Slump Sale and Its Implications: The Indian Scenario

 While acquiring a business undertaking, what you acquire is as cogent as how you acquire it. The question of “mode of acquisition” is crucial as it has a direct implication on several commercial considerations like tax liabilities, stamp duty implications, etc. Slump sale is a concept emanating from the Income Tax Act, 1961, and functions as one of the effective modes of acquisition of a business undertaking.

SLUMP SALE AS A CONCEPT: The Companies Act, 2013 (“Act”) does not define a slump sale transaction. Section 2(42C) of the Income Tax, Act 1961 (“IT Act”) defines the term slump sale as transfer of one or more undertaking(s) for lump sum consideration. Furthermore, a slump sale does not involve values being assigned to individual assets and liabilities of the undertaking so transferred.

CONSTITUENTS OF A VALID SLUMP SALE

1. TRANSFER OF THE WHOLE UNDERTAKING

• Explanation 1 to Section 2(19AA) of the IT Act prescribes that any part of an undertaking/ unit / division of a business activity taken as a whole without assigning values to the individual assets and liabilities of the said business activity constitutes an ‘undertaking’ for the purposes of slump sale.
• Essentially, it is an undertaking as a whole that is transferred on a going concern basis by way of a slump sale and not individual assets and labilities of the said undertaking. Thus, a transferred undertaking must be an identifiable stand alone business activity along with all its assets and liabilities like employees, contractual obligations, debt or borrowings, assets in the form of plant, machinery, immovable and movable property, etc.

1. SALE IS ON A GOING CONCERN BASIS

• While the term ‘sale’ is not defined under IT Act, inference can be drawn from Section 4 of the Sales of Goods Act, 1930 (“SOGA”) which defines sale as a contract whereby the seller transfers the property in goods to a buyer for a price. Thus, in terms of SOGA, payment of monetary consideration is one of the necessary requirements of sale.
• Since a part of an undertaking comprising of a business activity is sought to be transferred by way of a slump sale, the same is done on a ‘as is, where is’ basis. In other words, transfer of an undertaking under slump sale is as a going concern. 

1. CONSIDERATION FOR SLUMP SALE

• The consideration paid for effecting a slump sale is mandatorily lumpsum.

MODES OF EFFECTING A SLUMP SALE

• A slump sale can be undertaken by way of a Business Transfer Agreement (“BTA”).
• A BTA entails hiving off an undertaking from a corporate entity, i.e., the transferor and vesting the same into the transferee corporate for a lump sum monetary consideration.
• BTA is a far speedier mechanism for effecting a slump sale, however, often the stamp duty and tax implications on a BTA are higher in comparison to a slump sale carried out pursuant to a Scheme of Arrangement.

1. CORPORATE COMPLIANCES

• The charter documents of the transferor company and the transferee company must contain enabling provisions for transfer of a part of a business undertaking/slump sale.
• Section 180 of the Act mandates that a pre-requisite to transfer an undertaking is to procure prior consent of the shareholders by passing a special resolution.

1. TAX IMPLICATIONS

• Section 50B of the IT Act is a special provision for computation of capital gains tax in case of slump sale and prescribes that slump sale shall be exigible to capital gains tax.
• Section 50B(1) of the IT Act provides that capital gains arising from transfer of any capital asset forming a part of the undertaking which is held for more than thirty-six months preceding the date of sale, shall be computed as long term capital gain. In case, the undertaking is held for less than thirty six month, then the profits and gains arising out of transfer of such an undertaking shall be short term capital gain.

1. EXEMPTIONS IN CASE OF HOLDING AND SUBSIDIARY COMPANY

• In terms of Section 47 of the IT Act, certain transactions as prescribed therein are not considered as ‘transfer’ and hence, are not amenable to capital gains tax.
• As per Section 47(iv) of the IT Act, transfer of capital asset by a parent company to its subsidiary company is exempted from capital gains tax, provided that the parent company holds the entire shareholding of the subsidiary company and the subsidiary company is an Indian company.
• Similarly, according to Section 47(v) of the IT Act, transfer of capital asset by a subsidiary company to its parent company is exempted from capital gains tax, provided the parent company holds the entire shareholding of the subsidiary company and the parent company is an Indian company.
• It may be noted that if the capital asset so transferred in furtherance of Sections 47(iv) and 47(v) of the IT Act is converted as stock in trade for business, or if the parent company ceases to hold the share capital of the subsidiary company before the expiry of 8 years then the aforesaid exemptions are withdrawn.

1. STAMP DUTY IMPLICATIONS

• A BTA generally attracts imposition of levy of stamp duty under Article 23 of the Schedule to the Indian Stamp Act, 1899 (“ISA”) under the heading of ‘conveyance’ if the same is ‘deed of conveyance’. The rate of the levy of stamp duty varies from state to state depending upon where in India, the BTA is executed. 

(This Article is solely for information purposes, does not constitute legal or professional advisory and should not be relied upon or used as a substitute for legal advice from attorney.)

 About the Authors:

Mr. Sandeep Bhuraria, has been a practicing lawyer for about 30 years and is a Senior Partner at ZEUS Law Associates. He leads the Commercial Litigation and Restructuring division. He is well versed in the intricacies of Indian Commercial, Civil and Insolvency Laws. He regularly advises foreign investors as well as Indian entrepreneurs on their legal strategy with respect to restructuring their businesses in India. Parijat, is a Senior Associate at ZEUS Law Associates and works in the Commercial Litigation and Restructuring vertical. 

ZEUS Law Associates is an ISO certified full service corporate commercial law firm with a team of dedicated and experienced lawyers well versed in handling domestic and cross border transactions across sectors, jurisdictions and regulatory landscapes. The firm’s distinct practice areas include Corporate & Commercial Law, Real Estate & Infrastructure, Litigation, Alternate Dispute Resolution, Indirect Tax and NRI Services.”