Income Tax--Current Issues

Practice Update

V.K. Subramani

TAX EFFECT OF SLUMP SALE OF MORE THAN ONE UNIT WITH SOME OF THEM HELD FOR LESS THAN 36 MONTHS

Slump sale is governed by section 50B. The Finance Act, 2021 amended the definition of the term 'slump sale' contained in section 2(42C) to cover transfer of one or more undertaking by any means for lump sum consideration. This amendment is clarificatory in nature and to tax slump sale made otherwise than by sale. Sub-section (2) to section 50B was substituted which deals with computation of 'net worth' without considering indexation benefits and determination of FMV of the assets for the said purpose. Clause (aa) in the Explanation is inserted to give consequential effect for treating goodwill to be treated as 'nil' except in cases where there is some cost of acquisition. In other words, any notional value assigned to goodwill shall be taken as 'nil' while computing the 'net worth' of the undertaking.

Section 50B says that the second proviso to section 48 shall not apply to computation of capital gain on slump sale. Which means no indexation benefit shall be available on slump sale. In Pr. CIT v. Wockhardt Hospitals Ltd (2020) 192 DTR (Bom) 289 : 2020 TaxPub(DT) 1759 (Bom-HC) the assessee owned 12 hospitals which were sold on slump sale basis. Out of 12 hospitals, 4 hospitals were owned by it for less than 36 months. One of the issues litigated was whether the capital gain on sale of 12 hospitals for lump sum consideration is taxable as long-term or short-term capital gain. It was held that even if one asset (one hospital in this case) is held for more than 36 months, the transaction would be chargeable tax as long-term capital gain.

Yet another issue which was resolved in this decision was whether the expenditure incurred in connection with transfer is eligible for deduction while computing capital gain. The court referred to the decision of the tribunal who in turn referred to the case of Dy. CIT v. Summit Securities Ltd. (2011) 59 DTR (Mum) (SB) (Trib) 313 : 2011 TaxPub(DT) 1696 (Mum-Trib) where it was held that section 50B is a separate code in itself only for the determination of cost of acquisition and cost of improvement but not for the computation of capital gains in case of slump sale. Thus it held that expenditure incurred in connection with slump sale is eligible for deduction while computing the capital gain.