Section 2(42C)

Section 2(42C) — the law in short

What the courts have decided on section 2(42C), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Electric Control Gear Mfg. Co. Supreme CourtCuts both ways
  The Assessing Officer says that because depreciation of a known amount was allowed on the assets over the years, that figure must be the excess over written down value and can be taxed. Nothing in our documents allocates the price. Can he do that?
  No. The Supreme Court held that where there is nothing to indicate the price attributable to the machinery, plant or building out of the total consideration, the balancing charge cannot be applied, and the mere fact that a particular sum had been allowed as depreciation does not make that sum the excess between price and written down value. The Revenue's appeal on that question failed.
• CIT v Mugneeram Bangur & Co Supreme CourtHelps taxpayer
  We sold our land development business as a going concern for a lump sum, and the schedule to the agreement showed a figure for land. Can the officer tax a profit on the land as stock-in-trade?
  No. The Supreme Court held that the sale was of the whole concern and that no part of the slump price was attributable to the cost of the land, so no part of it was taxable. The firm was not carrying on a business of purely buying and selling land; it bought land, developed it and sold it, and the agreement itself recorded liabilities for roads, drains, sanitation, electricity and a school. The figure for land in the schedule was the cost price as it stood in the books, and there was no evidence of any attempt to value the land at the date of sale.
• PCIT v Wellman Coke India Ltd High CourtHelps taxpayer
  My client's auditor could not upload Form 3CEA with the return and the Assessing Officer has disallowed the whole slump sale loss for that reason alone. Is the report a condition precedent?
  No. The Calcutta High Court dismissed the Revenue's appeal and answered the question against it: furnishing Form 3CEA within the due date for the return is not a mandatory condition, and a report produced during the assessment proceedings before the final order is sufficient compliance. It applied the Supreme Court's decision in CIT v. G.M. Knitting Industries Private Limited.
• Triune Projects P Ltd v DCIT High CourtHelps taxpayer
  We left some written-off assets out of the business transfer. Does that stop it being a slump sale?
  No. The definition of 'undertaking' does not require every asset on the transferor's books to pass. If the business activity taken as a whole moves — live contracts, employees, tangible assets and know-how — leaving out bad debts and assets already written off does not take the transaction outside s.2(42C) read with s.50B.
• Areva T & D India Ltd v DCIT High CourtHelps taxpayer
  We bought a business under a slump sale agreement and booked the excess of price over net tangible assets as 'goodwill'. The Assessing Officer says goodwill is not depreciable. Can we still get depreciation on it?
  For the years before AY 2021-22, yes, if the excess in truth represents identified business and commercial rights and not goodwill in the abstract. The Delhi High Court held that know-how, business claims, business information, business records, contracts and skilled employees acquired under a slump sale agreement are 'business or commercial rights of similar nature' under s.32(1)(ii) and are depreciable, whatever the label in the books. Read the amendment note before relying on this today.
• SREI Infrastructure Finance Ltd v Income Tax Settlement Commission High CourtHelps department
  My client moved its finance division to a subsidiary under a scheme of arrangement sanctioned by the Company Court, not under a sale deed. The Settlement Commission has taxed it under s.50B. Can a statutory scheme be a slump sale at all?
  Yes. The Delhi High Court held that the word 'sale' inside the expression 'slump sale' does not cut down the wide meaning of 'transfer' in s.2(47), so any transfer of an undertaking for a lump sum without values being assigned to individual assets falls within s.2(42C) and s.50B — including a transfer effected by a scheme sanctioned under ss.391-394 of the Companies Act 1956. The writ petition was dismissed.
• Premier Automobiles Ltd v ITO High CourtHelps taxpayer
  The Assessing Officer has broken our lump sum into building, plant and paint shop and charged short-term capital gains, relying on the values the buyer later put in its own books. Can he apportion a slump price like that?
