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Unit 14: Restructuring: Conversion and Slump Sale

14.3.4 Taxability of Gains Arising on Slump Sale Notes

Sec. 50B provides the mechanism for computation of capital gains arising on slump sale. On a
plain reading of the Section, some basic points which arise are:
1. Sec. 50B reads as ‘Special provision for computation of capital gains in case of slump
sale’. Since slump sale is governed by a ‘special provision’, this Section overrides all other
provisions of the Act.
2. Capital gains arising on transfer of an undertaking are deemed to be long-term capital gains.
However, if the undertaking is ‘owned and held’ for not more than 36 months immediately
before the date of transfer, gains shall be treated as short-term capital gains. It is important
to note that Circular No. 779, dated 14-9-1999, issued at the time of introduction of Sec. 50B,
has used the words ‘held’ instead of ‘owned and held’ used in the text of S. 50B. It is not
clear whether this difference in terminology is of any signifi cance.

3. Where an undertaking was acquired by an assessee under a will, and such an undertaking
is transferred by him as a slump sale within a year, the undertaking will be classifi ed as
short-term or a long-term asset based on the period for which the previous owner ‘owned
and held’ the undertaking [Sec. 49(1)(ii)].
4. Taxability arises in the year of transfer of the undertaking. The undertaking will be deemed
to be transferred on execution of the agreement and registration thereof coupled with the
handing over of possession of the undertaking to the transferee. However, if the year of
the agreement of the undertaking and registration thereof and the year of its possession
fall in two different previous years, then the previous year in which the possession of the
undertaking is handed over to the transferee will be considered as the year of transfer.
5. Capital gains arising on slump sale are calculated as the difference between sale
consideration and the net worth of the undertaking. Net worth is deemed to be the cost of
acquisition and cost of improvement for Sec. 48 and Sec. 49 of the Act.
6. As per Sec. 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.

7. In the year of transfer of the undertaking, the assessee has to furnish an accountant’s report
in Form 3CEA along with the return of income indicating the computation of net worth

arrived at and certifying that the figure of net worth has been correctly arrived at. Although
the certification of computation is based on the information and explanations obtained by

the accountant, the essence of the form is on reporting that the computation is ‘true and
correct’ rather than ‘true and fair’.
8. In case of slump sale of more than one undertaking, the computation should be done
separately for each undertaking. This is substantiated by Note 5 to Form 3CEA, which
requires the computation of net worth of each undertaking to be indicated separately.
9. In case of slump sale in the nature of succession of a firm or a proprietary concern by a

company, capital gains made on slump sale may be entitled to exemption u/s.47(xiii) and

(xiv), respectively, provided the other conditions of these Sections are satisfied. In case of
violation of conditions of S. 47(xiii) or (xiv) in any subsequent year, the benefit availed by

the firm or the sole proprietor will be taxable in the hands of the successor company in the

year in which the violation takes place as per S. 47A (3).
10. Besides, if the successor company violates the conditions of S. 47(xiii) or (xiv) by transferring
that undertaking under a slump sale within three years of conversion, the undertaking will
be classified as a short-term capital asset as per Sec. 50B. Then, the company would have to

pay for the loss of tax benefit due to violation of conditions, as well as tax on the short-term

capital gains arising on the slump sale.

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