Taxing gaps in slump sales

With the world economy poised to gain momentum, corporates all over the globe are discussing their plans for mergers and acquisitions. One concept that is being considered is that of a ‘slump sale’ as it has an edge over other modes of business restructurning on account of the tax efficiencies that come with it.

Indian taxation provides definitions for ‘slump sale’ and special provision for the computation of capital gains in case of slump sales. Section 2(42C) of the Income Tax Act, 1961, defines a slump sale as the transfer or sale of one or more undertakings for a lump sum consideration without values being assigned to individual assets and liabilities.

The term ‘undertaking’ has been defined under sub-clause (19AA) of section 2 of the act to include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole. It does not include individual assets or liabilities or any combination thereof that does not constitute a business activity. The judiciary in India seems to agree that a blend of assets and liabilities shall not constitute an undertaking, unless it can be an independent business concern.

Aseem Chawla is a partner, Amit Singhania is a senior consultant and Jasmeet Singh is an associate at Amarchand & Mangaldas & Suresh A Shroff Co.