India: Slump Sale Tantamount To Succession And Therefore Claim Of Depreciation To Be Restricted To WDV As Appearing In Books Of Transferor

BACKGROUND

While the taxability of slump sale in the hands of a seller is clearly spelt out by the provisions of section 50B of the Income-tax Act, 1961 (IT Act), the law seems to be ambiguous when it comes to the buyer. With uncertainty, sometimes, the tax officer relies on section 170 of the IT Act to treat such slump sale as succession of a business and thereby apply the relevant provisions of the IT Act in the case of a buyer. Section 170 of the IT Act governs the taxation in case of succession of a business. As a general rule, where a business is succeeded by any other person, who subsequently continues to carry on that business, the predecessor is assessed for the income of the Fiscal Years (FY) prior to the date of succession and the successor is assessed on the income of the FYs after the date of succession.

Recently, the Mumbai Tax Tribunal¹ had an occasion to analyse the applicability of section 170 of the IT Act to a case involving the slump sale of business and thereby invoking sixth proviso to section 32 of the IT Act to restrict the claim of depreciation made by the buyer of such business. We, at BDO in India, have summarised the ruling of the Mumbai Tax Tribunal and provided our comments on the impact of this decision.  

FACTS OF THE CASE

Taxpayer, an Indian private limited company, entered into Business Transfer Agreement (BTA) with an unrelated Indian private limited company (transferor) for purchase of an undertaking on a slump sale basis. As per the BTA, the taxpayer acquired various assets including goodwill from the transferor company. Consequently, the taxpayer ascertained the fair value (FMV) of these assets and added them to the existing Written Down Value (WDV) of respective block of assets and claimed depreciation. The tax officer treated the slump sale amounted to succession and hence the provisions of Section 170 of the Act gets attracted. Hence, he applied sixth² proviso to section 32(1) of the IT Act and disallowed the excess depreciation claim (i.e. based on the FMV of the acquired assets). The taxpayer filed an appeal before the First Appellate Authority against the order of Tax Officer. The First Appellate Authority referring to the contention raised in the ruling of Saipem Triune Engineering Pvt. Ltd³ agreed that the taxpayer's case was not that of succession. However, the First Appellate Authority observed that the value of the motor vehicle and furniture and fixture as per the valuation report was less than the corresponding closing WDV in the books of the transferor at the time of transfer. Hence, he directed the tax officer to take the value of WDV of these assets as per the corresponding WDV in books of the seller at the time of sale and reduce corresponding amount from the goodwill.

TRIBUNAL RULING

Before the Tax Tribunal, the main controversy involved was whether the provisions of Section 170 of the IT Act, which pertains to succession of business, gets attracted in case of business transferred on a slump sale basis and thereby invoking the sixth proviso to Section 32 of the IT Act. After hearing both the parties, the Mumbai Tax Tribunal held that the taxpayer has acquired the assets under BTA. As the taxpayer has succeeded the transferor company, the provisions of section 170 of the IT Act are applicable on the facts of the present case. Consequently, the depreciation claim would be governed by sixth proviso to section 32(1) of the IT Act. While pronouncing this Ruling, the Mumbai Tribunal observed that:

• The taxpayer has acquired the assets under a slump sale and from the definition of slump sale under section 2(42)(C) of the IT Act, it is clear that the same is a specie of transfer by way of sale.
• Section 50B of the IT Act deals with the mode of charging of tax, the profit or the gain arising out of slump sale. It nowhere deals with the issue of depreciation on assets acquired under slump sale. Accordingly, since there is no mention whatsoever about the issue of depreciation on assets acquired under slump sale under Section 50B of the IT Act the natural corollary is that depreciation on assets acquired under slump sale is to be governed by the general provisions given in the IT Act for depreciation on assets.
• Section 170 of the IT Act deals with transfer of assets pursuant to succession of business by any person otherwise than death. By way of BTA, the taxpayer had purchased an undertaking under slump sale. Hence, the taxpayer has succeeded the transferor company and thus, the provisions of Section 170 of the IT Act are clearly applicable.
• The Tax Tribunal further relied on the Supreme Court decision in the case of CIT Vs. K.H. Chambers⁴ and held that in this view of the matter the decisions referred by taxpayer cannot take precedence. Moreover, the Delhi tax Tribunal's decision in Saipem Triune Engineering Pvt. Ltd. cannot be said to be conclusive law that slump sale does not come under the realm of Section 170 of the IT Act.
• The sixth proviso to section 32(1) of the IT Act deals with the depreciation on transfer of assets in case of succession, amalgamation and demerger. Also, the IT Act has not given any exclusion whatsoever regarding issue of depreciation on slump sale from the ambit of provisions of Section 32 of the IT Act. Hence, on the principle of the Noscitur a sociis⁵, the asset transferred under slump sale would fall under the sweep of this section, i.e. sixth proviso to Section 32 of the IT Act, despite the word slump sale not used therein specifically. Accordingly, even without invoking section 170 of the IT Act, the depreciation on assets transferred under slump sale has to be governed by sixth proviso to Section 32 of the IT Act.

However, based on several judicial precedents⁶, the Tribunal held that the balancing figure between the value of slump sale consideration and the WDV of assets taken over shall qualify as goodwill, and eligible for consequent depreciation.       

BDO COMMENTS

In case of slump sale, as the book value of an individual asset is not available with the buyer, the buyer usually carries out the valuation of asset acquired and then claims depreciation on the value so ascribed. This decision has held slump sale, even though it is not expressly provided in section 170 of the IT Act, tantamount to succession. This will impact buyers who have acquired or propose to acquire depreciable assets on a slump sale basis and thereby claiming higher amount of depreciation (based on the fair value of the assets acquired on slum sale). However, considering the fact that the Tribunal has acknowledged and upheld that difference between slump sale value and book value of assets acquired (on a slump sale basis) qualify as goodwill, and eligible for consequential depreciation, it seems that the overall impact of this decision to some extent has been neutralised.

Footnotes