A company can sell its assets and liabilities through slump sale. As per section 2(42C) of the Income Tax Act, “slump sale” means the transfer of one or more undertaking, by any means (“by any means” was substituted with “as result of sale” as per the Finance Act, 2021. In my opinion and understanding, it has been amended as in one of the case court concluded that since “sale” is not defined or expressly stated in income tax or companies act, therefore, premium on share is outside the preview of capital gain thus slump sale by way of share exchange or relinquishment were not considered as slump sale, therefore, no capital gain), for a lump sum consideration without values being assigned to any individual assets and/or liabilities in such transfer.
Demerger, means transfer of “undertaking” with NCLT approval, wherein, definition of “undertaking”(as defined under section 2(19AA) of the Income Tax Act) is same for both i.e. slump sale and Demerger but slump sale of undertaking is done at a lump sum consideration without any separate value being assigned to any asset or liability even when a separate value has been assigned to assets or liabilities for the purpose of stamp duty or registration fees or any tax or fee as also specified in the explanation to section 2(42C). However, in the case of Demerger asset or liabilities of undertaking are being valued independently and transfer of undertaking is to be done as per the share entitlement ratio under scheme.
CONSIDERATION
For any demerger transaction, a resulting company issues shares to the shareholders of the demerged company and no other nature of consideration can be paid in the case of demerger. However, for slump sale transaction, consideration can be into shares or cash payment or otherwise.
TAX IMPLICATIONS
Demerger is a transaction wherein on transfer of “undertaking” via share exchange ratio there is no capital gain tax liability on the shareholders of resulting company or demerged company. However, in case of cross border demerger or if the resulting entity is not an Indian company, in that case capital gain tax is applicable. Further, in case of demerger resulting company can utilize carry forward losses or even unabsorbed depreciation associated to the transferred undertaking.
In case of slump sale, no relaxation on capital gain is available, rather, Finance Act, 2021, has removed the indexation benefits, therefore, in order to calculate the capital gain tax, the benefit of inflation is no longer available and capital gain will be assessed from the actual cost of acquisition. Nonetheless, percentage of capital gain on slump sale depends upon the aspects that whether the tassets were held for less than 36 months or for 36 months and above, accordingly, short term or long-term capital gain will be charged on the slump sale.
TRIBUNAL APPROVAL
For a scheme of Demerger an approval of NCLT is required reason being that the scheme itself is complete code as it deals with all aspects related to the relaxation on the aspects of charges, fees or cost, treatment of employees, assets and liabilities etc. However, for slump sale no tribunal approval is required and an interpretation of section 180 of the companies act states that it can be done through special resolution. In some states even no stamp duty is payable in case of demerger but it is payable in case of slump sale.
PRACTICAL STARTEGY
Demerger is opted as a strategy of spin-off, split-off, group restructuring or family business division arrangement. Slump sale is exercised to sale a unit for cash or disposal of any asset or as an private equity exit strategy.
-Dixit Mehta, Ductus Legal
DUCTUS EDGE 