OPINION

QUERIST: LANCO

ISSUES FOR EXAMINATION

Our opinion is required by Querist on the following issues:

a) Provisions of capital gaincomputation under slump sale.

b) Availability of 80 IA benefit to the buyer on slump sale

REPLY TO ISSUE (a)

Relevant sections are applicable in case of slump sale under Income Tax Act: Expl 1

of section 2(19AA), 2(42C), 50B, 43(6)(c)(i)(C)

Meaning

Slump sale has been defined in section 2(42C) of the Income-tax Act. It means

transfer of one or more of the undertaking as a whole as a result of the sale for a
lump sum consideration. It further provides that in case of slump sale values should

not be assigned to individual assets and liabilities. However, the values of individual

assets and liabilities are allowed to be determined for stamp duty, registration or

other similar purposes.

In the context of section 50B, the capital asset is of unique nature, as it not only

encompasses all the assets but also all the liabilities of the undertaking. Where the

manufacturing apparatus only of an undertaking is transferred without any transfer

of the related business, it cannot be said that there is transfer of undertaking.

Reference in this regard may be made to the decision of Mahindra Engineering &

Chemical Products Ltd, dated 18.04.2012

Where an industrial undertaking is transferred under slump sale which was owned

and held by the assessee for not more than 36 months immediately preceding the

date of its transfer, the profit or gains arising from such transfer is deemed to be

capital gain arising from the transfer of short term capital assets. The relevant

criterion for considering whether the undertaking is a short term or long term is the

period of owning and holding the undertaking as a whole and not individual assets

of such undertaking. Suppose the undertaking was set up four years ago and some

of the assets were purchased and held for a period of not more than 36 months, it is

the entire undertaking which will be treated as long term capital asset for the

purposes of computing capital gain on its transfer. The period of holding of

individual assets of the undertaking has been delinked for computing capital gain on
the transfer of undertaking. In such a case even if some assets of the undertaking

were purchased a day before its transfer, they will still form part of the undertaking

as a long term capital asset. So long as the undertaking is owned and held by the

assessee for a period of more than 36 months, the capital gain arising from its slump

sale is considered as long term capital gain notwithstanding the period for which its

individual assets were owned and held.

Conditions

¾ The undertaking as a whole should be transferred

¾ Values should not be assigned to the individual assets and liabilities

for the purpose of transfer

Procedure

¾ Board resolution is required.

¾ Intimation of Board decision will be given to all the stock exchanges on

which the company’s shares are listed (if applicable).

¾ As an undertaking is sold, the company is required to take

shareholders approval by way of ordinary resolution in general

meeting u/s 293(1) of the Companies Act.

¾ The related formalities of intimation and filing are to be complied.

 ¾ The net-worth of the undertaking is to be certified by a Chartered

Accountant.

Implications under Income Tax act:

Capital gains in the hands of transferor:

¾ Section 50B of the Income-tax Act provides that any profits or gains

arising from the slump sale affected in the previous year shall be

chargeable to income-tax as capital gains in the hands of transferor.

¾ In case the undertaking has been owned by the transferor for a

period not exceeding 36 months, then the gain arising from the

transfer of such undertaking shall be treated as short term capital

gains otherwise it shall be treated as long term capital gains.

¾ The cost of acquisition and improvement of the undertaking in such

cases will be the net worth of the undertaking.

¾ In case of long term capital gains, the benefit of indexation shall not

be available.
 ¾ Computation of Net Worth: Net Worth shall be the aggregate value

of total assets of the undertaking as reduced by the value of

liabilities of the undertaking as appearing in the books of accounts.

For computing the net worth, the aggregate value of total assets shall

be,—

(a) in the case of depreciable assets, the written down

value of the block of assets

(b) in the case of capital assets in respect of which the

whole of the expenditure has been allowed or is

allowable as a deduction under section 35AD, nil; and

(c) in the case of other assets, the book value of such

assets.

Extract of Section 50B:

(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.
(3) 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 the 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.
[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 :
Provided that any change in the value of assets on account of
revaluation of assets shall be ignored for the purposes of computing the
net worth.
Explanation 2.—For computing the net worth, the aggregate value of
total assets shall be,—
(a) in the case of depreciable assets, the written down value
of the block of assets determined in accordance with the provisions
contained in sub-item (c) of item (i) of sub-clause (c) of clause (6) of
section 43; [and]
(b) in the case of capital assets in respect of which the whole
of the expenditure has been allowed or is allowable as a deduction
under section 35AD, nil; and
(c) in the case of other assets, the book value of such assets

Sub-section (2) of section 50B makes it abundantly clear that the undertaking or

division as a whole is considered as one capital asset and the net worth of this capital

asset is considered as cost of acquisition and cost of improvement for the purposes of

sections 48 and 49. Section 50B is a code in itself for the determination of cost of

acquisition and cost of improvement of the undertaking.

