‘Undertaking’ Test for Slump Sale Transactions Under The Income Tax Act: Examining Recent Trends

by Saumya Raizada

What is a Slump Sale?

A Slump sale is a sale/transfer of a business/division of a company that is effected under a normal agreement and can be achieved without going through the court process of a demerger. Under the 2013 Act, the Company needs to obtain an approval from its shareholders constituting super majority, if it needs to dispose an undertaking or a substantial portion of an undertaking.[1]Slump sale remains a popular form of reorganization, by which assets are transferred from one taxpayer to another. Other  than a demerger or share transfer, an “undertaking” is transferred via slump sale. Undertaking, as per Income Tax Act, 1961( “ITA”) includes “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 judicial position is that no sales tax would be payable on the transfer of a business as a going concern, including on the transfer of a whole unit or division of any business under the value-added tax laws or the sales tax laws of the state. This is based on the principle that the sale of an entire business is not the same as sale of movable good i.e. sale of entire ‘business’ cannot be equated to sale of movable goods.[2] The attraction of VAT in cases where in the transferor entity shuts down its whole business by completing the sale will vary state to state and the transaction will only attract VAT in cases where the state legislation specifically provides such.

The Undertaking Test :

50B of the Income Tax Act, 1971 provides for a  Special provision for the computation of capital gains in case of slump sale.

 The question of whether omitting to transfer 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.[3]In the recent judgement of Projects Pvt. Ltd vs. DCIT ( “Triune Projects”) [TS-6237-HC-2016(DELHI)-O] the Delhi High Court has clear a little bit of air regarding some  of the most important questions.


The Assessee entered into a Slump Sale Agreement with the buyer which had the effect of transferring the business undertaking entered by the appellant/assessee as  ‘going concern’. All tangible assets and liabilities together with goodwill were conveyed for a lump sum consideration of 45.85 crores. The Assessing Officer held that the assessee’s slump sale tax  claim was a “sham transaction” designed to avoid tax liability by artificially inflating the value of the assets and that the assets so transferred were short term in nature. The AO thereby directed a higher rate of tax.

The Assessee appealed before the ITAT. In the meanwhile, the buyer of assets, formerly known as ‘Saipem Triune Engineering Private Limited’, preferred an appeal on its own before the ITAT against a similar finding that the transaction was colourable and there was no expression of a slump sale from the said purchase of such assets.

The ITAT, upheld the genuineness of this slump sale agreement and set aside the findings of the AO and the CIT. The ITAT, however, remanded the matter with respect to valuation of goodwill to the AO. The buyer, therefore, appealed to the High Court.

The Court held that goodwill  was an intangible asset and it could only be evaluated in accordance to what was disclosed by the taxpayer himself and no one else. While doing so, the High Court placed reliance upon the decision of the  Supreme Court in  the case of  CIT v. Smifs Securities Ltd[4].

High Court’s ruling:

One Cannot expect the purchaser to buy defunct assets

The sale transaction was reported for a total consideration of Rs.45.83 Crores. The sale was for a going concern, which included ongoing service contracts, employment contracts and other tangible assets, and intangible assets such as technical know-how etc.  The Court was of the opinion that one cannot be expected to purchase defunct assets or superfluous assets and in such cases, the transaction does not cease to be a slump sale if all other elements of a slump sale are present.

Undertaking under 2(42C) of the Income Tax Act does not place any preconsition on paying good money for irrecoverble debts

The Court refuted the understanding of the Revenue that  in the sale of a going concern the buyer is bound to pay good money, transact and purchase irrecoverable debts. This the Court held is inconsistent with common and commercial understanding and it isn’t a pre-condition, as is evident from the definition of “undertaking”, cited in Explanation (1) to Section 2 (19) (A) of the Act.[5] This definition of “undertaking” is what has been engrafted into by reference, under Section 2(42C) of the Act. Therefore, if certain assets or properties are left out because they would cause inconvenience or trouble for the purchasing party, it the purchasing party has a right to exclude it from the list of assets.

