An agreement for slump sale of windmill division by Ashok Leyland Ltd[1] to Ashok Leyland Wind Energy Ltd (ALWEL) was entered into effective from 1st February 2015.
- The windmill division, comprising movable and immovable assets, liabilities, licenses, intangibles, and employees, was sold on a going concern basis to ALWEL under a business transfer agreement described explicitly as a “slump sale.”
- Consideration was agreed as a lump sum of INR 93 crores for all assets and liabilities except for unbilled revenue.
- Unbilled revenue (accrued receivables not yet invoiced) was separately accounted as deferred consideration payable by ALWEL to Ashok Leyland upon realization.
- The net worth of the undertaking was certified formally by an accountant, leading to the capital gain computation under Section 50B of the Income Tax Act.
- The deferred consideration related only to the timing and accrual accounting of revenue and did not affect the lump sum nature of the sale.
AO’s Contentions and Tribunal’s Findings
- The Assessing Officer (AO) challenged the transaction, contending that assigning a separate value to unbilled revenue meant the sale was not on a lump sum basis within the meaning of Section 2(42C) read with Section 50B, thus disqualifying it as a slump sale.
- AO re-characterized the capital gain as business income, thus disallowing the benefit of Section 50B.
- The Tribunal, however, observed that:
- The deferred consideration for unbilled revenue was a necessary accounting mechanism reflecting revenue rights accruing to the seller before effective transfer date but realized afterward.
- This two-step valuation does not amounts to itemized asset valuation prohibited under the slump sale definition.
- The sale agreement and independent valuation report indicated a single lump sum consideration for the going concern.
- The AO did not assign individual values to other assets or liabilities inconsistent with the slump sale principle.
- The Tribunal referenced legal provisions:
- Section 50B, which taxes profits from slump sales as capital gains.
- Section 2(42C), which defines slump sale as transfer of one or more undertakings for lump sum consideration without values being assigned to individual assets and liabilities.
- Explanation 2 clarifies that valuation solely for stamp duty does not count as assigning individual values.
- The Tribunal relied on precedents, notably Premier Automobiles[2], which supported interpreting slump sales to allow deferred consideration for current assets like unbilled revenue.
- It held that the AO’s re-characterizing the capital gains as business income was arbitrary and unsustainable, directing the AO to assess gains under Section 50B as declared.
Conclusion on Slump Sale
The Tribunal emphasized that a lump sum consideration can include deferred components for accrued but unbilled revenue which belong to the seller up to the effective date but realized post-sale. Such deferred consideration is a legitimate accounting practice and does not amount to itemizing individual assets or liabilities.
The Tribunal upheld the classification of the windmill division sale as a slump sale under Section 50B, recognizing that:
- The lump sum consideration excludes unbilled revenue only for accounting clarity.
- Deferred consideration for unbilled revenue is a permissible aspect and does not violate the lump sum condition.
- The sale constitutes transfer of a business undertaking as a going concern.
- Capital gains arising should be taxed under Section 50B as initially declared by Ashok Leyland.
The court held that the valuation of deferred consideration for current assets like unbilled revenue as part of a slump sale does not negate the lump sum nature of the sale and thus qualifies for slump sale treatment under Section 50B and 2(42C).
This ruling reinforces the principle that lump sum sales of business undertakings can include deferred consideration components for certain current assets without losing slump sale treatment, providing useful clarity in taxation of complex corporate transactions.
For detailed discussion, please feel free to contact devadhaantu@devadhaantu.in
________________________________________________________________
[1] M/s. Ashok Leyland Ltd. v. ACIT [ITA Nos.2330 & 2618/Chny/2019] dated 07 July, 2025, Chennai ITAT
[2] Premier Automobiles vs ITO (Bombay High Court) ITA No.2618/Chny/2019