It is important to note here that the position under income tax was that the `Net

worth’ as defined u/s 50B cannot be a negative figure and in case it is so, that is,

where the liabilities are more than the value of assets as computed u/s 50B, then for
the purposes of computing capital gain u/s 48, the net worth would be considered as

Nil. This view was upheld in Zuari Industries Ltd. Vs. ACIT [(2007) 105 ITD 569

(Mum.)] and Paper Base Co. Ltd. Vs. CIT [2008) 19 SOT 163 (Del)].

However, in a recent case of M/s.Summit Securities Limited ITA No.4977

/Mum/2009 (SB) dated 7th March 2012, the position has been revered by Special

Bench. Therefore, if the liabilities are more than the value of assets as computed u/s

50B, then for the purposes of computing capital gain u/s 48, the negative net worth

would be added to consideration for determining capital gains amount.

REPLY TO ISSUE (a)

Section 80-IA of the Income-tax Act provides as under:

“Where the gross total income of an assessee includes any profits and gains derived

by an undertaking or an enterprise from any business referred to in sub-

section (4) (such business being hereinafter referred to as the eligible business), there

shall, in accordance with and subject to the provisions of this section, be allowed, in

computing the total income of the assessee, a deduction of an amount equal to

hundred per cent of the profits and gains derived from such business for ten

consecutive assessment years”

The objective for introduction of tax benefit to a power undertaking is made clear in the

memorandum explaining the provisions of the Finance Bill, 1993 introduced in the

Parliament [200 ITR (St.) 140]. The above object has further been clarified in its Circular No.

657 issued by CBDT on 20th August, 1993 which provides that the provision was

insertedwith a view to substantially increase the power generation capacity in the country.

Understanding the intent of the provision is considered necessary for the purpose of finding

correct answer to the above query.

The provisions of section 80IA provides that the benefit of deduction under section

80IA shall be available to an assessee who derives any profits or gains from an

undertaking which is engaged in the specified business. In other words, what is

relevant for the purpose of claiming deduction under section 80IA is:
 • There should be an undertaking

• The undertaking should be engaged in the specified business

In the instant case, it has already been discussed in detail that in case of slump sale

what is being transferred is an undertaking as a whole, therefore, the first

requirement will be satisfied since the buyer will acquire the entire undertaking.

Now, the second requirement is that the undertaking should be engaged in the

specified business. We understand that seller is rightfully entitled for deduction

under section 80IA. Therefore, if the same business is continued then it can be

assumed that the buyer is engaged in the specified business as provided in section

80IA. Therefore, the second requirement will also be satisfied.

Once the aforesaid primary conditions are satisfied, the section further provides that

the undertaking should not have been formed by the following means:

• By splitting up or the reconstruction of an existing business

• By the transfer to a new business of machinery or plant previously used for

any purposes.
Therefore, the issue to examine is whether acquisition of undertaking by way of

slump sale can be said as formation by way of splitting up or the reconstruction of

an existing business.

The provisions contained in section 80IA are silent in this regard and do not provide

for whether the benefit would be available to the purchaser of the undertaking or

not. It is a well settled law of interpretation that if the provisions contained in the

Act are silent in any regard, then in order to examine the legal position regard must

be given to the cases decided by the judiciaries in this regard at the first instance.

Thereafter, if there is no judicial precedence available, the for the purpose of

ascertaining the correct legal position reference may be made to provisions

contained in other sections of the Act which provide for similar benefit.

In the above context, we may mention that there is no direct judicial precedence

available in this regard. In other words, no direct case has yet been decided by any

judicial authority straight on this legal position. Therefore, it becomes imperative to

refer to provisions contained in other section of the Income-tax Act.

Analysis of section 10A which is parimateria to section 80IA

In order to examine the aforesaid legal provisions, regard may be made to the other

section wherein deduction is available to the assessee qua an undertaking. Reference

in this regard may be made to the provisions contained in section 10A of the Income-

tax Act.

The provisions contained in section 10A provides for the deduction with respect to

profits of an undertaking. In other words, the deduction is available qua an

undertaking and not qua an assessee. Therefore, provisions contained in this section

and related board circular may be referred to in order to ascertain the correct legal

position.

It may be mentioned that section 10A also provide that the undertaking should not

have been formed by the following means:

• By splitting up or the reconstruction of an existing business

• By the transfer to a new business of machinery or plant previously used for

any purposes.

In other words, the provisions contained in section 10A and 80IA is almost identical

in this regard. Therefore, if the benefit of section 10A is available on transfer of

undertaking under slump sale, then it can be said that the benefit will also be

available in case of section 80IA.

There is a recent circular which has been issued by the CBDT vide its circular no

01/2013 dated 17.01.2013 wherein the CBDT has considered the availability of
deduction under section 10B on slump sale. The CBDT in the said circular has

answered the following question:

“Whether tax Benefits under sections 10A, 10AA and 10B would continue to remain

available in case of a slump-Sale of a Unit/Undertaking.”

