1. Introduction
1.1 Transfer of business is such a term which has very wide scope and covers, from transfer of business in between two persons at individual level to conversion of one entity into another. The transfer of business is envisaged due to inevitable transfer of ownership and the crucial factors require consideration in such case embodies size and dominance of the undertaking, strategic repositioning, superior efficiency, value differential, synergy factors, fiscal leverage. Etc.
1.2 There are various modes of transfer of business which are adopted by the entities such as transfer of business from individual to individual, conversion of proprietary business into company, conversion of firm into company, merger/amalgamation or demerger etc. Transfer of business undertaking follows /entails transfer of assets as well as liabilities. Obviously transfer of business does involve transfer of movable as well as immovable assets. But when the business is transferred as a whole business unit/undertakings as running business termed as a going concern, then the scenario is different from taxation point of view. Such a transaction of transfer is termed as slump sale which is the suitable and
most preferred method for transfer of business.
2. Slump Sale
There were lots of controversies about taxation of such a sale of business as a going concern due to period of holding of the assets etc. To resolve the controversy regarding tax incidence upon sale of an undertaking by way of slump sale, the Finance Act, 1999 inserted sections 2 (42C) and 50B and amended section 43(6).
The definition of the slump sale as per section 2[42][c] reads 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 the individual assets and liabilities in such sales”. In order to come within the purview of the definition, all the three conditions/limbs should be satisfied that is
1. Taxpayer owns an undertaking and
2. He transfers the undertaking by way of sale and
3. The transfer is for lump sum consideration without assigning values to individual assets and liabilities.
2.1 Undertaking for this purpose means any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof which does not constitute a business activity.
In other words, a part of undertaking will not be termed as “undertaking” for the purposes of the definition if the asset/liabilities of the specific part of the undertaking cannot by themselves constitute a business activity. It is imperative here to note that the purchaser/transferee of the undertaking should able to start the business immediately upon transfer. Likewise, transfer of assets which excludes a few significant assets without which the business cannot be carried on effectively may not be considered as a transfer of business within the definition of slump sale.
To come within the purview of “undertaking” it is essential that the undertaking itself should constitute a business activity as a whole if such undertaking is transferred: or the part of the undertaking should constitute a business activity as a whole if that part of undertaking is transferred or the unit or division of the undertaking should constitute a business activity as a whole, if such unit/division of the undertaking is transferred. The most crucial part is that the transferee/buyer should be able to start the business as it is upon transfer.
The definition does not cover the transfer by any other mode such as compulsory acquisition.
2.2 The crux of the matter is that transfer should take place for a lump sum consideration without assigning values to individual assets and liabilities. In this regard the following points should be
noted
1. The determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.
2. If the values of individual assets are determined for determining the purchase consideration or where it is possible to identify the price attributable to different assets except as referred in 1 above, the transaction would not be regarded as “slump sale” even if the individual values are not mentioned in the agreement –Please refer CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 (SC). To put it differently, if the values of individual assets are determined for arriving at the purchase consideration [not being the case covered by (1)] the transaction will not be treated as “slump sale” even if such valued are not disclosed in the agreement.
2.3 Another crucial aspect is of determination /working of written down values in the hands of transferor in the case of slump sale.
As per sec.43(6) the written down value of a block of assets shall be determined as follows :
a. Find out the depreciated value of the block on the first day of the previous year and add “actual cost” of the asset acquired during the previous year.
b. From the value as per step a above deduct money received / receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold discarded, demolished destroyed during the previous year.
However, in the case of a slump sale, the following shall be reduced from the value determined after step b.
Actual case of assets falling in the block transferred by “slump sale”
Less:
a. depreciation actually allowed in respect of that asset in respect of any previous year relevant to the assessment year commencing before 1988-89; and
b. depreciation that would have been allowable from the assessment year 1988-89 onward as if that asset was the only asset in the relevant block of assets.
2.4 Capital gains in the case of slump sale (Sec 50B). The provisions of section 50B, applicable for computation of capital gains in the case of slump sale, are as below.
i) Any profit or gains arising from the slump sale effected in the previous year shall be chargeable as long-term capital gains and shall be deemed to be the income of the previous year in which the transfer took place.
Where, however, any capital asset being one or more undertakings owned and held by the assessee for not more than 36 months is transferred under the slump sale, then capital gains shall be deemed to be short–term capital gains.
ii) In the case of slump sale of the capital asset being one or more undertaking, the “net worth” of the undertaking shall be taken as cost of acquisition and cost of improvement. “Net worth” for this purpose is the aggregate value of total assets of the undertaking or division as reduced by the value of liablilites of such undertaking or division as appearing in the books of account. Any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of computing the net worth. The aggregate value of total assets of such undertaking or division shall be the written down value of block of assets determined in accordance with the provisions contained in sub-item (c) of section 43(6)(c)(i) in the case of depreciable assets and the book value for all other assets.
iii) The benefit of indexation will not be available. Revaluation shall be ignored whether it is done during the current year or the earlier years or whether
it is upward revision or downward revision
iv) If net worth is negative it is taken as equal to zero and the sale consideration will become capital gains – Please refer Zuari Inds. Ltd. v. CIT (2006) 9 SOT 563 (Mum).
v) It is mandatory for every assessee, in the case of slump sale, to furnish a report of a chartered accountant in Form No. 3CEA indicating the computation of the net worth of the undertaking or division, as the case may be and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at.
For computing net worth the aggregate of total assets shall be in the case of depreciable assets the written down value of block of assets, determined in accordance with the provisions contained in sub-item (c) of section 43(6)(c)(1) plus/and in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD to be taken as Nil plus/and in the case of other assets the book value of such assets.
