
The values of property may be specified in the agreement but it should be proved that such assignment of values
was done for other purposes and not to compute value for transfer of such assets.
Is it necessary that undertaking should be a slump in order to effect a slump sale ?
Slump means dropping or falling heavily of something. It can be related to an undertaking that has suddenly
declined or deteriorated or sinked heavily, being operational or financial loss.
The intention of the law maker was to introduce the concept of slump sale for those undertakings whose assets &
liabilities has lost its value in the market. In these cases, assignment is not done for each asset or liability but as a
whole i.e. raddi ke bhaw mein bechna.
But since there is no such specific condition has been stated in the law for undertaking to be necessarily a slump,

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the process of slump sale can be used even for transfer of profit-making company.
Therefore, it is not necessary that undertaking should be a slump to effect slump sale.
Transfer of assets without transfer of liabilities:
Slump sale do not apply where assets of an undertaking are transferred without transfer of liabilities. The base of
Slump sale is the transfer of an undertaking as a whole . In a case where liabilities has not been transferred, it
cannot be stated that undertaking has been transferred as a whole and therby provisions of slump sale shall not be
applied.
Unabsorbed losses and depreciation:
The unabsorbed losses and depreciation with respect to transferred undertaking shall be allowed to carry forward in
future years to the transferor.
COMPUTATION OF CAPITAL GAINS:
Net Profit shall be ,
Slump Sale consideration
Less: Net Worth of the undertaking or division
Taxability: The net amount of profit out of transfer with respect to slump sale shall be taxable under the head
Capital Gains. No income shall be taxable under income from business if the transfer has duly complied with the
conditions being a slump sale.
Even stock in trade of such undertaking shall not be taxable under income from business.
Taxable Year: The taxable year shall be the effective year, where effective year is the year in which transfer of
undertaking has been legally made effective. The taxability shall not be dependent upon the date of actual
possession of assets or actual transfer.
Effective date shall be taken as the date of agreement or effective date, if any specified therein.
Nature of Capital Gains: The nature of Capital Gains (whether short term or long term) shall be dependent upon the
period of holding of the undertaking ,where such undertaking shall become long term if it has been held for more than
36 months. The nature or period of holding of assets of such undertaking shall not be considered to determine the
nature of Capital Gains.
Even if all assets are short term in nature and undertaking is long term in nature, the transfer of assets shall be held
as long term only & taxable as Long term Capital Gains.
COMPUTATION OF NET WORTH:
No Cost of acquisition or Cost of improvement:
No actual cost of acquisition or cost of improvement shall be taken for the computation of Net worth. Net worth shall
be taken on the basis of :
Book values of assets & liabilities
as on the date of transfer.
No Indexation:

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No indexation is required since even cost of acquisition or improvement shall not been considered for the
computation of Net worth.
No Revaluation:
Revaluation of assets shall not be considered while computing the Net Worth.
What if revaluation of assets has been done in current or past years?
There shall not be made any change to the value of such assets. Revaluation is not allowed as on the date of
transfer but earlier revaluation wont make any difference. Simply, existing book values shall be picked for
computation of Net Worth.
Whether revaluation can be done for assignment of value to the assets for other purposes?
Yes, revaluation can be done for other purposes (other than purpose of sale).
But no revaluation shall be done for computing Net Worth.
Value of Depreciable assets:
In case of depreciable assets, the written down value of such assets shall be computed as per Sec 43(6)(c)(i)(C),
which computes the WDV in the following way:
Actual cost of the assets falling within the block transferred by way of slump sale as reduced by
Less: depreciation actually allowed upto AY 1987-88 in respect of the asset transferred
Less: depreciation that would have been allowable for AY 1988-89 and future AYs as if the asset was the only asset
in the block of assets.
( However, the above reduction shall be limited to the written down value of Block of assets)
Note :
The law does not prescribe as to what will be the actual cost of the assets in the hands of the transferee. A logical
view is that the slump consideration should be apportioned on the basis of fair market value of the assets and
depreciation be allowed on such apportioned cost.
Value of Non Depreciable assets:
In case of non depreciable assets, the value of assets shall be taken at their Book Values.
Value of Assets in regard to which deduction has been provided u/s 35AD:
In such cases , the values taken shall be NIL.
This is because, since deduction in respect of such value has already been given earlier. Now adding the value of
such asset for the computation of Net Worth shall give assessee the cascading benefits.
AFTER SLUMP SALE: Successors Position
In the absence of any specific provisions for computation of WDV of assets acquired upon slump sale in the
books of the transferee, a view could be taken that apportionment of slump consideration on the basis of fair
values of various assets is possible.
Where claims for export incentives and cash assistance formed part of assets of the undertaking acquired by

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way of slump sale, and the amount of the claim was received by the transferee, the amount so received was
held to be capital receipts. This was because the claims for export incentives and cash assistance were
actionable claims purchased by the assessee for a consideration.
Where the transferor is denied deduction u/s.43B on the ground of non-payment of dues, and the dues are
paid by the successor, the benefit of deduction u/s.43B should be available even to the transferee.
(Author is a Licentiate Company Secretary and CA Final student of ICAI and she can be reached For any queries or
suggestions, at anjaligoyal0602@gmail.com)

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