Slump sale under Indian Tax

Posted on 10 June 2022 Category : Indian Tax Terms

What is slump sale under Indian Tax

This post explains about slump sale.

Slump sale

• A slump sale is one of the methods available to effect transfer of a unit or division or undertaking from one taxpayer to another taxpayer.

• Chapter IV-E of the Income-tax Act, 1961 titled Computation of Total income – Capital gains‘ contains provisions for computation of capital gains in case of a slump sale‘.

• An essential requirement of slump sale is that the assets and liabilities of the undertaking/ unit are sold to buyer.

Taxability of Slump sale

Section 50B was introduced vide Finance Act, 1999. The Memorandum explaining the provisions of Finance Bill, 1999, to the extent relevant, is reproduced below:

“With a view to recognise demergers, slump sales and to rationalise the existing provisions of amalgamation, a number of amendments have been proposed on the basis of the following broad principles: …………

In the cases of slump sales, law should have clarity that the gains arising from such sales would be taxed under the head ?capital gains and there should be no ambiguity with regard to the mode of computation of such profits and gains”.

Overview of applicable sections

Section 2(42C) of the IT Act, 1961 defines Slump sale. Paraphrasing section 2(42C), the following cumulative conditions emerge before a transaction can qualify to be slump sale:

• There should be a transfer of one or more undertakings‘. The concept of undertaking as applicable to demerger is as equally applicable to the Slump sale.

• Transfer should be as a result of sale

• Transfer should be for a lump sum consideration

• Values should not be assigned to individual assets and liabilities in such sales

• Determination of value of an asset or liability solely for the purpose of payment of stamp duty, registration fees or other similar taxes or fees is not regarded as assignment of values to individual assets or liabilities.

Computation of capital gains

Sale consideration (minus) cost of acquisition/ improvement of undertaking/ division forms chargeable capital gains.

Cost of acquisition/Indexation benefit Net worth of the undertaking is regarded as the cost of acquisition/ improvement. Indexation benefit is not available

The information on slump sale is detailed above. Comment below your thoughts on slump sale

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