Merger Implications under Companies Act

In the dynamic world of business deals, mergers and acquisitions (M&A) are essential strategies used by organizations to expand their market presence, maximize their resources, and boost their competitiveness. Slump sales are one of the key methods used in M&A, among many others. This article analyses the intricacies of slump sales and how they relate to merger Implications under Companies Act and the Income Tax Act. 

Understanding slump sale

Section 2(42C) of the Income Tax Act 1961, defines slump sale as the transfer of one or more undertakings by any means for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer.

In simpler words, slump sale means the transfer of an entire business unit for a single consideration without assigning value to individual assets and liabilities. Under the slump sale the business is sold on a ‘going concern basis’ that is there is going to be a transfer of all assets/ liabilities, contracts, employees, etc so that the business would be able to carry on its activities as earlier.

Guidance Note on Slump Sale

Income Tax Impact

• Any profit and gain arising from the slump sale in the previous year is chargeable to income tax as capital gains arising from the transfer of the undertaking. 
• Where the undertaking is owned and held by the transferor for 36 months or less immediately preceding the transfer, the undertaking would be regarded as a short-term capital asset and the gains taxed accordingly. In other cases, the undertaking would be regarded as a long-term capital asset even though such an undertaking may have acquired certain assets that are held for less than 36 months.
• Apart from the definition of slump sale in Section 2(42C) provisions for its taxation have also been made merger Implications under the Companies the Income Tax Act. Section 50 B of the Income Tax Act lays down a special computing mechanism for the computation of capital gains on a ‘Slump-sale’ transaction. 
• Section 50B of the Income Tax Act also provides for the mechanism to compute ‘Net worth’ which is deemed to be the cost of acquisition of the undertaking being transferred for the purpose of Sections 48 and 49 of the Income Tax Act so as to enable the computation of capital gains. It is the aggregate value of the assets of the undertaking or division as reduced by the value of liabilities of such.

Impact of Goods and Services Tax Act

• Slump sale is also considered as supply under the Goods and Services Tax Act. However, since it is a transfer in going concern, it attracts a nil rate of GST. 

Accounting Treatment of slump sale in books of purchaser

• The purchaser shall record the purchase of the entire business as a single transaction under a new asset account
• Allocation of consideration paid under assets and liabilities acquired as part of slum sale on fair value.
• Record all tangible, intangible, and current and non-current liabilities at their fair value.
• Calculate the difference between the total consideration paid and the net fair value of assets and liabilities acquired.
  If consideration> fair value of net assets = Goodwill
  If consideration< fair value of net assets= Gain or Bargain purchase.

• Record contingent liabilities at fair value
• Disclose in detail all the assets and liabilities acquired, contingent liabilities, and methods used for determining the fair value in the financial statement.
•  At last, consider all the tax implications of slump sale acquisition

Compliances under the Companies Act 2013 for Slump Sale

• Slump Sales are regulated under sections 230-232 of the Companies Act 2013. Any slump sale involving a public company requires approval from the company’s board of directors, shareholders, creditors, and other relevant regulatory authorities such as the National Company Law Tribunal (NCLT) and Income Tax Authorities.
• Section 230 of the Companies Act 2013 talks about compromise, arrangement, amalgamation, and takeovers. Under this application is filed to NCLT with all related documents and disclosures
• A draft scheme of arrangement is then prepared for getting approval in a board meeting under Form No. NCLT 1
• The application process involves meticulous documentation, including agreements, valuation reports, and disclosure of material information to stakeholders.
• NCLT shall then give directions regarding the time and place of the meeting, Notices to be sent to authorities, etc.
• Notice of such meeting shall be sent to all members and creditors at least one month prior to the meeting.
• Communication of such notice shall be sent by either
• The Chairperson
• The company
• Any other person as tribunal may direct Through registered post email or any other method as the tribunal may direct.
• Both the transferor and transferee company need to ensure that MOA allows the sale of undertakings for the transferor and permits carrying on acquired business for the transferee.
• The transferor also needs to ensure that they agree:
  •  To provide an Audited Balance Sheet
  • Determine consideration for slump sale 
  • Slump Sale Agreement
  • Comply with Income Tax and Stamp duty provisions

• Lastly, when the scheme of arrangement is agreed upon by the members of the meeting, a petition shall be presented to the Tribunal by the company within 7 days of the filing of the report. 

Other requirements as per the Companies Act

Section 180 of the Companies Act imposes restriction on the powers of the Board of Directors to sell, lease, or dispose of the whole or substantially the whole of the undertaking. Therefore, slump sale requires a special resolution to be passed at the general meeting of shareholders

Conclusion

Slump sales represent a pragmatic approach to business transfers, offering both regulatory compliance and tax efficiency. Merger Implications Under the Companies Act, slump sales are subject to stringent approval and disclosure requirements to safeguard the interests of stakeholders. Meanwhile, under the Income Tax Act, slump sales are treated as capital gains, with provisions for exemptions and deductions to mitigate tax liabilities. Make your process easy with team Legal Window. Feel free to reach us at admin@legalwindow.in.