Slump sale remains a popular form of reorganization, by which assets are transferred from one taxpayer to another. In cases other than a demerger or share transfer, an “undertaking” is transferred via slump sale. Undertaking here, is defined by Income Tax Act (“ITA”) “to include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity”. The question of whether omission of transfer of certain assets of the undertaking would still constitute transfer of an “undertaking”, thus attracting Section 50B of the ITA, has been at the center of substantial debate. 

In a recent judgment by the Delhi High Court, considerable relief has been offered in that direction. In Triune Projects Pvt. Ltd vs. DCIT ( “Triune Projects”) [TS-6237-HC-2016(DELHI)-O], the genuineness of the slump sale was questioned on the basis of two aspects- (i) the inflated consideration to avoid tax payment and (ii) retainment of two assets of the “undertaking”. The former was allowed for, as payment for goodwill, as the court denied the transaction being a sham. With respect to the second aspect, the Revenue contended that two assets i.e. one in the form of bad debt and another shown to be written off was retained by the seller. Thus implying that the entire “undertaking was not sold” as per the pre- requisites of a slump sale as defined in Section2 (42C) of the ITA.

The High Court was of the opinion that the ITAT entirely misdirected itself in its interpretation of the reference judgment in Triune Energy Services Pvt. Ltd. v. Deputy Commissioner of Income Tax [TS-5750-HC-2015(DELHI)-O] It emphasized on the insubstantiality of the Revenue’s contention. The sale was held to be a going concern which included ongoing service contracts, employment contracts and other tangible assets, and intangible assets such as technical know-how. The Revenue’s contention was held to deviate from common and commercial understanding whereby it cannot be expected from a purchaser to buy and pay value for superfluous and non-operational debts. Therefore, if certain assets are left out because they would be redundant or cause inconvenience to the purchasing party, it is well within his rights to exclude it from the list of assets.

Previously, in Rohan Software Pvt. Ltd. v. Income Tax Office [TS-5461-ITAT-2007(MUMBAI)-O] a similar conflict in understanding was developed, where the concept of “undertaking’’ was argued to be limited to the sale of  ALL assets and liabilities of the undertaking concerned. The tax authorities took the position that the transfer of intellectual property, codes, formulae and designs, did not, in and of itself, constitute the transfer of an “undertaking” as a going concern because the taxpayer had not transferred certain assets of the undertaking. The Tribunal explained how a transaction involving any part or unit of the undertaking taken as a whole would attract Section 50B. This position has been reaffirmed by the High Court in Triune Projects case. The contended propaganda received utmost lucidity as the High Court unmistakably lay down that the sale of all assets is not a pre-condition as per the definition of “undertaking” with reference to a slump sale.

The important aspect for an organization to ascertain is whether the basic structure of the unit is being transferred or not transferred. Even if certain assets are not transferred, it will not result in nullifying the validity of the sale of the ‘undertaking’ as a slump sale. The essence of the re-structuring bid should be to determine what the core business of the undertaking is and whether all elements of the core business are being transferred or not. The constituents of basic structure of the unit or core business of the unit will be dependent on the facts and business areas of each organisation. It has also been held by various authorities [Premier Automobiles vs. ITO [TS-40-HC-2003(BOM)-O], Dy. CIT vs. Mahalasa Gases & Chemicals [TS-5179-ITAT-2004(BANGALORE)-O], Dy. CIT v. I.C.I. India Ltd [TS-5179-ITAT-2008(KOLKATA)-O]] in the past that sundry debtors, excess land, motor car, building, bank balance etc. do not constitute basic structure of the unit and they will not affect the slump sale of the undertaking. However, the basic structure of the business concern will vary depending on the nature of the business.

The test that must be applied is whether the transferee is able to continue running the business without the assets which have not been transferred. It must also be seen if the business operations are affected in any manner and to what extent they are affected. Hence, for a sale to be termed as ‘slump sale’ it is not necessary to transfer all assets and liabilities, however, the core elements of the business must be transferred for a lump sum price.