Capital gains relating to slump sale & Recent Developments in slump sale.pdf · Capital gains relating to ... provision for computation of capital gains in case of slump ... 2011

Capital gains relating to slump sale & Recent Developments

Praful Poladia

16 April 2011

Contents

► Introduction

► Pre-section 50B position

► Section 50B : Overview

► Slump sale

► Undertaking

► Cost of acquisition of Undertaking

► Slump Sale v/s Itemised Sale

► Slump Sale : Some issues

► Implications in the hands of the purchaser

Introduction

Pre-Section 50B position

� Transfer of undertaking as a going concern for slump consideration not liable

to capital gains

� No taxation with reference to individual asset in absence of earmarked sale

consideration

� No taxation for transfer of business as cost of undertaking and cost of

improvement not ascertainable

� Charge fails in absence of support computation mechanism

Capital gains relating to slump sale & Recent Developments Page 4April 16, 2011

� Charge fails in absence of support computation mechanism

� SC in PNB Finance Ltd (307 ITR 75) in the context of slump sale held as under.

“In this case, s. 45 applies. There is no dispute on that point. The first test is that

the charging section and the computation provisions are inextricably linked. The

charging section and the computation provisions together constituted an

integrated code. Therefore, where the computation provisions cannot apply, it is

evident that such a case was not intended to fall within the charging section,

which, in the present case, is s. 45.”

Section 50B : Overview

� Section 50B introduced w.e.f. AY 2000-01 for computation of capital gains in

case of slump sale of undertaking.

� CBDT Circular 779 dated 14 September 1999 explaining provisions of S.50B

states.

“A new section 50B has been inserted in the Income tax Act containing special

provision for computation of capital gains in case of slump sale……..”

� Slump sale defined u/s.2(42C)


� ‘Undertaking’ defined u/s.2(19AA)

� Net worth of undertaking constitutes cost of acquisition

� Long term v. Short term determined w.r.t age of the undertaking

� Indexation benefit not available

� Report from an accountant which certifies computation of net worth to be

furnished in prescribed form

Popular forms of reorganisation

� Illustrative popular forms of reorganisation

� Share transfer

� Demerger

� Assets transfer

� Business transfer

� Itemised sale


� Itemised sale

� Slump sale

Popular modes of slump sale

� Popular modes of slump sale

� All cash deal

� Swap deal

� Cash cum swap deal


Slump Sale

Slump sale – Sec 2(42C)

� Section 2(42C) defines slump sale as

““slump sale” means the transfer of one or more undertakings as a result of the

sale for a lump sum consideration without values being assigned to the individual

assets and liabilities in such sales.”

� Conditions to be satisfied cumulatively in order to qualify an arrangement as

‘slump sale’

� There should be transfer of one or more ‘undertakings’

� Transfer should be as a result of ‘sale’


� Sale should be for a ‘lump sum’ consideration

� No values should be assigned to individual assets or liabilities in such sales

� Specific exception provided

� 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

not regarded as assignment of values to individual assets or liabilities

Is definition in line with concept of slump sale

understood by the Courts?

Meaning of slump price

� Sale for a lump sum consideration without assignment of values to individual

assets and liabilities

� Factors supporting lump sum consideration

� Business valuation on DCF or yield method

� Valuation as a multiple of capacity, customer base etc

� Negotiated value for ‘the undertaking’


� Negotiated value for ‘the undertaking’

� Issues : Whether following impact the slump sale

� Absence of ‘assignment of individual’ values ‘in document of sale’ v/s.’ in

transaction of sale’

� Reference in any collateral documents or evidences such as Board

resolution, pre-sale correspondences exchanged; asset valuation report,

etc [Refer, Artex Manufacturing [227 ITR 260(SC)]

Meaning of slump price

� Impact of separate valuation of Land and Building or intangible for

payment of stamp duty / registration charges / sales tax

� Adjustment contemplated for working capital.[Refer, Premium

Automobiles (264 ITR 229(Bom)]

� Separate mention in respect of value of liability taken over (or)


� Separate mention in respect of value of liability taken over (or)

mention about cap on value of contingent liability

Undertaking

Meaning and scope of Undertaking – Sec 2(19AA)

� ‘Undertaking’ is defined in Explanation 1 to Sec 2(19AA) as under

“For the purposes of this clause, “undertaking” shall include any part of

an undertaking, or a unit or division of an undertaking or a business

activity taken as a whole, but does not include individual assets or

liabilities or any combination thereof not constituting a business activity.”

� Inclusive definition : ‘undertaking’ in popular sense covered

� Extracts from P. Alikunju, M.A. Nazeer Cashew Industries v. CIT 166

ITR 804 (Ker)


ITR 804 (Ker)

“Undertaking" in common parlance means an "enterprise", "venture",

"engagement". It can as well mean "the act of one who undertakes or engages

in a project or business" (Webster).

………………..

Construing this word "business", the Supreme Court in Narain Swadeshi

Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) has observed that the word

"business" connotes some real, substantial and systematic or organised course

of activity or conduct with a set purpose.“


� Extracts from CIT v. Textile Machinery Corporation 80 ITR 428 (Cal)

“The words "industrial undertaking" in the Indian IT Act, 1922, should, in our view,

be interpreted to mean any venture or enterprise which a person undertakes to do

and which has relation to some industry or has some industrial consequences

………………Undertaking" is a very general and wide term. It has both literary as

well as technical connotations ……………Normally, anything undertaken to be done

is an undertaking.”


► Yallamma Cotton Woollen and Silk Mills Co Ltd vs Official Liquidator 40 Com

Cas 466 while examining the expression “undertaking” in the context of

“floating charge” Mysore HC observed as.

