DIRECT TAXATION WITH

RESPECT TO BUSINESS
MODULE 5: Taxation On Slump Sale, M&A

BY: SUSHIL JAIN

ASSISTANT PROFESSOR, KPMSOL, NMIMS MUMBAI
 INTRODUCTION
A slump sale refers to the transfer of one or more
undertakings as a going concern, for a lump sum
consideration, without assigning individual values to the
assets and liabilities. In India, slump sale transactions
are governed by the provisions of the Income-tax Act,
1961, specifically under Section 50B. This section lays
down the tax implications and computation methodology
for capital gains arising from such transactions.
Example: Company A transfers its entire manufacturing
unit to Company B for a consolidated amount of ₹100
crore without individually valuing its machinery,
inventory, and other assets. This transaction qualifies as
a slump sale.
 LEGAL PROISION
Section 2(42C) of the Income-tax Act, 1961, defines a
slump sale as the transfer of an undertaking or division
for a lump sum consideration, where individual values of
assets and liabilities are not assigned.

Essential Elements of Slump Sale:

• Transfer of an undertaking or business unit.

• Lump sum consideration.
• No individual valuation of assets and liabilities.
 Valuation Rules for Net Worth
Net worth is calculated as per Rule 11UAA of the Income-tax Rules, 1962.

Assets Included: All tangible and intangible assets.

Liabilities Deducted: Total liabilities as recorded in the books of accounts.

Important Points:

1. Revaluation of assets is ignored.

2. Contingent liabilities are not considered.

Example Calculation:

Total Assets = ₹100 crore

Total Liabilities = ₹30 crore
Net Worth = ₹70 crore
If the slump sale consideration is ₹100 crore, capital gains = 100 - 70 = ₹30 crore.
 Reporting and Documentation
Auditor’s Report: Section 50B mandates obtaining a
report from a Chartered Accountant (Form 3CEA)
certifying the computation of net worth.

Transfer Agreement: Clear terms mentioning that the

sale is on a slump sale basis.

Valuation Report: For substantiating the sale

consideration.
 GST and Stamp Duty Implications
Goods and Services Tax (GST):
A slump sale is considered a supply of services if it
involves the transfer of a business as a going concern.
GST may not be applicable on the transfer of an entire
business.

Stamp Duty:
Stamp duty is levied as per state laws on the transfer of
immovable property.
SLUMP SALE V ASSET SALE
 NUMERICAL FOR SLUMP SALE
Scenario: A company transfers its automobile
manufacturing division for a lump sum consideration of
₹150 crore.
Assets: Machinery - ₹40 crore, Inventory - ₹30 crore,
Intangible assets - ₹20 crore, Land and building - ₹50
crore.
Liabilities: ₹35 crore.
Net Worth: 40 + 30 + 20 + 50 - 35 = ₹105 crore.
Capital Gain: 150 - 105 = ₹45 crore. (20% LTCG) or (30%
STCG)
 TAXATION ON AMALGAMATION AND
DEMERGER
Taxation plays a crucial role in restructuring corporate entities
through amalgamations and demergers. The provisions of the
Indian Income Tax Act, 1961, provide detailed regulations to
ensure tax neutrality and promote genuine business
restructuring.
Amalgamation: According to Section 2(1B) of the Income Tax
Act, amalgamation means the merger of one or more
companies with another company, or the merger of two or
more companies to form one company, provided:
• All properties and liabilities of the amalgamating companies
become the properties and liabilities of the amalgamated
company.
• At least 75% of the shareholders of the amalgamating
company become shareholders of the amalgamated
company.
 TAXATION ON AMALGAMATION AND
DEMERGER
Demerger: As per Section 2(19AA), demerger refers to the
transfer of one or more undertakings of a company to
another company pursuant to a scheme of arrangement,
satisfying the following conditions:
All assets and liabilities of the undertaking are transferred
at book value.
Shareholders holding not less than 75% of the shares in
the demerged company become shareholders in the
resulting company.
Company X transfers its IT services division to a newly
formed Company Y. Shareholders of X receive shares in Y
in proportion to their holdings. The transfer of assets is
tax-exempt under Section 47(vib), and shareholders are
not liable for capital gains under Section 47(vid).
 Tax Neutrality in Amalgamation

Tax Exemption to Amalgamating Company: Under

Section 47(vi), any transfer of a capital asset by the
amalgamating company to the amalgamated company in
a scheme of amalgamation is not considered a taxable
transfer, provided the amalgamated company is an
Indian company.

