The sale of a business undertaking on a going concern basis for a lump sum consideration is referred to as ‘slump sale’ and section 50B of the Income-tax Act, 1961 (the Act) provides for a mechanism to compute capital gains arising from such a slump sale. Section 50B has for long remained a complete code to provide the computation mechanism for capital gains with respect to only a specific transaction, being the ‘slump sale’.
The essence of this amendment seems to be to align this method of transfer of capital assets with other methods (such as transfer of shares, gifts, assets), wherein a minimum value has been prescribed and such prescribed minimum value did not apply to transfer of capital assets forming part of an undertaking transferred on a slump sale basis. For example, an immovable property could be transferred as an indivisible part of an undertaking under slump sale at any value, without having any reference to the value adopted or assessed by the stamp valuation authority, which if otherwise transferred on a stand-alone basis would need to be transferred at any value higher than the value adopted or assessed by the stamp valuation authority. In addition, the Finance Act, 2021 also expands the scope of section 50B from merely ‘sale’ of an undertaking to any form of transfer of an undertaking, whether or not a ‘sale’ per se, essentially to include ‘slump exchanges’ within its ambit.
Section 50B was inserted by the Finance Act, 1999 with effect from 1st April, 2000 and since then this amendment by the Finance Act, 2021 is the first major amendment to this code of taxing profits and gains arising from slump sales. This article evaluates the following amendments in the ensuing paragraphs:
i. Amendment in section 2(42C) of the Act; ii. Substitution of sub-section 2 of section 50B of the Act; iii. Insertion of clause (aa) in Explanation 2 to section 50B of the Act; and iv. The date of enforcement of these amendments and whether these amendments will have retrospective effect.
LIKELY IMPACT OF THE AMENDMENT ON M&As / DEALS
Sale of business undertakings has been one of the prominent methods of deal consummation in India, since the buyers usually find it cleaner to acquire an Indian business without acquiring the legal entity / company and therefore keep the acquisition free of any legacy legal, tax or commercial disputes. In such transactions, it is hard to believe any transaction being consummated at a value less than its fair value, unless the transaction is consummated with the mala fide intention of transferring the assets for a value less than their fair value. Therefore, such transactions with independent parties are likely to remain un-impacted except the compliances attached with slump sale under the new provisions like obtaining a valuation report in compliance with the prescribed rules as o