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Transfer of Different Assets Equals Slump Sale
Under the Income-tax Act, 1961 individual sale of assets is treated differently from a slump sale of a business. In case of an itemised sale of assets, gain or loss on the sale of such assets is computed based on whether the asset is depreciable or not and on the basis of the period of its holding. The Mumbai Tribunal has, based on underlying substance, held that the transfer of various assets of a business pursuant to multiple agreements for separate identifiable considerations should be regarded as 'slump sale of the business on a going concern basis and be liable to tax accordingly. Taxand India considers this recent decision of the Mumbai Tribunal.
When a taxpayer sells the entire business through a slump sale, the Act prescribes a different formula for computing the capital gains on such a slump sale. In the case of a slump sale, capital gain is computed by reducing the net worth of the business so sold from the full value of sale consideration. Capital gain on sale of a business which is more than 36 months old is regarded as a long term capital gain regardless of the period for which individual assets forming part of the business have been held.
While the arguments of the taxpayer regarding the non taxability of a significant portion of the consideration on the basis that the computational machinery fails may require a greater evaluation based on the specific facts, the Tribunal clearly seems to have failed to appreciate the distinction between an itemised sale and a slump sale of business particularly in a situation where the parties to the transaction have agreed on specific values for individual assets transferred. Such an action by the Tribunal appears to question the liberty of the taxpayer to determine the mode of transfer of its assets/business and the tax consequences that would follow accordingly.
The decision of the Tribunal, which is clearly a case of application of judicial anti avoidance rules, comes in the back drop of the intensely debated General Anti Avoidance Rules proposed by the Finance Bill 2012 and is likely to increase anxiety on the sweeping nature of the proposed anti avoidance rules and the impact that they will have on various transactions and tax positions adopted by taxpayers.
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