This article amongst other aspects highlights the reasons for the prominence of a ‘slump sale’ in respect of the structuring of asset purchase arrangements and the landmark judicial precedents) underpinning such reasons.
Legal definition of Slump Sale and how it differs from an Itemised Sale: The acquisition of a target entity may be structured via one of either form of the purchase of the assets of the target entity, i.e.: by way of a ‘slump sale’ or an ‘itemised sale of the assets.
Slump sale is defined under the Income Tax Act, 1961 (“ITA”) as the transfer of one or more undertaking(s) by way of sale for a lump sum consideration without assigning values to individual assets and liabilities. Conversely, an itemised sale of the assets of a company involves the assigning of a piece-meal value to each discrete asset/liability being sold.
Individual assignment of value and its effect on Slump Sale: It is to be noted that the assignment of value to an asset/liability towards determination of stamp duty/registration fees and other such taxes shall not otherwise detract from classification as a slump sale herein as per Explanation 2 to Section 2(42C) of the ITA.
Changing legal regime and gaining prominence of Slump Sale: A ‘slump sale’ has emerged as the preferred mechanism for structuring acquisitions in India subsequent to its formalisation under the ITA as facilitated by the Finance Act, 1999 via inclusion of the definition of a slump sale under Section 2(42C) and the special provision for computation of capital gains under Section 50B; however, prior to the same, the taxation of a business transfer structured as aslump sale was fraught with uncertainty with respect to its taxation as capital gains under Section 45 of the ITA or as profits chargeable to tax under Section 41 of the ITA.
Subsequent to the insertion of the definition of a ‘slump sale’ and clarification of its manner of taxation as capital gains via the amendments to the Income Tax Act, 1961 effected by the Finance Act, 1999 and the decision of the Hon’ble Supreme Court of India in PNB Finance Ltd. vs. Commissioner of Income Tax -I, New Delhi clarifying the manner of taxation of a slump sale, the conduct of a business transfer via slump sale has gained prominence on account of the relative ease of purchase price determination and associated tax advantages.
Apex court judgments on Slump Sale classification:
Reference in such respect may be drawn to the decision of the Hon’ble Supreme Court of India in the case of PB Finance Ltd. vs. Commissioner of Income Tax – I, New Delhi where the apex court removed and excepted the taxation of a slump sale from Sections 41 and 45 of the ITA.
The Hon’ble Supreme Court relied on its decision in CIT vs. Electric Control Gear Manufacturing Co. in holding that Section 41(2) of the ITA bore no application, as for such applicability, the assets subject to the slump sale would have to be only depreciable assets with the consideration capable of allocation between various assets; the Hon’ble Supreme Court also further relied on its decision in CIT vs. B.C. Srinivasa Setty in holding that Section 45 of the ITA was inapplicable in the context of a slump sale as the ‘assets’*in a slump sale such as tenancy rights, manpower etc. did not fall within the contemplation of Section 45 of the ITA.
Accordingly, the inclusion of the relevant provisions pertaining to a slump sale under the ITA and the prospective application of such provisions along with the ratio in PNB Finance Ltd. vs. Commissioner of Income Tax – I, New Delhi, have provided a fillip to the structuring of transactions as slump sales.
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