Quite often, a manufacturing unit is disposed by an entrepreneur as going concern along with assets and liabilities to another company and the transferee intends to carry on the manufacturing activities in such existing unit. The question arises whether on transfer of various immovable and movable assets of the unit, as going concern i.e., stock-in-trade, consumables, loans and advances, deposits, sundry creditors including outstanding liabilities for a lump sum amount without stipulating any price for individual items i.e. “slump sale” will attract the tax under VAT Act?. As regards, transfer of immovable property i.e. plot of land, factory shed and other structures constructed thereon, its ownership can be transferred only by execution of registered sale deed in favour of the transferee after payment of stamp duty hence it will not attract any liability to pay VAT or GST Law. Attempts are being made by the assessing authority to levy tax on transfer of entire undertaking as a going concern under VAT Act and same question will also arise under
Goods & Services Tax Act, hence it is discussed hereunder :-
Whenever, a company decides to transfer its industrial unit as “slump sale” to another company, separate agreement is executed for transfer of all movable assets such as plant and machinery, DG Set, electrical installation, furniture & fixtures, air conditioners, computers, factory and office equipments, inventories, tools and consumables, vehicles etc. along with liabilities which remained on the date of transfer along with liabilities. It can be safely claimed that the transferor shall not be liable to pay VAT under MP VAT Act on such transfer on following grounds :-
i) Sale of plant & machinery embedded or fixed in the earth
The word “goods” has been defined u/s. 2(m) of MP VAT Act and u/s. 2(52) of Central Goods & Service Tax Act. It covers all kinds of movable property including computer software, all growing crops, grass, trees, plants and things attached to or forming part of the land which are agreed to be severed before the sale or under the contract of sale. When the plant and machineries, electrical installation, D.G. Set, Air conditioners, Humidification plant etc. are transferred, it will continue to remain in the same status i.e. installed, because such transfer is “on a going concern basis” it cannot be covered within the meaning of “goods” and will not attract any tax under MP VAT Act.
It has consistently been held by Apex Court as well many High Courts that anything which is embedded or fixed in the earth is not covered within the definition of “goods” since goods means movable property only. Reference can be made to judgments of Supreme Court in the case of Mittal Engineering Works Pvt. Ltd. v. CCE (1997) 106 STC 201 (SC).
Duncans Industries Ltd v. State of UP (2001) 1 SCC 633 (SC) & TTJ Industries Ltd. v. CCE (2004) 4 STJ 1 (SC).
ii) “Tax Incidence in case of “Slump Sale” i.e. entire business
The term ‘slump sale’ connotes the sale of an entire business undertaking, comprising of various assets net of liabilities for a lump sum consideration. Though the term has not been defined under any of the State VAT laws or under the CST Act but section 2(42C) of the Income tax Act, 1961 recognises “slump sale” as a transfer of an undertaking and defines the word ‘slump sale’ as under :-
“Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities in such sales”.
Explanation – 2 to aforesaid section further provides that “For the removal of doubts it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees, or other small similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities”.
Next question for consideration is, whether Sale of business undertaking i.e. “Slump sale” can be considered as sale of goods ? Obviously, the answer would be that transfer of entire “business undertaking” to another registered dealer of M.P., as a going concern, i.e. “slump sale”, is neither covered within the definition of “Business” nor “sale” nor “goods” hence the transferor cannot be subjected to tax.When ‘Business’ or ‘Undertaking’ will not fall within the meaning of ‘goods’, VAT implication would not trigger on the transactions involving the transfer of business as a going concern.
In the case of Sri Ram Sahai v. CST  14 STC 275 (Allah.) it was held that “business” is not a movable property and therefore, it is not covered within the meaning of “goods”. Transfer of entire business undertaking, is not frequently done. It cannot be treated that the seller is engaged in any business activity in disposing of the entire undertaking including movables and immovables and all other properties.
