What is a Slump Sale under Income Tax?

Business management has evolved over the years. The cut-throat competition has compelled businesses to become multifaceted. Today, organisations are not focused on a single segment but offer a range of products and services under different brand names. It enables businesses to sell off a segment at the time of need. The slump sale section governs taxation proceeds on any income earned through this sale.

The continuous amendments have resulted in endless ambiguities with regards to slump sale India. This article illustrates the applicability of the slump sale income tax in detail.

What is a Slump Sale?

A slump sale is a sale where you sell an undertaking without taking the values of individual assets and liabilities into account.

According to Section 2(19AA), an undertaking is any part of the division or business activity that does not include individual assets or liabilities.

However, determining the value of assets and liabilities for stamp duty, registration fee, or other taxes does not disqualify the sale from being a slump sale.

What Constitutes as a Slump Sale?

If the transfer of undertakings satisfies the following, it is a slump sale:

 

• The business is sold off as a whole, going concern

• Sale is made for a lump-sum consideration

• Materials available on record do not include any item-wise values

Analysis of a Slump Sale

• The subject matter of the slump sale must be an undertaking of the assessee

• The undertaking must be a part of a corporate or non-corporate entity

• Slump sale must be of one or more undertakings

• The transfer of an undertaking must be the result of a sale

• The consideration must be lump-sum and the assessee must arrive at it without computing individual values

• The consideration must be in cash or by issuing shares of the transferor company

• Transfer of assets without transferring liabilities is not a slump sale

Taxability of Gains and Losses Arising on the Slump Sale

The gain or loss earned through the slump sale is treated as a capital gain or loss under the Income Tax Act, 1961. Here's the prescribed way of computation.

Factor in the following while computing gains and losses.

• The slump sale is governed under a special provision, and hence Section 50B overrides other provisions of the Income Tax Act.

• In this scenario, gains and losses are regarded as long-term capital gains/losses. However, if the undertaking is not owned and held for more than 36 months, it will be treated as short-term capital gains/losses.

• Gains and losses are taxable in the year of transfer of the undertaking.

• Capital gains earned through a slump sale are a difference between the sale value and the net worth of the undertaking. Under Section 48 and 49 of the Income Tax Act, the net worth is the cost of acquisition and improvement.

• According to Section 50B, the assessee receives no indexation benefit on the cost of acquisition i.e. the net worth.

• If more than one undertaking is sold off during the slump sale, the gains or losses must be computed separately