Tax Exemption to Shareholders: Section 47(vii) exempts

capital gains arising from the transfer of shares by
shareholders of the amalgamating company in exchange
for shares of the amalgamated company.
 Tax Neutrality in DEMERGER
Tax Exemption to Demerged Company: Under Section
47(vib), transfer of assets in a demerger is not treated
as a transfer for capital gains purposes, provided the
resulting company is an Indian company.

Tax Exemption to Shareholders:Section 47(vid) exempts

the transfer of shares by shareholders of the demerged
company in exchange for shares of the resulting
company.
 COST OF ACQUISITION AND PERIOD OF
HOLDING
Cost of Acquisition: For amalgamation: The cost of
acquisition of shares received by the shareholder is deemed
to be the cost of shares held in the amalgamating company.

For demerger: The cost of shares of the demerged company

is apportioned between the shares of the demerged
company and the resulting company based on the net book
value of assets transferred.

Period of Holding: Under Section 49(2A), the period of

holding of shares received in amalgamation or demerger
includes the period for which the shares of the
amalgamating or demerged company were held.
 COST OF ACQUISITION AND PERIOD OF
HOLDING
Amalgamation: Company A is amalgamating with Company B. A
shareholder holds 100 shares of Company A, acquired at ₹50 per share
(total cost = ₹5,000). As part of the amalgamation, the shareholder
receives 80 shares of Company B in exchange for the 100 shares of
Company A.

The cost of acquisition of the shares received in Company B will be

deemed the same as the cost of the shares held in the amalgamating
company (Company A).

Cost of acquisition of shares in Company B = ₹5,000 (same as the cost

of shares in Company A)
Cost per share in Company B = Total cost ÷ Number of shares in
Company B
= ₹5,000 ÷ 80
= ₹62.50 per share
 COST OF ACQUISITION AND PERIOD OF
HOLDING
Company X undergoes a demerger, transferring assets worth ₹30 lakhs to a newly formed
Company Y. The net book value of Company X's remaining assets is ₹70 lakhs. A
shareholder holds 1,000 shares in Company X, acquired for ₹1,00,000. The cost of shares
of Company X is to be apportioned between Company X and Company Y based on the net
book value of assets transferred.

Determine the ratio of asset transfer:

Total assets = ₹70 lakhs (remaining in Company X) + ₹30 lakhs (transferred to Company
Y) = ₹1 crore
Ratio of assets:
Company X = ₹70 lakhs / ₹1 crore = 70%
Company Y = ₹30 lakhs / ₹1 crore = 30%
Apportion the cost of acquisition:
Cost of shares in Company X = ₹1,00,000 × 70% = ₹70,000
Cost of shares in Company Y = ₹1,00,000 × 30% = ₹30,000
Calculate the cost per share: If Company X issues 1,000 shares and Company Y issues 500
shares (as part of the demerger):
Cost per share in Company X = ₹70,000 ÷ 1,000 = ₹70 per share
Cost per share in Company Y = ₹30,000 ÷ 500 = ₹60 per share
 Carry Forward and Set-Off of Losses

Amalgamation: Section 72A allows the amalgamated company to

carry forward and set off the accumulated losses and unabsorbed
depreciation of the amalgamating company, subject to
conditions:
• The amalgamating company must have been engaged in
specified businesses such as manufacturing, banking, or power
generation.
• The amalgamated company must hold at least 75% of the book
value of fixed assets of the amalgamating company for at least
five years.

Demerger: Section 72A(4) permits the resulting company to carry

forward and set off the accumulated losses and unabsorbed
depreciation of the demerged undertaking.
 STAMP DUTY AND OTHER TAXES
While the Income Tax Act ensures tax neutrality for
genuine amalgamations and demergers, stamp duty may
still apply on the transfer of assets. State-specific laws
govern stamp duty rates.

CIT v. Texspin Engineering and Manufacturing Works

(2003): The Bombay High Court held that the transfer of
assets under a scheme of amalgamation, if done in
compliance with Section 2(1B), is not taxable as a
"transfer.
Inox Leisure Ltd. v. ACIT (2016): The tribunal held that tax
neutrality applies only if the amalgamated company is an
Indian company, highlighting the importance of
jurisdictional compliance.
 CONSIDERATIONS BY REVENUE AND MARKET
REGULATOR
Business Purpose Test: Tax authorities may scrutinize
whether the amalgamation or demerger is motivated by
genuine business reasons or aimed at tax avoidance.

Valuation of Assets: Accurate valuation of assets and

liabilities is crucial to ensure compliance with book
value conditions in demergers.

Compliance with SEBI Regulations: Listed companies

must comply with SEBI's framework for mergers and
demergers, ensuring transparency and fairness to
shareholders.