Finance Act, 2021, has introduced amendment in the provisions related to slump exchange arrangements. Scope of slump-sale enlarged to include transfer of business undertaking as slump-exchange without any cash consideration:
“Slump Sale”, as defined u/s 2(42C) of the ITA, means 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 transfer.
Accordingly, earlier, sale of business undertaking under a transaction for which the consideration in the form of money accruing immediately or deferred or in the form of issuance of a debt instrument (again with a pre-determined liability) was considered as a “sale” of an undertaking. Consequently, where the transfer of an undertaking was for a consideration other than the above-mentioned forms (say, in the form of issue of fresh equity shares of another entity or for any asset class), known as “slump exchange”, was not considered as a “slump sale”.
Therefore, since there was no specific mechanism to compute capital gains tax for a “slump exchange”, it was held by various authorities in the past (most notably, by the Bombay High Court in the case of Bharat Bijlee Ltd[1]), that such a transfer pursuant to “slump exchange” would not be subject to capital gains tax.
Now, the scope of “slump sale” is widened so as to mean transfer of one or more undertakings, by any means, for lump sum consideration without any value being assigned to individual assets and liabilities. Consequently, all types of “transfer” as defined in clause (47) of section 2 of the ITA to include within its scope. As a result, any transfer of undertaking pursuant to an exchange, as well, would be included in the definition of “slump sale”.
In such cases, it is the fair market value of capital asset as on the date of transfer shall be deemed to be full value of consideration for the purposes of calculating capital gains. Valuation mechanism to determine the fair market value of the slump exchange(s) has been separately notified under Rule 11UAE of the Income Tax Rule, 1962. Further, for the purposes of calculation of networth of business undertaking, value of self-generated goodwill shall be considered as Nil.
In the absence of any specific provision, it was unclear to implement the structure of slump exchange without any tax liability, basis Bombay High Court’s judgement which is pending for final verdict in the Supreme Court. With this new amendment, tax treatment of slump exchange transaction is clear with respect to its tax treatment determination. And it puts to rest heavily debated issue under the ITA. However, it is unclear whether the amendment is prospective or retrospective. As retrospective applicability of same could have an adverse impact on issues under litigation.
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[1] CIT vs Bharat Bijlee Limited (Income Tax Appeal no. 2153 of 2011)