The vital factor in determining the above issue would be facts such as how a slump-

sale is made and what is its nature. It will also be important to ensure that the slump

sale would not result into any splitting or reconstruction of existing business. These

are factual issues requiring verification of facts. It is, however, clarified that on

the sole ground of change in ownership of an undertaking, the claim of

exemption cannot be denied to an otherwise eligible undertaking and the tax

holiday can be availed of for the unexpired period at the rates as applicable

for the remaining years, subject to fulfilment of prescribed conditions.

In the said circular the CBDT has clearly clarified that the benefit of deduction

cannot be denied on the sole ground of change in ownership of an undertaking

which is otherwise eligible for deduction. In other words, the CBDT has clarified that

the deduction will continue to available even in case of slump sale. Therefore, it can

impliedly be said that the acquisition of an undertaking by way of slump sale will

not be treated as formation by way of splitting up or reconstruction.

The issue of availability of deduction on slump sale under section 10A was also

considered by the Hon’ble Bombay High Court in the case of Sonata Software Ltd,

wherein the Hon’ble High Court has clearly held that the benefit of deduction under
section 10A shall be available to the with respect to the undertaking even if the

undertaking is transferred by way of slump sale.

From the aforesaid discussion, it can be said that the acquisition of an undertaking

by way of slump sale shall not be treated as formation by way of splitting up or

reconstruction.

So far as the issue relating to transfer to a new business is concerned, it will not be

applicable since there is no transfer of assets as such to a new business, rather the

existing business itself is being transferred. Therefore, the assets continue to remain

in the same business in which they were used.

From the aforesaid detailed discussion, it can be interpreted that all the requirement

of claiming deduction under section 80IA are being duly complied on acquisition of

an undertaking under slump sale, therefore, the deduction should continue to

available to the buyer.

Another Possible View:

It may be argued that wherever the intent of legislature is to pass on the benefit to

the successor, it has been specifically so provided in the section itself. For

example, the proviso to section 80-IA(4)(i)(c) provides for continuation of relief to

the transferee enterprise in case of transfer of industrial undertaking in the nature

of “infrastructure facility” on fulfillment of certain conditions.

Likewise, the transferee is made specifically eligible for relief under section 80- IA

(4)(iii) i.e. in case of transfer of industrial park or SEZ.

However, there is no such provision of passing on the benefit to transferee under

section 80IA (4)(iv) i.e. in case of power undertakings.

Further, Sub-section (12) of section 80-IA provides that where any undertaking of an

Indian company which is entitled to the deduction under the said section is

transferred before the expiry of the period specified therein, to another Indian

company in a scheme of amalgamation or demerger, the provisions of the said

section 80-IA shall apply to the amalgamated or the resulting company as they

would have applied to the amalgamating or the demerged company if the

amalgamation or demerger had not taken place.

A new sub-section (12A) has been inserted in section 80-IA providing that the

provisions of sub-section (12) shall not apply to any undertaking or enterprise,

which is transferred in a scheme of amalgamation or demerger after 31-3-2007.

Thus, if an undertaking or an enterprise is transferred in a scheme of amalgamation

or demerger after 31-3-2007, the benefit of deduction under section 80-IA will not be

available even to the amalgamated or demerged undertaking or enterprise.

Section 80-IA should be taken a complete code by itself. Wherever, therefore, the

legislature intended the transfer of benefit u/s 80IA along with the transfer of

undertaking, the section would specifically provide for the same. Therefore, the

benefit u/s 80IA may not be available in the case of outright sale.

Conclusion:

The issue of continued availability of benefit u/s 80-IA to the buyer is a controversial

issue and has not been set at rest till date. Technically a sound view emerges that in

case of slump sale 80IA should be available. But, simultaneously it can be argued

that when the benefit is not available to amalgamation/demerger case, does

legislature intend to pass this benefit in case of outright sale?

Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 196 ITR 188

(SC) held that "A provision in a taxing statute granting incentives for promoting growth

and development should be construed liberally, and since a provision for promoting economic

growth has to be interpreted liberally the restriction on it too has to be construed so as to

advance the objective of the provisions and not to frustrate it"

Section 80-IA is an incentive provision. The objective for introduction of tax benefit to a

power undertaking is made clear in the memorandum explaining the provisions of the

Finance Bill, 1993 introduced in the Parliament [200 ITR (St.) 140]. The above object has

further been clarified in its Circular No. 657 issued by CBDT on 20th August, 1993 which

provides that the provision was insertedwith a view to substantially increase the power

generation capacity in the country. Technically, there is no prohibition except in the case of

amalgamation and demerger. Therefore, in our opinion, the deduction u/s 80IA can be

claimed by buyer under slump sale. However, the income tax department probably will take

the other possible view and the issue may lead to litigation.

Advised Accordingly, Dated: 25.03.2013