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What is Slump Sale & Section 50B of the Income Tax Act?
Under section 50B, special provisions are given to calculate capital gain or loss in case of slump sale. First of all let’s understand “What is the meaning of slump sale”?
Slump sale means sale of entire business as a going concern, with all assets & liabilities in one go. In simple words we can say, transfer of one or more undertakings for a lump sum consideration rather than assigning value for all individual assets.
|Sale of entire business||As going concern||For lump sum consideration|
- ‘Undertaking’ shall include any part of an undertaking, a unit or division, or a business activity in whole, but shall not include individual assets or liabilities or any combination thereof which does not constitute a business activity.
- Slump Sale means sale of any undertaking as a going concern, where consideration is considered in lump sum and individual values are not taken into account. But, when individual values of assets are taken for calculating the amount of stamp duty , registration charges, taxes etc then it won’t violate slump sale.
- For the purposes of Slump Sale a Chartered Accountant’s report in form No. 3CEA will be required.
- Only transfer of assets or liabilities is not a slump sale
- On slump saleno indexation benefit will be allowed.
- Court approval is not required for carrying out such transactions.
How to calculate capital gain u/s 50B?
Capital gain in case of slump sale u/s 50B shall be calculated as below :-
|Full value of lump sum consideration||XXX|
|Less :- Expenditure in relation to transfer||(XXX)|
|Less :- Net worth** of the undertaking being the cost of acquisition and improvement||(XXX)|
**Computation of Net Worth
|Aggregate value of total assets of the undertaking or division :
In case of depreciable assets
In case of capital assets in respect of which whole expenditure claimed u/s 35AD
In case of other assets
WDV of block
Book value of assets
|Less :- Value of liabilities of such undertaking or division||Book value|
|Net worth of the undertaking||XXX|
**If net worth comes negative, then cost of acquisition shall be NIL.
What are the tax rates in case of slump sale?
Taxability of capital gain depends upon the nature of capital assets which is
- 20% in case of Long Term Capital Gain (LTCG) and
- Normal rates of tax in case of Short Term Capital Gain (STCG)
What are the key points of section 50B?
The key points of Section 50B includes
- How to determine the nature of capital assets ?
This is very important to decide tax rates, and depends on whether gain or loss arising out of the slump sale is long term or short term.
Particular Nature of capital asset If undertaking held for more than 3 years Long Term If undertaking held for 3 years or less Short Term
- Whether indexation benefit is available u/s 50B ? While calculating capital gain in case of slump sale, no indexation benefit shall be available in case of long term capital asset.
- What is the reporting requirement under section 50B ? Certificate by a chartered accountant :- In case of slump sale, every assessee shall furnish in the prescribed form along with the return of income, report of a CA along with computation of net worth.
- In which year, capital gain arise out of the slump sale shall be taxable ? The capital gains arising out of a slump sale shall be taxable in the year of transfer.
- What is the treatment of transfer of stock in case of slump sale u/s 50B ? No profit under the head profit from business & profession shall arise even if stock is transferred in case of slump sale.
- Treatment of accumulated business losses and depreciation : Accumulated business losses and depreciation shall be carried forward by the transferor in case of slump sale.
How is Slump Sale different from Itemised Sale?
Slump Sale refers to sale of business as a going concern without assigning the assets and liabilities any individual values. Whereas itemised sale means the sale of one or more business assets not essentially resulting in sale of business.
It was witnessed particularly in the case of loss making undertakings, transactions of slump sale was window dressed as itemised sale to stop the same various rulings came out.
The difference amongst slump sale and itemised sale can be summarised as under
|Slump Sale||Itemised Sale|
|No individual values are assigned to assets||Individual values are assigned to assets|
|Warrants sale of all assets and liabilities||One or more assets can be sold|
|Business is sold as a going concern||Business might not be transferred as a going concern|
|It results not just in sale of asset but mandatorily in sale of business||Itemised sale may refer to mere sale of asset(s) and not sale of business|
What does Transfer of ALL assets mean?
Some of us understand & interpret, that transfer of ALL assets is mandatory to qualify the transaction as a slump sale. However, it has been clarified by some judicial pronouncements that it is NOT essential to transfer all assets to qualify the transaction as a slump sale. Even if some assets are retained by the transferor due to any reason and transferee can start its operations without any difficulty with transferred assets then it will be a slump sale.
Is Exchange also considered as a slump sale?
It was clarified that any transaction to be considered as slump sale if consideration is cash. Exchange of capital assets shall NOT qualify as slump sale.
Are there any cases where sale is not slump sale?
Yes, in addition to the two scenarios explained in detail above i.e. exchange and itemised sale there are other cases in which sale cannot be termed as slump sale. These situations arise when
- Sale of business is done pursuant to court’s order and not a contract between the parties
- Where the essentials of valid contract like incapacity to enter into contact or free consent etc is unavailable
- When there is no consideration for the sale and
- When the transaction cannot be qualified as a valid sale it cannot also be termed as a slump sale.
Frequently Asked Questions
Q- What is Form 3CEA?
Ans. Form No. 3CEA is a report of CA which needs to be furnished in case of slump sale u/s 50B. This form is filed online for which DSC is mandatory. The form needs to be filed along with return of income and due date of filing form is same as applicable to assessee for income tax return specified u/s 139(1).
Q- In case of slump sale, whether revaluation of assets shall be considered while calculation COA (Cost of Acquisition)?
Ans. Revaluation of assets shall be ignored while calculating Net worth. Book value of assets shall be considered in this case.
Q- Can the transferee carry forward the accumulated business losses in case of the slump sale ?
Unlike demerger, amalgamation accumulated losses cannot be carried forward by the transferee.
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