Finance Bill 2021 - 4. Slump Sale - Ambiguity on nature of transfer resolved - Proposed amendment

Slump Sale now includes all type of transfers - Proposed amendment to the Income Tax Act, 1961.

Source: The Income Tax Act, 1961, The Finance Bill 2021 and the memorandum to the Finance bill.

Introduction

Dear Readers,

The existing definition of Slump Sale [as per section 2(42C) of the Income Tax Act, 1961], is as follows;

(42C) "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."

Also it is very relevant to consider the definition of "transfer" as per section 2(47) which includes sale / exchange / relinquishment of asset, or extinguishment of rights, or compulsory acquisition under law, or conversion of asset to stock in trade, or maturity / redemption / etc.

As can be clearly seen above Section 2(47) includes various terms under the definition of transfer, as compared to the definition of slump sale (which includes only transfer as a result of sale). 

Hence plainly reading in case there is any transfer of undertaking by way of exchange, relinquishment, compulsory acquisition, etc. it can be very well considered to be a "Transfer" as per section 2(47) but will it still qualify as 'Slump Sale' as per section 2(42C)?

Anomaly now proposed by Finance Bill 2021, to be resolved by way of amendment to Income Tax Act, 1961

The Finance Bill, 2021 now proposes to amend the definition of Slump Sale [Section 2(42C)]  as follows; the relevant changes in the definition is emphasized 

(42C) "slump sale" means the transfer of one or more undertakings as a result by any means for lump sum consideration without values being assigned to the individual assets and liabilities in such sales."

(new explanation inserted)

Explanation 3 - For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47)

The conclusion is that any type of transfer which is made for lump sum consideration without values being individually assigned to the Assets and Liabilities will be concluded to be as "Slump Sale"

Need of the Amendment

As per the Memorandum to the Finance bill, 2021, it is seen that lot of tax avoidance schemes are drawn to defeat the intent of the provision, which leads for courts intervention to determine whether in substance the transfer made is "Slump Sale" or not. Some of them can be listed as below as referred from the case laws mentioned in the Memorandum to the Finance Bill, 2021;

• Where Shares are allotted in consideration of sale of entire undertaking / Assets - CIT vs. R.R. Ramakrishna Pillai (Supreme Court) 
• Where a Sugar mill is given on long term lease in return of entire quantity of molasses (waste product while producing sugar) to be supplied by the lessee to the lessor. - Dhampur Sugar Mills [(2006) 147 STC 57]
• Any other situation where a transfer of an asset and the consideration thereof is ascertained first and is then discharged by way of non-monetary assets.

Hence as can be seen from above, the substance was in nature of slump sale, however it was not treated as slump sale due to consideration being in nature of exchange, etc. The benefit to such tax avoidance scheme might differ on case to case basis.

Conclusion

Hence, seems that the principle of "Substance over form" being upheld for the definition of "Slump Sale". It is quite exciting to watch over the same been enshrined in the Act and any future course of litigation in the path of "Slump Sale"

Do let me know your views on the same in comments below.