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Slump Sale Special Provision Under Section 50B for Computation of Capital Gains on Slump Sale
The world of business is no longer the same in the modern era. Rather than concentrating their attention on just one aspect, the majority of medium-sized and larger organisations are now diverse. They run several companies in various sectors of the market. As a result, a single organisation may have distinct divisions or projects. Each of them has its own set of assets and liabilities and a distinct line of business. At some point, the company may decide to sell off a portion of the project or the entire enterprise when the necessity arises. This is referred to as a slump sale. In this guide, we will cover everything you need to know about a slump sale in India and its treatment from a tax perspective.
Contents :-
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What is a Slump Sale under Income Tax?
For income tax purposes, a sale of an enterprise without taking into account the individual valuations of the assets or liabilities within the undertaking would be regarded as a slump sale. It might be significant to point out that figuring out individual values might only be relevant when figuring out stamp duty or other comparable taxes. The gain or loss out of this transaction comes under the head of Capital Gain/Loss under the Income Tax Act. It is either long-term or short-term, considering the period for which the business held the undertaking. The capital gain or loss is long-term for undertakings held for more than 36 months and short-term for those held for less than 36 months. Additionally, the indexation benefit is not available in the computation of the capital gains.
What is Section 50B of the Income Tax Act?
Section 50B sets special provisions to calculate capital gain or loss for a slump sale. In this context, it is important to break down the real meaning of a slump sale. It means the sale of the entire business as a going entity, with the entire assets and liabilities in one go. It involves the transfer of an undertaking for a lump sum consideration instead of assigning value for all individual assets. Here are a few notable points under Section 50B of the Income Tax Act:
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An "undertaking" is any component of a unit, division, or entire business activity; nonetheless, it excludes individual assets, liabilities, or any combination of them that does not represent a business activity.
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A lump sale is the sale of a venture as a continuing concern for a fixed amount of money, without taking into account the separate values of the endeavour. Slump sales are not violated, nevertheless, if the individual values of the assets are used to determine the amount of stamp duty, registration fees, taxes, etc.
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A chartered accountant's report in form No. 3CEA will be necessary for the Slump Sale.
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The exclusive transfer of assets or liabilities is not involved.
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Court approval is not needed for such transactions.
Calculation of Capital Gain for a Slump Sale Under Section 50B
Capital gain for a slump sale under Section 50B is calculated as follows:
Particular | Amount |
|---|---|
Full value of lump sum consideration for the undertaking | XXX |
Less Expenditure related to the transfer of the undertaking | (XXX) |
Less Net worth of the undertaking (cost of acquisition and improvement) | (XXX) |
Capital Gain/loss | XXX |
The Net Worth of the undertaking is calculated as follows:
Particular | Amount |
|---|---|
Aggregate value of total assets of the undertaking:
Depreciable assets
Capital assets in respect of which whole expenditure claimed under section 35AD
In the case of other assets | WDV of block
Nil
Book value of assets |
Less Value of liabilities | Book value |
Net worth of the undertaking | XXX |
Tax Rates Applicable for a Slump Sale
The following tax rates are applicable for a slump sale:
Long-Term Capital Gain (LTCG)- 20%
Short-Term Capital Gain (STCG)- Normal rates of tax
Difference Between a Slump Sale and an Itemised Sale
A "slump sale" is the selling of a company as a continuing concern without placing a specific value on its assets and liabilities. On the other hand, an itemised sale is the selling of one or more company assets without necessarily culminating in the sale of the business. It was especially evident in the instance of loss-making endeavours, where slump sale transactions were covered up as itemised sales to avoid the release of several decisions. The following table summarises the distinction between an itemised sale and a slump sale:
Slump Sale | Itemised Sale |
|---|---|
No individual values assigned to assets | Individual values assigned to assets |
Sale of all assets and liabilities | One or more assets can be sold |
Business sold as a going concern | Business might not be transferred as a going concern |
Results in the sale of assets and mandatorily in the sale of business | This may refer to the mere sale of asset(s) and not a sale of business |
When is a Sale Not Regarded as a Slump Sale
A sale is not regarded as a slump sale in the following situations:
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When the necessary elements of a valid contract, such as incapacity to engage in a contract or free assent, are unavailable
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When there is no consideration for the sale
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When the business is sold in accordance with a court order rather than a contract between the parties
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A transaction isn't a slump sale if it can't be considered a legitimate sale.
Other Noteworthy Points
In addition to the previously mentioned effects, a slump sale may have other ones. Notable are the following points:
If someone acquires property for less than fair market value (FMV) and real consideration paid for that property, the difference will be taxable under the heading "Income from Other Sources" under certain restrictions.
Nevertheless, this clause will not be applicable if the entire undertaking—including the immovable property—is transferred as part of a slump sale. It is not required to transfer every asset in order to be eligible for a slump sale.
On the other hand, the transferred assets ought to be able to stand alone as an undertaking. A slump sale requires cash as payment; otherwise, the transaction would be referred to as an "exchange" rather than a "sale." Examples of acceptable forms of payment for a slump sale include shares, bonds, debentures, etc.
Conclusion
A slump sale entails unusual circumstances where the entire business undertaking is transferred in one go, along with all its assets and liabilities. The tax treatment for this transaction has specific nuances a business owner must understand and comply with. This guidance note on slump sales offers a complete overview of the process. If you still have doubts, you can consult an expert to learn more about income tax on a slump sale basis.
Frequently asked questions
Q
What is a slump sale example in India?
A
Selling a portion or all of a company to a different company for a one-time payment is known as a lump sale. In a slump sale, the buyer inherits from the seller all of the seller's obligations, contracts, employees, and intellectual property.
Q
What does the transfer of all assets of an enterprise mean?
A
A tax audit report should be filed on or before the deadline for filing the income return. If the taxpayer has engaged in an international transaction, it is November 30 of the next year; for other taxpayers, it is September 30 of the following year. The year that follows is the year of assessment.
Q
Is exchange also regarded as a slump sale?
A
Any deal with cash as payment will be regarded as a slump sale. Capital asset exchanges are not considered slump sales.
Q
What is a slump sale agreement?
A
A Slump Sale agreement is signed by a buyer who plans to buy a business venture from a seller who owns one or more of them. Buyers and sellers must adhere to the slump sale agreement format to ensure the legitimacy of the transaction.
Q
What is stamp duty on a slump sale?
A
Stamp duty on slump sales, also known as asset sales, varies from state to state and ranges from 5% to 10% for immovable property and 2% to 3% for moveable goods.
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What is Form 3CEA?
A
Form No. 3CEA is a report required by the CA in the event of a slump sale under Section 50B. DSC is required while submitting this online form. The form must be filed with the income return, and the filing deadline is the same as the one that applies to the assessee for the income tax return as stated in section 139(1).
Q
In the event of a slump sale, is it possible for the transferee to carry forward the total amount of business losses?
A
In contrast to demergers, the transferee of an amalgamation cannot carry forward any accrued losses.
Prachi Jain
Chartered Accountant
Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.
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