SLUMP SALE

INTRODUCTION

The development component is a primary driver and of paramount importance for any company. Understandingly, the strategy to improve the performance of any company can occur through organic means that can be a remarkably continuous process often through inorganic means that are fast but burdened with liabilities.

One of the well ways of improving the performance of the company through inorganic ensures is to acquire the assets of an undertaking or its corporation as an ongoing concern. As a growing concern, the transfer of business is attributed to as ‘Slump Sale’.

Slump sales are among the types of corporate restructuring in which the company is selling its business and has become one of India’s most commonly used techniques of business acquisition.

Slump sales are usually carried out:

  • Improving the company’s performance is inefficient;
  • Enhancing focus and eliminating negative synergies and facilitating strategic investment;
  • Seeking the accompanying tax and regulatory added benefit.

 

WHAT DOES SLUMP SALES CONSTITUTE?

Indian courts have held those principles underlying the Act’s ‘slump sale’:

 

  1. Continuity of Business

Although discussing the definition of ‘slump sale’ in the case, the Bombay High Court in the case  Premier Automobiles Ltd. v. ITO and Anr.[1] Observed that one of the key criteria for deciding whether a transaction will be a ‘slump sale’ is whether market continuity exists. Thus when analysing whether a transaction can be considered as a slump sale or not, the definition of ‘going concern’ is one of the most significant criteria to be met. The Punjab and Haryana High Court have reaffirmed the same opinion in case CIT v. Max India Ltd[2].

 

  1. Transfer of Liabilities

Business continuity usually means that whole assets and liabilities of the undertaking involved are transferred as part of the transaction. The Supreme Court upheld this view in the case R.C. Cooper v. Union of India[3], in which it is upheld though when taken as a whole ‘undertaking’ was part of an undertaking or business. With respect to this, the ‘net value’ of the undertaking becoming transferred and takes into account the book value of the liabilities to be significantly reduced from the undertaking’s aggregate amount of assets, emphasising the prerequisite for the transfer of liabilities.

 

  1. Transfer of whole Assets

Although an important feature of a ‘slump sale’ would be that the company’s assets and liabilities are transferred to keep the business going, it is not significant that all assets are transferred for a transaction to be classified as a ‘slump sale’. The Punjab and Haryana High Court observed in the case of CIT v. Max India Ltd.[4] that it is not necessary that whole assets to be transferred for a transaction to be qualified as a slump sale.

 

Even though the transferor holds those assets and does not transfer them to the transferee, the transaction may indeed maintain the slumping aspects of the sale. In order to be called a slump sale, however it is important that the assets being transferred (including the liabilities) are an undertaking in themselves and that they can operate ‘without interruption.’ This interpretation of the word ‘undertaking’ extends similarly to demergers.

(4) Exchange not a Slump Sale

In the case of Bharat Bijlee Limited v. Addl. CIT[5] the Bombay High Court observed that a crucial component for that transaction to be treated as a ‘slump sale’ has been that the transfer of the undertaking must be for the purpose of considering cash. In the present case, by referring to a previous judgement of the Supreme Court, the Bombay High Court held that the transfer of an undertaking in return for the transferee entity’s shares or bonds would not entail as a ‘sale’ and therefore would not be taxed as a slump sale under section 50B of the Act.

(5)  Long Term Capital Gains

One other significant element of a slump sale is that where the undertaking has indeed been expected to hold for a period of 36 months, the gains arising from the sale of the undertaking if any undertaking are calculated as long-term capital gains, despite the fact that some of the assets might be hold for a period of less than 36 months. It is important to analyse the substance, not the form of a slump sale transaction.

The framework of slump sales was embedded in the Income Tax Act, 1961 ( by form of the Finance Act, 1999 when Section 2(42C)) has been incorporated to define slump sales and Section 50B was added to compute slump sales taxes that put an end to the long-standing doubts about taxability or gains in business of slump sales.

Before the introduction of section 2(42C), the court determined that slump selling is a sale of a business through going basis of concern in which individual assets or liabilities could not be attributed to the lump sum price.

[1] Premier Automobiles Ltd. v. I.T.O. and Anr, (2003) 264 I.T.R. 193 (India).

[2] C.I.T. v. Max India Ltd, (2009) 319 I.T.R. 68 (India).

[3] R.C. Cooper v. Union of India, A.I.R. 1970 S.C. 564 (India).

[4] C.I.T. v. Max India Ltd., (2009) 319 I.T.R. 68 (India).

[5] Bharat Bijlee Limited v. Addl. C.I.T., 2015 S.C.C. Online I.T.A.T. 842 (India).

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