What is Slump Sale?
A slump sale is a method of transferring an undertaking (business unit or division) from one company to another for a lump sum consideration without assigning specific values to individual assets and liabilities. It is governed by Section 180(1)(a) of the Companies Act 2013 and Section 50B of the Income Tax Act 1961.
Key Characteristics of Slump Sale
- • Transfer of an "undertaking" as a whole
- • Lump sum consideration without asset-wise valuation
- • Transfer of assets AND liabilities together
- • No court approval typically required
- • Taxed as capital gains under Section 50B
- • Net worth is deemed as cost of acquisition
Definition under Income Tax Act
Section 50B of the Income Tax Act specifically deals with capital gains in case of slump sale. The section defines slump sale as:
"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."
When to Use Slump Sale
Ideal For
- • Quick business transfers
- • Unrelated party transactions
- • Cash-based acquisitions
- • Avoiding court processes
- • Tax planning in certain scenarios
Not Suitable For
- • Related party transactions needing tax neutrality
- • Complex liability transfers needing creditor protection
- • Where loss carry-forward is critical
- • Listed company demergers
- • Employee-intensive transfers needing protection
Legal Framework
Companies Act 2013
Section 180(1)(a) - Restriction on Sale of Undertaking
The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution:
"To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings."
Exceptions - When Special Resolution is NOT Required
- • Sale of undertaking in the ordinary course of business
- • Sale with consent of all members in meeting (unanimous resolution)
- • If the company's articles permit Board to sell without special resolution
- • Sale of investment in the ordinary course of business (for investment companies)
Income Tax Act 1961
Section 50B
Special provision for computation of capital gains in case of slump sale. Deems net worth as cost of acquisition and full value of consideration.
Section 50B vs Section 45
Section 50B overrides general capital gains provisions. Specific method for computing gains in slump sale transactions.
What Constitutes an Undertaking?
An "undertaking" is a key concept in slump sale. It means a business unit or division that can be operated as a going concern.
Elements of an Undertaking
- • Assets (tangible and intangible) used for business
- • Liabilities associated with the business
- • Rights and licenses
- • Employees engaged in the business
- • Goodwill and business connections
- • Ability to function as a going concern
What Does NOT Constitute Slump Sale?
- • Transfer of individual assets without liabilities
- • Sale of assets where values are assigned to each asset
- • Piecemeal sale of business components
- • Transfer without business activity (mere asset transfer)
- • Transfer without consideration
Judicial Interpretation
Courts have held that for a transaction to qualify as slump sale:
- • The business must be capable of being carried on independently
- • Both assets and liabilities must transfer together
- • No itemized valuation should be done
- • The transaction must be for a lump sum consideration
Slump Sale Process
Step 1: Identify the Undertaking
- • Define the scope of business/division to be transferred
- • Identify all assets and liabilities
- • Prepare asset and liability schedule (for internal purposes)
- • Due diligence preparation
Step 2: Valuation
- • Engage valuer to determine fair value of undertaking
- • Methods: DCF, net asset value, market approach
- • Valuation for determining consideration (not for assigning values to individual assets)
Step 3: Board Resolution
- • Convene Board meeting
- • Approve slump sale transaction
- • Authorize execution of Business Transfer Agreement (BTA)
- • Fix consideration amount
Step 4: Shareholder Approval (if required)
- • Check articles of association
- • Convene general meeting if special resolution required
- • Pass special resolution (75% majority)
- • File MGT-14 with ROC within 30 days
Step 5: Execute Business Transfer Agreement
- • Draft comprehensive BTA
- • Representations and warranties
- • Indemnification clauses
- • Conditions precedent
- • Closing mechanics
Step 6: Closing and Transfer
- • Payment of consideration
- • Transfer of physical assets
- • Transfer of title documents
- • Intimation to contract counterparties
- • Employee communication
Step 7: Post-Transfer Compliance
- • Update statutory registers
- • Transfer licenses and permits (where transferable)
- • GST registration cancellation/amendment
- • Intimate tax authorities
- • Financial reporting
Board and Shareholder Approval
Board Approval Requirements
The Board of Directors must approve the slump sale transaction through a Board resolution. The resolution should cover:
- • Identification of undertaking to be sold
- • Purchase consideration
- • Approval of Business Transfer Agreement
- • Authorization for execution and delivery
- • Appointment of authorized signatories
When is Special Resolution Required?
