A slump sale is a mode of transferring a business as a whole for a lump sum consideration without assigning values to individual assets and liabilities. The term “slump” refers to the transfer of the entire business undertaking in a lump sum manner. Here’s a detailed explanation of slump sale with three illustrations containing provisions.
Provisions of Slump Sale:
Transfer of Business:
- The seller transfers the entire business undertaking to the buyer.
Relief under Section 89A – In Respect of Salary, etc., Paid in Arrears or in Advance
- The consideration for the slump sale is a lump sum amount agreed upon between the buyer and the seller.
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- Assets and Liabilities:
- Individual values are not assigned to the assets and liabilities being transferred.
- Tax Implications:
- The seller is liable to pay capital gains tax on the profit arising from the slump sale.
- ABC Ltd decides to sell its manufacturing unit, including land, buildings, machinery, and liabilities, to XYZ Ltd.
How to read Notice under section 139(9), 142(1), 148, 153C
- ABC Ltd and XYZ Ltd agree on a lump sum consideration for the entire manufacturing unit without assigning values to individual assets and liabilities.
- ABC Ltd will be liable to pay capital gains tax on the profit arising from the slump sale.
- Mr. A owns and operates a retail business. He decides to sell the entire business to Mr. B.
- Mr. A and Mr. B agree on a lump sum amount for the entire business, including assets, liabilities, and goodwill.
- Mr. A will incur capital gains tax on the profit from the slump sale.
- Company X decides to divest its software development division and sell it to Company Y.
- The entire software development division, along with its assets, liabilities, and workforce, is transferred to Company Y for a lump sum consideration.
- Company X will be liable for capital gains tax on the profit generated from the slump sale.
Deductions under Section 80C to 80U
Illustrative example of a slump sale between a holding company and its subsidiary company.
- ABC Finance Corp., a finance company, has a subsidiary.
- The subsidiary transfers a certain amount to ABC Finance Corp. under a scheme of arrangement sanctioned by the High Court. This arrangement falls under the provisions of Sections 391 to 394 of the Companies Act, 2013.
Question: Can this scheme of arrangement be treated as a slump sale to attract capital gains provisions?
Understanding Slump Sale:
- In simple terms, a slump sale involves the transfer of a whole or part of a business concern as a going concern, including all assets and liabilities.
- It’s like selling the entire business “lock, stock, and barrel” without assigning individual values to assets and liabilities.
- The term “undertaking” includes any part of a business, a unit, or a division taken as a whole, but not individual assets or liabilities.
Quick Test for Slump Sale:
- The business is sold off as a whole and as a going concern.
- The sale is for a lump sum consideration.
- The materials available do not indicate item-wise value of the assets transferred.
Taxability of Gains Arising on Slump Sale:
- Section 50B of the Income-tax Act, 1961 provides the mechanism for computing capital gains arising from a slump sale.
- Since slump sale is governed by a special provision, Section 50B overrides other provisions of the Act.
- Capital gains arising from the transfer of an undertaking are deemed to be long-term capital gains.
- ABC Finance Corp. transfers its entire business (including assets and liabilities) to another company.
- The consideration received for this transfer constitutes a lump sum.
- Since individual values are not assigned to assets and liabilities, it qualifies as a slump sale.
- Capital gains arising from this transaction will be computed as per Section 50B.
Remember, this example is for illustrative purposes, and specific cases may vary. Always consult official sources or tax professionals for accurate advice. 📊💼
- Valuation: In a slump sale, the valuation is generally negotiated between the parties involved, and it’s crucial to ensure that the consideration reflects the fair market value of the business.
- Due Diligence: Both the buyer and the seller should conduct thorough due diligence to understand the assets and liabilities being transferred and to avoid any post-sale disputes.
- Stamp Duty: The transfer of assets in a slump sale may attract stamp duty, and it’s essential to comply with local stamp duty regulations.
- Consent of Creditors: In some cases, consent from creditors may be required, especially if there is a change in control or ownership.
Understanding the provisions of slump sale is essential for businesses considering such transactions. Professional advice should be sought to ensure compliance with tax laws and other legal aspects related to slump sales.