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Circular for Issue of Capital And Disclosure Requirements

The Finance Bill, 2021 has proposed to amend Section 2(42C) of the Income Tax Act, 1961 (“ IT Act ”) which defines the term “slump sale”, with a view to expand the scope and ambit of the said definition. The abovementioned amendment is proposed to take effect from April 01, 2021 and thereby, be applicable in respect of the assessment year of 2021-22 and the subsequent assessment years.

  • Existing Position –

    Presently, any transfer of one or more undertakings by way of sale for a lump sum consideration without the assignment of any values to the individual assets and liabilities associated with such sale is considered to be a “slump sale” within the purview of Section 2(42C) of the IT Act. Such a transfer is liable to capital gains tax under Section 50B of the IT Act. It is worth noting that the from the present reading of Section 2(42C) of the IT Act, it is not clear as to whether such lump sum consideration would include a consideration paid in kind or not, and therefore sale transactions involving payment of consideration in kind have been a bone of contention as far as the concept of “slump sale” and payment of capital gains tax under the IT Act is concerned.

    There are certain judicial precedents which have also held that a transaction shall be liable to capital gains tax where the same involves sale by way of consideration in cash and not in the case of an exchange of assets, which further deepens such an ambiguity. For instance, in the case of Areva T&D India Ltd. v. CIT1, the Madras High Court held that for a transaction to qualify as a “sale” and consequently, also a “slump sale”, monetary consideration shall be a pre-requisite for such transaction. In the aforementioned case, reliance was also placed upon a decision of the Bombay High Court2 wherein the Court was of the opinion that the transfer of an undertaking on a going concern basis against the issuance of preference shares and bonds would amount to an exchange rather than a sale. Consequently, the Court held that Section 50B of the IT Act providing for the mechanism of computation of capital gains in case of a slump sale would not be applicable in the case of such a transfer.

    This ambiguity and loophole is sought to be plugged by the proposed amendment under the Finance Bill, 2021.

  • Change introduced by the Amendment –

    The definition of the term “slump sale” is proposed to be amended with a view to expand its scope and include all forms transfers of an undertaking which take place “by any means” rather than just being limited to transfer as a result of sale. The existing definition under Section 2(42C) is now proposed to read as follows – “the transfer of one or more undertakings, by any means, for lump sum consideration without value being assigned to individual assets and liabilities in such cases.” Moreover, an explanation has also been proposed to be inserted under the said clause to provide that the term “transfer” shall have the same exhaustive meaning given to such term under Section 2(47) of the IT Act, inclusive of sale, relinquishment, exchange, etc.

The proposed change would provide greater clarity on the taxability of slump exchanges, bringing such transactions clearly under the umbrella of a “slump sale”, hence, making such transactions liable to being subject to capital gains tax.

1 (2020) 119 171 (Mad)
2 CIT v. Bharat Bijlee Limited, (2014) 365 ITR 258