Slump Sale and the Law
Slump Sale and the Law Slump Sale is a transfer of one, or more undertakings for a lump sum consideration, without the values being assigned to individual assets and liabilities. In other words, it is a process by which an acquirer purchases assets and liabilities of a company while buying an entire business of such a company.
Slump Sale remains undefined in the Companies Act, 2013 (Companies Act), however, it is defined under Section 2(42C) of the Income Tax Act, 1961 (Tax Act). An acquisition to qualify as a slump sale under the Tax Act, it must satisfy the following elements:
- One or more undertaking must be transferred by way of a sale;
- Lump sum consideration must be assigned to the whole of the sale; and
- Separate values to each of the assets or liabilities must not be assigned for the transfer.
Explanation 1 to Section 2(19AA) of the Tax Act states that an ‘undertaking’ shall include any part of an undertaking, or a unit or division of an undertaking or a business activity is taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Further, explanation to Section 180(1) of the Companies Act, 2013 states that an undertaking is one in which the investment of a company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year, or an undertaking which generates 20% of the total income of the company during the previous financial year.
LUMP SUM CONSIDERATION
For a transaction to be a slump sale, it is necessary that the assets and liabilities are transferred for a lump sum consideration, and no individual value is assigned to them. Explanation 2 to Section 2(42C) of the Tax Act state that valuation of individual assets and liabilities for payment of stamp duty, or registration fee is not regarded as the assignment of values to individual assets and liabilities. Thus, the assignment of values to individual assets and liabilities for payment of stamp duty does not take away the character of a slump sale from a transfer.
Transfer of assets without transfer of liabilities:
In case of assets of an undertaking being transferred without the transfer of liabilities, such a transfer would not be a slump sale. It is important that for a transfer to be a slump sale, the transfer of an undertaking be done as a whole.
If a transfer is a slump sale in accordance with the Tax Act, as discussed earlier, the transferor entity gets capital gains to benefit under Section 50B of the Tax Act, if a capital asset is sold. A capital asset is an asset sold for making a profit and is sold at a price greater than the purchase price. Section 50B of the Tax Act states that if the transferor transfers assets held for a period of 36 months prior to the transfer, the consideration is taxed as a long-term capital gain.
On the other hand, if the transferor held the assets for less than 36 months, the transfer is taxed as a short-term gain. Further, if a transfer is done to a subsidiary, in such case, no capital gains tax is chargeable on the transferor, is exempted under Section 47 of Tax Act. However, no such tax benefit is given if the transferor ceases to hold the whole of the subsidiary before the expiry of 8 years from the date of transfer. Slump Sale and the Law. PROCEDURE TO REGISTER A DESIGN
Although individual values cannot be assigned to the various assets for purposes of the transaction in a slump sale, appropriate values have to be considered for purposes of stamp duties. Under the Indian Stamp Act, 1899, stamp duty is payable in relation to the transfer of immovable properties. Generally, anything embedded in or attached to, the earth (such as land or buildings) is considered immovable property and any transfer of the same can attract significant stamp duties.
So, in any business transfer arrangement that seeks to transfer plant and machinery together with the land, and such plant and machinery is embedded in, or attached to, the earth, the same will be treated as immovable property and its transfer will be stamped accordingly.
A view has been taken that there is no sales tax payable on the transfer of a business as a going concern, including the transfer of a whole unit or division of any business under the value-added tax laws or the local sales tax laws. This is based on the rationale that the sale of an entire business cannot be equated with the sale of movable goods, the latter being subject to sales tax. The prevalent view in relation to sales tax in the case of a slump sale is that such sale would not attract sales tax since business is not considered goods under sales tax laws.
It is important that any undertaking, which is proposed to be transferred by way of slump sale, should be a ‘going concern’, meaning a concern, capable of continuing its business in future. In addition, it must be noted that for a slump sale, all assets and liabilities of an undertaking are transferred. Succinctly, to constitute a slump sale, there is a transfer of an undertaking on a going concern basis, with a lump sum consideration paid to the transferee without assignment of individual values to assets and liabilities.