Further Observations:

The High Court discussed what constitutes a slump sale in the above judgement and observed that it is not necessary for a purchaser to pay for defunct assets for the sale to constitute a slump sale.


  • ‘Undertaking’ shall include any part of the undertaking

The law provides that undertakings shall have the meaning assigned to it under Explanation 1 of Section 19(AA) of the Income Tax Act. “Undertaking shall include any part of the undertaking or a unit or a 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 any business activity”. Thereby what was transferred was essentially undertaking under the ITA, 1961. Nowhere in the said definition is there any requirement of the purchase of all assets, particularly defunct assets.  And as all tangible assets and liabilities together with goodwill were conveyed for a lump sum consideration of 45.85 Crores, and the value of individual assets and liabilities were not ascertained, as is the requirement for a slump sale under Section2(42C) of the Income Tax Act, the transaction is correctly a Slump Sale within the Act.

  •   It is a slump sale when exclusion of some liabilities in the agreement does not affect the smooth transfer of the going concern:

The Hon’ble ITAT Kolkata “D” Bench in the case of CIT vs. ICI (India) Ltd. (ITA No. 1020/Kol/2007)[6] has held that the question is whether  the sale is a “slump sale” of the undertaking as a whole or is it merely a sale of the depreciable assets within the meaning of section 50. It was still held to be a transfer of a going concern when all assets and liabilities relating to a fertilizer business were transferred  as a going concern and the fact that two of the  assets, namely, Bank Balance and Insurance Claim were excluded from the assets transfer did not hamper the smooth transfer of the going concern.

  • When purchaser can carry on the business, which was carried by the seller prior to the business transfer, without acquiring all assets and liabilities of the undertaking it constitutes a slump sale:

It has been held in the case of Rohan Software Pvt Ltd. v. ITO[7] Income Tax Tribunal, Mumbai held that if the subsequent purchaser was able to carry on his business, as was carried on by the party who sold it to him, even without purchasing all of the assets and liabilities of the undertaking it will be treated as if the undertaking has been sold as a whole.

The Honourable Punjab and Haryana High Court has held that when  there was a sale of a going concern even when some of the assets were retained by a transferor the sale was still a slump sale.[8]


The High Court in this case has observed in a similar way that inspite of excluding certain assets from the list of assets eligible for the slump sale transaction; the transaction qualifies the test of Section 50B of the Act and is eligible for the beneficial tax rate of 20 per cent. Henceforth, contrary to the common misunderstanding it is not required that only when 100% of the assets and liabilities when transferred the transaction will constitute a slump sale. The test that must be applied is whether the transferee is being able to continue the business without the assets which have not been transferred and whether or not the assets and liabilities which form the core elements of the said business have been transferred for a lump sump price or not.

Saumya Raizada is a third year student at HNLU


[1] The Indian Companies Act, 2013- A Snapshot, LAKSHMIKUMARAN & SRIDHARAN, http://www.lakshmisri.com/Uploads/MediaTypes/Documents/L&S_Companies_Act_Booklet_Oct2014.pdf (Last Visited March 29, 2017)

[2]Nikita Hora, Taxation of a Slump Sale in India, LIVE LAW, http://www.livelaw.in/taxation-of-slump-sale-in-india/(Last Visited: March17, 2017).

[3] Kunal Savani, “Undertaking” Test for Slump Sale Transactions, ORANGE, http://orange.taxsutra.com/articles/eb8e8889ee61be557170dad8e130fc/expert_article(Last Visited: March17, 2017).

[4] 348 ITR 302 (SC)

[5]Tax news Flash: Exclusion of Defunct or Superflous Assets in a Slump Sale is a commercial decision. Therefore, the tax-payer is entitled to 20% tax rate under Section 50-B of the Income Tax Act, KPMG(March 26, 2017, 8:54, http://www.in.kpmg.com/taxflashnews/KPMG-Flash-News-Triune-Projects-Private-Limited-4.pdf

[6] (2008) 23 SOT 58 (Kol)

[7] [2008] 21 SOT 258 (Mum)

[8] CIT v. Max India Ltd. [2009] 319 ITR 68 (P&H)

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