The case centers on the validity of a slump sale transaction under Indian tax law, specifically under Sections 242C and 50B of the Income Tax Act, 1961.
Case Background and Facts
Digital Insight India Products Pvt. Ltd[1] (‘the Assessee’), a captive service provider, entered into a Business Sale and Purchase Agreement dated March 24, 2017, with NCR Corporation India Pvt. Ltd. (‘the Buyer’) for a lump sum consideration of INR 22.40 Crores by way of a slump sale. The Assessee contended that it transferred its entire business operations, assets, liabilities, employees, and contracts to the Buyer as a going concern without assigning individual values to assets and liabilities, fulfilling the conditions of a slump sale under Section 242C of the Income Tax Act. The sale consideration not being fully received by the end of the Assessment Year 2017-2018 led to trade receivables reflecting in the balance sheet. The Assessee filed a revised income tax return for AY 2017-2018, declaring long-term capital gains from the slump sale.
The Assessing Officer treated the transaction as a normal business sale instead of a slump sale, resulting in the lump sum consideration being added to the Assessee’s taxable business income under Section 28(ii) of the Act. The key reasons given included:
- The sale agreement titled “Sale and Purchase of Business” allegedly indicating a routine sale.
- The slump sale agreement was not registered; the e-stamp used was for immovable property sale.
- Trade receivables in the balance sheet suggested that not all assets were transferred.
- The Buyer categorized the acquisition as a business combination under common control, not a slump sale.
The Commissioner of Income Tax Appeals (CITA) concurred with these views but partly allowed relief by reducing the consideration amount based on net assets transferred.
The Assessee appealed, arguing that:
- The transaction met all requirements of slump sale under Section 242C.
- No individual values were assigned in the sale agreement; it was for a lump sum consideration.
- The trade receivables represented the unpaid sale consideration, not retained assets.
- All liabilities were transferred to the Buyer as per the agreement.
- Form 3CEA, a certificate by a chartered accountant for net worth computation under Section 50B(3), cannot be construed as assigning individual values, and furnishing it does not imply itemized asset sale.
The Revenue appealed against the CITA’s partial relief, seeking restoration of the Assessing Officer’s order.
The addition made by the Assessing Officer under business income was set aside, and benefit of capital gains tax under Section 50B was granted.
- The ITAT accepted the Assessee’s contention that the transaction constituted a valid slump sale under Section 242C.
- The Agreement explicitly described the transaction as slump sale on an “as is where is” basis without individual asset valuation.
- Clause 2.1.4 of the Agreement, relied upon by Revenue and CITA to argue retained liabilities by Assessee, was a standard indemnity clause covering pre-completion tax liabilities. Clause 3.1 clarified that the Buyer assumed all debts and liabilities up to completion. Therefore, no liabilities were retained by the Assessee.
- The trade receivables in the Assessee’s books were rightly considered as purchase consideration receivable, not assets retained.
- Requirement to furnish Form 3CEA cannot be construed as assigning values to individual assets; it is compliance for net worth reporting.
- The authorities below failed to appreciate the true nature of the slump sale, wrongly categorizing it as normal business sale.
Conclusion
This ITAT ruling clarifies that a genuine slump sale is characterized by transfer of business as a going concern for lump sum consideration without individual asset values. Trade receivables representing sale consideration do not negate slump sale, nor do indemnity clauses shield pre-sale liabilities from being transferred. Form 3CEA compliance does not convert slump sale into item-wise asset sale. This judgment provides authoritative guidance on the tax treatment of slump sales and the application of Sections 242C and 50B, favoring capital gains tax treatment over business income classification.
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[1] ACIT v Digital Insight India Products Pvt Ltd [ITA No. 5048/MUM/2024, ITA No. 5036/MUM/2024] dated April 29, 2025