The object of the seller is normally to close down the activity hence it cannot be covered within the meaning of “sale of goods”. [Refer – Monsanto Chemicals of India (P) Ltd. v. The State of Tamilnadu (1982) 51 STC 278 (Mad.) and Sealants and Gasket Industries v. State of Maharashtra (2006) 9 STJ 389 (Mah-Trib)]. It is also worthwhile to note that retention of certain liabilities while transferring entire business by the transferor would not devoid the transaction to be categorized as sale of “business” as held in the case of Zacharia v. State of Kerala (1977) 39 STC 221 (Kerala).
iii) Slump sale – In the course of business :
Any sale of goods can be subject to tax only when it is effected in the course of business of the dealer. Full Bench of A.P. High Court in the case of M/s. Coromandal Fertilizers Limited (1999) 112 STC 1 had held that disposal of entire business as a slump sale is not covered in the course of business even if it involves sale of certain movables hence it is not covered by the definition of “goods”. It further held that the transfer of property in goods as an integral part of the agreement to sell is not “in the course of business” for the obvious reason that the seller wants to put an end to its entire business. An activity directed towards the end or termination of business is not a transaction “in the course of business”.
iv) “Slump sale” is not “sale”
Pursuant to the “slump sale” of the undertaking, entire assets of the company vests in the new company by execution of sale deed. Vesting of business of the undertaking “as a going concern” does not involve any “sale”. The High Court of MP in the case of STI India Ltd (Biplus Division) v. CCT, MP (2007) 10 STJ 657 followed the judgment of M/s. Coromandal Fertilizers Limited (1999) 112 STC 1 (supra) and held that “the sale of movable assets by the petitioner on closure of business, by no stretch of imagination or reasoning can be said to have taken place during the course of business as dealer – the impugned orders levying tax and penalty cannot be sustained”. Even transfer of one unit by a dealer out of many undertakings, as a going concern having separately identifiable assets, liabilities, income and expenditure, will also be considered a transfer of said business as a “going concern” and will not attract any VAT liability. Reference may be made to following judgments :–
a) The Dy. C.S.T. v. Dat Pathe (1985) 59 STC 374 (Kerala);
b) The Dy. CCT v. K. Behanan Thomas (1977) 39 STC 325 (Madras);
c) Lohia Machines Ltd v. CST U.P. (1998) 110 STC 305 (Allahabad).
In substance, a transaction of “sale” attracts tax under VAT Act only if it is carried out (a) in the course of business and (b) if it is a “sale” of movable property and (c) it is a sale of “goods”. As discussed above, transfer of entire business as a going concern is outside the ambit of “goods”, “sale” and “in the course of business”. Therefore, transfer of plant & machinery, electric installations, furnitures and other equipments may be partially covered within the meaning of immovable asset and partially movable assets but when the agreement between the parties is to effect sale of entire business undertaking, as a going concern, the consideration received cannot be covered within the definition of “goods” so as to levy tax as sale consideration under VAT Act.
v) Tax incidence on Slump Sale under GST
The Central Goods and Services Tax Act (CGST Act) does not clearly stipulate the law vis-à-vis transfer of business as a going concern or slump sale. There being no clarity whether the transactions involving slump sale would be taxable under the new CGST Act or not, the provisions of the Act need to be analysed so as to reach a view on the applicability of GST on Slump Sale, though premature.
Charging Section 9 (Levy and Collection) and Section 12 (Time of Supply of Goods) of CGST Act shall be applicable on supplies of all intra-state goods or services or both which shall include transfer of business as a going concern also subject to given exemptions. The scope of “Supply” under Section 7(1) of the CGST Act is wider than the definition of “Slump Sale” under Section 2(42C) of the Income Tax Act, 1961, as it includes any sale, transfer, disposal, lease/license or exchange of goods or services and hence it includes any sale or transfer of goods within its ambit. Section 7(1)(d) includes the activities to be treated as supply of goods or supply of services as referred to Schedule-II. Para-4 of Schedule-II deals with transfer of business assets and Sub-clause (c) excludes the activity by person when business is transferred as a going concern to another person. Consequently, based on the judicial views under Sales tax or VAT regime, it can be safely argued that GST may not be applicable on Slump Sales considering “business as a going concern” to be outside the scope of section 7 i.e. scope of “Supply”.
It will not be out of place to state that section 18(3) of CGST Act read with Rule 41 of CGST Rules provides for availability of input credit on transfer of business which remain unutilised in electronic credit ledger of the transferor by submitting return in Form ITC-02. However, any unutilised balance in electronic cash ledger of the transferor will have to be claimed as refund by the transferor. Such provisions will equally apply to a case of transfer of business as going concern.
Section 22(3) of CGST Act also contemplates a situation of transfer of business on account of succession or otherwise to another person as a going concern and makes it obligatory that the transferee must obtain registration under with effect from date of such transfer i.e. before the agreement for transfer of assets is executed.
[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]