SECTION 50 OF INCOME TAX ACT, 1961 IS NOT APPLICABLE TO CAPITAL GAINS IN SLUMP SALE.

[Mr. M. GOVINDARAJAN]

Slump sale is defined under Section 2(42C) of the Income Tax as the transfer or 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. The explanation to the said section gives the meaning of ‘undertaking’ which is assigned to it in Explanation 1 to clause (19AA).   The explanation 2 to the said section declared that determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

Section 50B provides for computation of capital gain in the case of slump sale.  Section 50B(1) provides that 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. The proviso to the said sub section provides 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 36 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.

Section 50B (2) provides that 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 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.

Section 50B(3) provides that every assessee in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in Explanation below sub section (2) of Section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

The explanation 1 to this section gives the meaning of ‘net worth’ as 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 the books of account. 

Section 50 provides for assessment for capital gain of assets forming part of block of assets in respect of which depreciation is allowed under the Act.   But this section is not applicable in slump sales.   This is well explained incase law ‘Commissioner of Income Tax V. Accelerated freeze drying Co. Ltd.’- [2010 -TMI - 206336 - Kerala High Court]. The facts of this case run as follows:

The assessee was engaged in seafood processing and export with their own factories transferred one of their industrial units as a going concern during the previous year relevant for the assessment year 2003 – 04 to Hindustan Level Limited for a total consideration of Rs.22.20 crores which includes the aggregate value for land, building, machinery and all equipment with liabilities specifically mentioned in the agreement.  The sale agreement consists two parts, one sale deed executed and registered covers land and building and for the purpose of stamp duty and registration fee a valuation was separately made based on which stamp duty and registration fee were paid.  It is specifically mentioned in the conveyance deed that the fair market value was adopted only for the purpose of stamp duty and registration charges.  In clause 3.2 of the sale deed it is clearly stated that the undertaking is transferred as a going concern on ‘slump sale basis’. 

The assessee when filed the income tax return he submitted the auditor’s report in Form 3CEA prescribed under Rule 6H of the Income Tax Rules which is the requirement for the purpose of assessment of capital gains on slump sale under Section 50B(3) by obtaining a certificate from the Chartered Accountant.   In the return the assessee returned the transaction for the assessment for capital gains as sale of depreciable items under Section 50 of the Act.  The assessee contended before the assessing authority:

• Form 3CEA is furnished as a precaution;
• The sale of industrial undertaking should be assessed for capital gains as sale of depreciable assets under Section 50 of the Income Tax Act.

The Assessing Officer made the assessment for capital gains as provided under Section 50B of the Act since he found the sale as slump sale.  Reassessment was also made by the assessing authority.   The assessee challenged the assessment order as well as reassessment before the Commissioner of Income Tax (Appeals).  The Commissioner (Appeals) allowed the appeal on both grounds.  The Commissioner (Appeals) held that the sale of the industrial undertaking is not slump sales but is to be associated as sale of depreciable assets under Sec. 50 of the Act. Against this order the Revenue filed appeal before the Tribunal which also upheld the order of the Commissioner (appeals).   Aggrieved against this the Revenue filed appeal before the High Court.

The High Court noted the following:

• The assessee was well aware of Explanation 2 to Section 2(42C) because except the value adopted for land and building which is specifically stated as for the purpose of payment of stamp duty and registration fee the sale price agreed and paid a lump sum amount;
• The assessee and the purchaser have specifically stated in clause 3.2 of the sale deed that the sale is on ‘slump sale basis’ which is nothing but adoption of the said terms as contained in the above provision of the Income Tax Act.
• The assessee knowing well the chance of transaction being treated as a ‘slump sale’ for the purpose of assessment of capital gain furnished along with the return filed the Chartered Accountant’s certificate in Form 3CEA prescribed under Rule 6H in terms of Section 50B(3) of the Income Tax Act;
• Even after that the assessee claimed that capital gain is assessable on sale of undertaking as sale of depreciable assets under Section 50 of the Act;

In the view of the High Court the assessee’s claim for assessment of capital gain under Section 50 of the Act is not tenable because the said section provides for assessment of capital gains in the case of sale of depreciable assets.   What the assessee has sold is not any asset in a block, if at all the assets sold form part of a block of asset on which depreciation was being allowed.  The distinction between Sections 50 and 50B is that while Section 50 provides for computation of capital gains on the sale of only depreciable assets section 50B provides for computation of capital gain on the sale of undertaking as a whole which includes depreciable assets as well.  There is also a difference in the mode of computation of capital gains, under Section 50 for depreciable assets and for slump sale under Section 50B.   Section 50 is a full code for computation of capital gains on depreciable assets.   On the other hand, under Section 50B the asset has to be first classified between long term or short term capital asset and then for the purpose of Sections 48 and 49 net worth has to be computed in terms of Explanation 1 to the said section.   The capital gain under Section 50B is the sale proceeds as reduced by net worth.

 In view of the above the High Court held that the sale of the undertaking is a slump sale within the meaning of Section 2(42C) assessable under Section 50B of the Act.