In general terms, a ‘Slump Sale‘ is the sale/transfer of an ‘undertaking(s)’ for a lump sum consideration, without separate or independent values being assigned to the underlying individual assets and liabilities of the said undertaking(s). The Income Tax Act 1961 (the Act) through section 50B provides the legal authority and mechanism for taxation of such sale/transfer as capital gains and is defined in the Act as provided below.
Special provision for computation of capital gains in case of slump sale
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place :
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.
Explanation 1.—For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account :
Latest Supreme Court decision^ on the subject with respect to dissolution of a Partnership Firm
- In the above said matter, a partnership firm had earlier ‘dissolved’ by the afflux of time, as provided in the relevant partnership deed. However, a difference of opinion amongst the erstwhile partners, resulted in the affairs of the firm not being wound up immediately upon such dissolution.
- In consequence thereof, two of the partners filed a Company Petition before the jurisdictional High Court for the purposes of winding up.
- Whilst the matter before the said Court was afoot, the business of the said firm was continued by seven of the erstwhile partners through an interim order to that effect passed by the said Court, and since the said partnership deed also stipulated that on dissolution, the firm was to be sold as a continuing concern to the partner(s) who could offer the highest price in consideration there of.
- On the aforesaid terms, the bid of an ‘Association of Persons’ (AOP), comprising of three erstwhile partners was the highest and accepted by the said Court and thereafter the assets of the said firm were treated as having been sold to the AOP pursuant to relevant orders to that effect being passed by the said High Court.
- During income tax assessment, the concerned Assessing Officer (AO) treated certain considerations received by the partners for the above sale as capital gains and charged the same to tax under the Act. This assessment was appealed and the case of the assessees before the lower income tax appellate authorities was that the said consideration was a ‘capital receipt’ (and not income) in their hands, thus not exigible to income tax.
Appellant-Assessee’s arguments on legal issues
Before the Hon’ble Supreme Court, an argument was put forth by the appellant-assessee that the above said sale was not taxable as the same was in the nature of a ‘Slump Sale’ and the said firm was sold as a ‘going concern’. In support it was further argued that the ‘undertaking’ that was transferred as a going concern was a ‘capital asset’, and since at the relevant time there was no provision (section 50B later inserted in time) in the Act to tax such said sale, the same could not therefore be taxed under the Act. Another argument made in the alternative was that if at all the capital gain tax was payable, liability to pay the same was that of the partnership firm and not the individual partners by virtue of section 45(4) of the Act.
Further, it was also argued that even if the provisions of capital gain were applicable and the consideration amount was to be taxed as the capital gain, the valuation of goodwill and the treatment of ‘cost of acquisition’ of the same as ‘Nil’, as done by the Assessing Officer, was contrary to law. Support for this was drawn from the facts that the provisions of section 55(2) of the Act read with sections 48 and 49 concerning valuation of ‘cost of acquisition’ of such ‘Goodwill’ was inserted and took effect under the Act later in time to the said sale.
Hon’ble Supreme Court’s adjudication
Holding against the Appellant-Assessee and for Revenue, the said Hon’ble Court held as follows –
(edited and paraphrased in relevant parts and headings are that of the author’s)
- Though the said partnership firm was sold as a ‘going concern’, nevertheless, the assets were that of a ‘dissolved’ firm which had earlier come to an end by afflux of time, a fact that Revenue had been able to substantiate.
- No doubt, in the said Company Petition the said interim order was passed by the High Court permitting the group of persons (seven in number), having controlling interest in the firm, to continue the business, however, this was done as an interim arrangement till the completion of winding up proceedings.
- Pertinently, insofar as the said firm is concerned, it did not carry on business thereafter as an existing firm. On the contrary, few ex-partners with controlling interest were allowed to continue the business activity in the interregnum as a stop-gap arrangement.
- Insofar as the firm is concerned, it did not file income tax returns after the date of dissolution. Obviously so, as it stood dissolved and was no more in existence. Precisely for this reason, the income that was generated from the business, after the dissolution, was assessed by the income tax authorities in the hands of such erstwhile partners as an AOP. It is this AOP which was filing the returns and getting the same assessed in that capacity and paying the income tax thereupon.
- Further, in the orders passed by the High Court from time to time in the said petition, insofar as the firm is concerned, it had always been described as ‘the dissolved partnership firm’. Thus, the assets which were sold ultimately were of a dissolved partnership firm, though as a going concern.
‘Slump Sale’ argument incorrect as 50B irrelevant as well as inapplicable
- That the outgoing partners (Appellant-Assessees herein) received their net share of the value of the assets of the firm out of the amount received by way of sale of the said assets of the firm as per the partnership deed.
- On the aforesaid facts, it became clear that asset of the firm that were sold were the capital asset within the meaning of section 2(14) of the Act. Once it is held to be the “capital asset”, gain therefrom is to be treated as capital gain within the meaning of Section 45 of the Act.
- The above said argument of the Appellant-Assessee also fails in view of the fact that the said assets were put to sale after their valuation. There was a specific and separate valuation for land as well as building and also machinery. Such valuation had to be treated as that of a partnership firm which had already stood dissolved.
- As per the definition under section 50B of the Act, the sale in question could be treated as slump sale only if there was no value assigned to the individual assets and liabilities in such sale. This had obviously not happened in this case.
- That not only value was assigned to individual assets, even the liabilities were taken care of when the amount of sale was apportioned among the outgoing partners, i.e. the Appellant-Assessees herein.
- Holding that the sale in question was not slump sale, obviously Section 50B also did not get attracted as this section contains special provision for computation of capital gains in case of slump sale.
- In the aforesaid scenario, when the Official Liquidator had distributed the amount among the nine partners, including the Appellant-Assessees herein, after deducting the liability of each of the partners, the concerned High Court had rightly held that the amount received by them is the value of net asset of the firm which would attract capital gain.
- Thus, the ‘transfer’ of the assets triggered the provisions of Section 45 of the Act and making the capital gain subject to the payment of tax under the Act.
Demand of tax from dissolved firm not tenable and argument on ‘Goodwill’
- Insofar as argument of the assessees that tax, if at all, should have been demanded from the partnership firm is concerned, on the facts of this case that may not be the situation where the firm had dissolved much before the transfer of the assets of the firm and this transfer took place few years after the dissolution, that too under the orders of the High Court with clear stipulation that proceeds thereof shall be distributed among the partners.
- Furthermore, the said High Court’s orders passed in the matter and the undertakings given by all the erstwhile partners including the Appellant-Assessees were with respect to all matters concerning winding up and sale including the said Appellant-Assessees personally bearing their liability to capital gains tax on share of ‘net assets’ received from the AOP for the said sale.
- The above said arguments that valuation of goodwill was wrongly done may also not survive in light of the findings in the matter. Furthermore, no such plea was taken by the assessees in the High Court or before the Tribunal or lower authorities.
- However, the appeal allowed partly for the relevant assessment year only to the extent that business income/revenue income for the said assessment year was to be assessed at the hands of the AOP and not Appellant-Assessee in terms of the orders of the said High Court, wherein the said AOP had retained the tax amount from the said consideration and which was supposed to file the return in that respect and pay tax on the said revenue income.
LL.B (CLC Faculty of Law Delhi University), JD (UNSW)
Taxation & Criminal Law Advocate
^Refer Vatsala Shenoy vs Jt.Commissioner Of Income Tax (Assessment), Mysore as decided by the Hon’ble Supreme Court of India in CA No. 1234-1245 Of 2012 and SLP (C) No.CC 9101, 10193 and 14812 of 2014 on 18 October 2016