“undertaking’’ is not anything which may be described as a tangible piece

of property like land, machinery or the equipment; it is in actual effect an

activity of man which in commercial or business parlance means an

activity engaged in with a view to earn profit.”


� Additionally, undertaking covers :

� A part of an undertaking

� A unit of an undertaking

� A division of an undertaking

� A business activity taken as whole


� A business activity taken as whole

� Specific exclusion

� Individual assets or liabilities or any combination thereof not constituting

a business activity

� Should undertaking be a going concern?


► Transfer of business undertaking excluding certain assets / liabilities

considered not fatal to slump sale concept . Test to apply : Whether buyer is

put in position to continue the running business without the impugned asset?

Citation Exclusion of asset

Premier Automobiles vs ITO

(264 ITR 229)(Bom)

Transfer of manufacturing undertaking - sundry

debtors not transferred

DCIT vs Mahalasa Gases &

Chemicals (84 TTJ 992)(Bang)

Transfer of manufacturing and distribution

undertaking - excess land, vehicle and debtors


not transferred

Rohan Software (P) Ltd vs ITO

(115 ITD 302)(Mum)

Sale of software business including intellectual

properties, etc; exclusion of building and motor

car does not defeat slump sale

Max India Ltd [112 TTJ 726] Transfer of manufacturing division -Technical

know-how transferred in subsequent period; until

that use thereof given on royalty payment

I.C. I India Ltd [23 SOT 58] Transfer of fertilizer unit - Bank balance, cheque

on hands, unpaid insurance claims not

transferred

Cost of acquisition

Cost of acquisition of Undertaking

� ‘Net worth’ of an undertaking constitutes cost of acquisition

� ‘Net worth’ defined to mean aggregate value of total assets of undertaking

(excluding revaluation) as reduced by book value of liabilities

� Aggregate value of total assets

� In case of depreciable assets : WDV of block of assets

� Capital assets claimed deduction u/s 35AD : NIL


� Capital assets claimed deduction u/s 35AD : NIL

� Other assets : Book value

� Illustrative ambiguities

� Cost / book value of scientific research assets claimed u/s.35

� Cost / book value of scientific research assets for which weighted deduction

claimed u/s.35(2AB)

� Cost / book value of Telecom license amortised under section 35ABB.

Slump Sale v/s Itemised Sale

Relevant consideration from seller’s perspective

Itemized sale Slump sale

► Huge block of asset of other items and / or expansion plan for recoupment where consideration likely to get adjusted in block of assets without giving rise to immediate taxable income. (However, this may impact future depreciation)

► Presence of high cost non depreciable assets where benefit of indexation or FMV substitution as on 1.4.81 is

► From the perspective of sales tax and stamp duty.

► If rigor of section 50C is to be avoided.

► If balance sheet has certain non-depreciable assets which have lost value and are not likely to fetch any price.

► If appreciation is attributable to inventory or depreciable assets.


FMV substitution as on 1.4.81 is available.

► Transfer of obsolete / non-moving stock-in-trade / consumable likely to result in business loss.

► Cases where section 50C or TP provisions etc permitting notional taxation is not a concern

► Sales tax, stamp duty, etc is not a concern

depreciable assets.

► If age of undertaking is more than 3 years whereas the age of valuable assets within it is less than 3 years.

Slump Sale : Some issues

Issue 1 : Impact of negative net worth

Scenario A

Sale consideration 100

Less: cost of acquisition (networth)

Aggregate value of

total assets

Less: Value of

300

(500)

liabilities (200) NIL

Scenario B

Sale consideration 100

Less: cost of acquisition (networth)

Aggregate value of

total assets

Less: Value of

300

(500) (200)


liabilities (200) NIL

Capital Gains (restricted to)

(negative net worth ignored)

100

liabilities

Capital Gains [100 – (-200)] 300

Which of the scenario represents correct

computation of capital gains?

Issue 2 : Applicability of section 50B in case of slump exchange

XYZ

Division

A

ABC

Allotment of

shares

Division

B

Transfer of

Division A

The transaction► XYZ transfers one of its business undertaking

(Division A) to ABC

► In exchange, ABC allots its equity shares to XYZ

by way of consideration ( ie.other than money)

► For XYZ, difference between fair value of business

over net worth results into capital gains


► Since there is no presence of money

consideration, admittedly transaction is of

exchange and not a sale*

Will section 50B apply to slump exchange?

*Refer Motor and General Motors Pvt 66 ITR 692(SC)

Issue 3 : Some issues

► Is section 50B a charging provision or machinery provisions?

► Impact on exemption under sections 47(xiii) /(xiv) or 47(iv)/(v) etc. which

exempts capital gains chargeable under section 45

► Impact on exemptions under sections 54EC / 54G

► Does section 50C apply to slump sale covered by section 50B?


► Does section 50C apply to slump sale covered by section 50B?

Implications in hands of purchaser

Implications in hands of purchaser

► Purchaser entitled to allocate value of consideration to individual asset on fair

basis including intangible assets acquired, depreciable assets, stock in trade,

etc. [Refer, Shreyans Industries Ltd 277 ITR 443 (P&H) ]

► Subject to fifth proviso to section 32, entitled to depreciation w.r.t actual cost

determined.


► Unless governed by specific provision, entitled to reckon cost of acquisition of

asset at actual price paid

► Beware about seller’s tax arrears / liability [S.281 / S.170]

Thank youThank youfor your participation !

“This Presentation provides certain general information existing as at the time of production. This

Presentation does not purport to identify all the issues or developments pursuant to the

transaction. Accordingly, this presentation should neither be regarded as comprehensive nor

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Capital gains relating to slump sale & Recent Developments in slump sale.pdf · Capital gains relating to ... provision for computation of capital gains in case of slump ... 2011