As mentioned earlier, any increase/decrease in book values due to revaluation shall be ignored. From the aggregate of total assets of the undertaking, which is transferred, liabilities of the undertaking shall be deducted. Nothing is deductible on account of contingent liability as it does not appear in balance sheet.
3. If transfer agreement specifies the individual value of assets to be transferred then such a transaction is not covered by “ slump sale”. Consequently, capital gain shall be computed separately for each and every individual assets .
4. In case of slump sale if the undertaking or part of the undertaking is transferred the gain (or loss) will be long – term if such undertaking was owned and held for more than 36 months, even if some of the assets in the undertaking are short-term capital asset or even if some of the assets are not “assets” under section 2(14) [for instance stock-in-trade forming part of slump sale].
5. In the case of slump sale, accumulated business loss / depreciation will be carried forward and set off by the transferor (now losses / depreciation can be carried forward even if business is discontinued). In the case of amalgamation / demerger, the transferee can carry forward the losses/ depreciation of the transferor by virtue of section 72A.
6. In the case of slump sale, a break up of cost of each asset / liability is not available. Consequently a problem arises as to how to find out “actual cost” of different assets acquired by way of slump sale in the hands of purchaser. No specific provision has been made in section 43(1) which defines “actual cost” or section 43(6) which defines “written down value”. In CIT v. Spunpipe and Construction Co. Ltd. (1965) 55 ITR 68 (Guj). It was held that in the case of acquisition of an undertaking as a going concern, the composite consideration can be bifurcated between various assets in a fair and reasonable manner permitted by law. Even Accounting Standard 10 provides that “where several assets are purchased for a consolidated price, the consideration can be appropriated to the various assets on a fair basis as determined by competent valuers.
Per the new section 56(a)(x) any company (listed or otherwise) that receives any property for inadequate consideration shall be subject to tax on the difference between the fair value of property received and the consideration paid. The term “property” has been exhaustively defined to include immovable property, shares and securities, bullion, etc., and thus does not specifically cover “business undertaking” acquired pursuant to slump sale. However, in cases where the buyer has purchased the business on a slump basis for a lump sum consideration (without values being assigned to the individual assets and liabilities) and records the value in its books as per purchase price allocation, then whether the provisions of section 56(2)(x) can be invoked if the value of the property (as per the Rules) is more than the value assigned pursuant to purchase price allocation. There is no specific exemption or any kind of direction in the Act which takes care of such a situation.
Proviso to this clause makes it clear that the provision shall not be applicable if the transaction is not regarded as transfer under clause iv, i.e. transfer of capital asset by a company to its subsidiary company & vice versa and clause vi, i.e., transfer in a case of amalgamation, transfer in a scheme of demerger, transfer in a case of business reorganization in case of co-op. bank etc.
3. Amalgamation/Merger
Amalgamation or merger contemplates joining of two or more companies to form/establish a new company which will be altogether new entity or absorbing one or more companies by an existing company. The term amalgamation is defined in section 2{1B} of the Income-tax Act.The following conditions must be fulfilled to qualify as a merger or as an amalgamation
1. All the properties of the amalgamating company immediately before the amalgamation should become the property of the amalgamated company.
2. All the liabilities of the amalgamating company immediately before the amalgamation should become the liabilities of the amalgamated company.
3. Shareholders holding not less than three fourths of the shares in value in the amalgamating company should become the shareholders of the amalgamated company.
In such a situation the transfer of capital assets to amalgamated company shall not be regarded as transfer u/s. 2(47).
4. Demerger
The company whose undertaking is transferred pursuant to demerger is known as demerged company and the company to which the undertaking is transferred is known as resulting company.
The following conditions should be satisfied under the Act for demerger
1. Entities involved should be companies and sections 391 to 394 of the Companies Act should be complied with.
2. It involves transfer of an undertaking and all the property of the undertaking should be transferred to the resulting company and the resulting company should take over all liabilities of the undertaking. Liabilities and properties are to be transferred at book value.
3. Shares in the resulting company are to be issued to the shareholders of the demerged company and the persons holding 75 per cent shares in the demerged company to become shareholders of the resulting company.
4. Transfer should be on going concern basis. Act has made special provisions regarding tax incidence on capital gains in the case of demerger.
In following situations the transaction would not be regarded as transfer u/s. 2(47) .
1. Transfer in case of demerger if the resulting company is an Indian Company
2. Shareholders of three fourths value {at least} should continue to remain shareholders of the resulting company and
3. Such transfer does not attract tax on capital gains in the country in which the demerged company is incorporated.
5. Conversion of sole proprietorship business into company
The transfer of capital assets in case of conversion of sole proprietary concern into company is not chargeable to tax by virtue of provisions of section 47(xiv) if following conditions are satisfied.
1. All the assets and liabilities of the sole proprietary business shall become the assets and liabilities of the company
2. The shareholding of the proprietor in the company is not less than 50 per cent of the total voting power and the same shareholding shall remain continued for five years
3. The proprietor shall not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares.
6. Conversion of firm into company
The transfer of capital assets in case of conversion of firm into company is not chargeable to tax by virtue of provisions of section 47 (xiii), if following conditions are satisfied
1. All the assets and liabilities of the firm shall become the assets and liabilities of the company.
2. All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm.
3. The partners shall not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares.
4. The aggregate of the shareholding in the company of the partners is not less than 50 per cent of the total voting power in the company and their shareholding should continue to be such for a period of five years.
Thus while doing the transfer of the business, one should keep in mind the various situations and eventualities contemplated above for the smooth transfer of the
business with minimum/optimum tax incidence.
[Source: Article printed in the souvenir of NTC held on 10th & 11th May, 2019 at Pune].
There is no limit to man’s desires; he goes on desiring, and when he comes to a point where desire cannot be fulfilled, the result is pain.
— Swami Vivekananda