Business Transfer:
Process
whereby an entire business undertaking is sold is known as slump sale. Another
way to sell the business is through an itemised sale wherein, gain or loss on
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. In a slump sale no
individual asset or liability is given a value, as it is sold in lump-sum. It
is executed through a Business Transfer Agreement. In such a transfer the
earlier undertaking virtually ceases to exist.
Asset Transfer:
Process
whereby the assets of an undertaking are sold in one or over multiple
agreements, each being taxable. It is executed through am Asset Transfer
Agreement.
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S.N
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Points
of Diffrence
|
Business
Transfer
|
Asset
Transfer
|
|
1.
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Applicable Sales Tax
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Not applicable
|
Applicable
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|
2.
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Capital Gain
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Calculated as per section 50B
of the IT Act.
|
Calculated as per section 48
and/or 50, depending upon the nature and type of transaction
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3.
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Execution
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Through a Business Transfer
Agreement
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Through an Asset Transfer
Agreement
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4.
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Ownership
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There is a complete change in
the ownership of the business
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Change in the ownership of
asset from the purchaser to the purchase
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5.
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Dissolution
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The Business is dissolved
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No dissolution of the business
takes place
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6.
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Automatic transfer
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Involves the sale and purchase
of assets as part of the business transfer
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There is no transfer of the
business as a whole, only of assets
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7.
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Transfer of liabilities
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Involves the transfer of
liabilities as well
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No liabilities pass on to the
purchaser
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8.
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Due diligence
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More expensive due diligence
due to the vast nature of transaction
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Comparatively cheaper due
diligence due to limited scope of transaction
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9.
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Retention of goodwill
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Only the retention of goodwill
takes place
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No transfer/retention of
goodwill takes place
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10.
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Transfer of employees
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Automatic transfer of employees
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No such transfer undertaken
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Important case laws:
The
court held in the below given cases that Sales Tax is not applicable on transactions
involving lump sale, as the business undertaken is not in the nature of ordinary
course of business and that the sale of business cannot be covered under the
head of sale of goods.
1. Sri Ram Sahai vs. Commissioner of Sales Tax [1]
2. Monsanto Chemicals Of India (P.) Limited V. The
State of Tamil Nadu[2]
3. Coromondal Fertilizers Limited vs. State of AP and
Spectra Bottling Co. v. State of AP,[3]
In
Mahindra Engineering & Chemical Products Limited v ITO 2(2)(2)[4]. The
Tribunal held that in the commercial world, transactions would have to be
considered in totality and that the substance of the transaction was relevant
rather than its form. The transaction was held to be sale of business and taxes
accordingly.
In PNB finance
ltd. V. Cit[5], the SC after considering
sections 41(2), and 45, held that gain from slump transactions is neither
taxable as business income u/s. 41 (2) nor as capital gains u/s. 45 of the act.
To attract section 41 (2), the subject matter should be depreciable assets and
the consideration received should be capable of allocation between various
assets. In case of a slump sale, there is an undertaking which gets transferred
(including depreciable and non-depreciable assets) and it is not possible to
allocate slump price to depreciable assets and therefore, the same cannot be
taxed u/s. 41 (2). To attract capital gain, held that the charging section and
the computation sections are integrated code and if one fails other fails. If
the computation sections fail then even the charging section fails.
Calculation
of capital gains for Business Transfer:
Full consideration of sale
Less:
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.
Calculation
of capital gains for Asset Transfer:
Short-term capital assets[Section
48]
Full value of consideration
Less: Cost
of acquisition of asset
Less: Cost
of improvement
Less: Expenditure
incurred wholly and exclusively in connection with such transfer
Long-term capital assets[Section
48]
Full value of consideration
Less: Indexed
Cost of acquisition (See Note 1)
Less: Indexed
Cost of Improvement (See Note 1)
Less: Expenditure
incurred wholly and exclusively in connection with such transfer
Depreciable asset[Section 50]
WDV of block of asset at the
beginning of previous year
Add: Actual
cost of assets falling within that block acquired during the year
Less: Full
value of consideration of assets transferred during the year
Less: Expenditure incurred wholly
and exclusively in connection with such transfer
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