Slump sale is a transfer of one or more business undertakings for a lump sum consideration, without assigning individual values to each asset and liability which is to be transferred. In this article, we discuss the way in which a slump sale is performed.
Elements of Slump Sale
The following elements constitute a slump sale:
- Sale of an undertaking
- Business is sold on a going concern basis
- Assets and liabilities are transferred to buyers
- A lump-sum amount is paid as consideration
Slump sale is intended to accomplish the following purposes:
- To enhance the performance of the business
- To focus and purge negative synergy
- To achieve tax and regulatory benefits
What Qualifies a Slump Sale?
The below-listed conditions qualify a slump sale:
- It must involve one or more undertakings.
- A transfer must be the result of a sale.
- Sales must occur for consideration.
- The value must not be assigned to individual assets or liabilities.
Taxability Under the Income Tax Act
- Gains derived from the transfer of the undertaking under this type of sales method is taxable. Any gain derived from the slump sale in the previous year is taxed as capital gains arising from the transfer. If the undertaking is owned for 36 months or less, then such an asset is called a short-term capital asset. In case of businesses held for more than 36 months, the asset would be termed a long-term capital asset and long-term capital gains would be applicable.
- The profit earned from the sale is taxed under capital gain and it will be considered as the income from the previous year’s transfer. The undertaking which is transferred would be considered as a capital asset. There is no distinction between depreciable assets, non-depreciable assets and stock for the purpose of calculating the tax. The entire income gained from the sale is considered as a capital gain arising from the single transaction.
- Thus capital gain arising from the sale is calculated based on the difference between sale consideration and the net worth of the undertaking. Net worth is considered to be the cost of the transfer and cost of the benefit. Net Worth is the difference between the aggregate value of the total assets of the undertaking and the value of its liabilities as it appears in the books of the account. The aggregate value of total assets is the sum total of the written value of the assets if it involves depreciation of an asset and the book value of other assets.