| Scenario | Approval Required |
|---|---|
| Sale in ordinary course of business | Board resolution only |
| Sale of whole/substantially whole undertaking | Special resolution (Section 180) |
| Articles permit Board to sell | Board resolution only |
| Unanimous shareholder consent | No special resolution needed |
ROC Filing
If special resolution is passed, file Form MGT-14 with ROC within 30 days of passing the resolution along with:
- • Copy of special resolution
- • Explanatory statement
- • Altered MOA (if applicable)
Tax Implications (Section 50B)
Computation of Capital Gains
Under Section 50B, capital gains in slump sale are computed as follows:
Capital Gains = Full Value of Consideration - Net Worth of Undertaking
Where:
- • Full Value of Consideration: Lump sum amount received
- • Net Worth: Aggregate value of total assets minus total liabilities
Computation of Net Worth
Net worth is computed as:
- For depreciable assets: Written Down Value (WDV) under Income Tax Act
- For non-depreciable assets: Book value
- Liabilities: Book value of liabilities transferred
Long-term vs Short-term Capital Gains
Long-term Capital Gains
If undertaking is held for more than 36 months. Tax rate: 20% with indexation benefit.
Short-term Capital Gains
If undertaking is held for 36 months or less. Taxed at normal applicable rates.
No Indexation Benefit for Depreciable Assets
For depreciable assets, the WDV as per Income Tax Act is taken as the cost of acquisition without indexation benefit.
GST Implications
Transfer of business as a going concern is exempt from GST under Notification No. 12/2017-Central Tax (Rate). However, the following must be ensured:
- • All assets and liabilities must transfer together
- • The recipient must carry on the business
- • Supplier must deregister for GST (if applicable)
- • Recipient must register for GST
Stamp Duty
Stamp duty is payable on the transfer of immovable properties and certain movable assets as per state laws. Rates vary from 3% to 8% depending on the state.
Accounting Treatment
In the Books of Transferor Company
- • Assets and liabilities of undertaking are derecognized at book values
- • Consideration received is recorded
- • Gain/loss on sale is recognized in Profit & Loss Account
- • If loss, assess impairment and write-off requirements
In the Books of Transferee Company
- • Assets and liabilities recorded at fair values or book values (based on accounting policy)
- • Goodwill may be recognized if consideration exceeds fair value of net assets
- • Capital reserve recognized if consideration is less than fair value
Ind AS 103 Compliance
If the transferee applies Ind AS, the acquisition should be accounted for as a business combination under Ind AS 103. This requires:
- • Identification of acquirer
- • Measurement of consideration transferred
- • Recognition and measurement of identifiable assets and liabilities
- • Recognition of goodwill or gain from bargain purchase
Valuation Requirements
Is Registered Valuer Mandatory?
For slump sale between unrelated parties, there is no statutory requirement for valuation by registered valuer. However:
- • Valuation is strongly recommended to determine fair consideration
- • For related party transactions, registered valuer may be required under Companies Act
- • Listed companies may require valuation as per SEBI regulations
- • Banks/FIs may require valuation if financing the acquisition
Valuation Methods
Net Asset Value (NAV) Method
Fair value of assets minus liabilities. Suitable for asset-heavy businesses.
Discounted Cash Flow (DCF)
Present value of projected future cash flows. Suitable for profitable going concerns.
Market Approach
Comparable company/transaction multiples. Suitable when comparable data is available.
Slump Sale vs Other Restructuring
| Aspect | Slump Sale | Demerger (Court) | Asset Sale |
|---|---|---|---|
| Court Approval | Not required | NCLT approval required | Not required |
| Tax Treatment | Capital gains u/s 50B | Tax neutral possible | Capital gains/ business income |
| Liabilities Transfer | Automatic with undertaking | Automatic transfer | Selective/negotiated |
| Loss Carry Forward | Not available to buyer | Available in resulting company | Not applicable |
| Timeline | 1-3 months | 6-12 months | 1-2 months |
| Shareholder Approval | May be required u/s 180 | 3/4th majority required | Generally not required |