  No. The Bombay High Court held that the basic test for a slump sale is continuity of business — whether there was a transfer of a business as a whole — and that on the facts the lump sum of Rs.210 crores was not apportionable to different assets and the individual values were not ascertainable. The buyer's later accounting entries could not be used, and the matter went back for a fresh computation on the footing of a slump sale.
• Gati Kintetsu Express Pvt Ltd v DCIT ITATHelps taxpayerSuperseded by amendment
  We took over a business under a business transfer agreement and assumed liabilities far in excess of the assets, paying no cash. The Assessing Officer says we paid nothing, so there is no cost and no depreciation on the intangibles. Is that right?
  No, on these facts. The Mumbai Tribunal held that where the buyer took over liabilities exceeding the assets by about Rs.125 crores and discharged those liabilities in later years, that discharge is consideration for acquiring the intangibles — business and commercial rights and goodwill — and depreciation follows. It also held that the fifth proviso to s.32(1) does not apply to a succession by way of slump sale.
• Pricol Engineering Industries Ltd v ACIT ITATHelps taxpayer
  We gave away a loss-making division at zero consideration; its liabilities exceeded its assets. The Principal Commissioner has revised the assessment under s.263 saying the negative net worth should have been taxed. Is that revision sustainable?
  Not on those facts. The Chennai Tribunal accepted that a negative net worth is to be taken into account in computing the capital gain, but only where there is a positive consideration; where the slump sale consideration is nil, reducing a negative net worth from nil still produces nil, so no tax was lost. The revision failed the second limb of s.263 — no prejudice to the Revenue — and was quashed.
• DCIT v Archroma India P Ltd ITATCuts both waysSuperseded by amendment
  I bought a business on slump sale. Can I depreciate the assets at the price I paid?
  No. A slump sale of an undertaking as a going concern is a succession to business otherwise than on death within s.170, so the proviso to s.32(1) applies and depreciation on the assets taken over is computed on the transferor's written down value, not on the buyer's allocation of the purchase price.
• DCIT v Summit Securities Ltd (Special Bench) ITATHelps departmentNo later treatment found
  I sold an undertaking as a slump sale and its net worth worked out to a negative figure. Do I compute capital gain on the price alone, or does the negative net worth get added to it?
  It is added. The Special Bench of the Mumbai Tribunal held that where the net worth computed under section 50B is negative, it cannot be reduced to nil. Section 48 requires the cost of acquisition to be deducted from the full value of consideration, and deducting a negative figure necessarily means adding it. The Bench rejected the argument that capital gain can never exceed the sale consideration, holding that this is true of an ordinary asset but not of an undertaking, which is a bundle of assets net of liabilities. On the facts, the consideration was Rs.143 crore and the net worth minus Rs.157.19 crore.
• Bharat Bijlee Ltd v Addl CIT ITATHelps taxpayerSuperseded by amendment
  For an old year still under appeal, my client transferred a division under a scheme and was paid in preference shares and bonds, not money. The Assessing Officer has applied s.50B. Was that right for a pre-2021 year?
  For a year before AY 2021-22, no. The Mumbai Tribunal held that s.2(42C) as it then stood required a transfer 'as a result of the sale', that a sale needs money consideration, and that a transfer of an undertaking in exchange for preference shares and bonds was an exchange and not a sale, so s.2(42C) and s.50B did not apply and the computation provisions failed. For AY 2021-22 onwards this is no longer the law, because s.2(42C) now covers transfer 'by any means'.
• Statutory position — Rule 11UAE and the substituted s.50B(2) and s.2(42C): slump sale from AY 2021-22 CBDT Circulars & InstructionsCuts both ways
  My client is signing a business transfer agreement now. Can I still take the price in the agreement as the full value of consideration for the s.50B computation, the way every reported case does?
  No. From AY 2021-22 s.50B(2)(ii) deems the fair market value of the capital assets on the date of transfer, calculated in the prescribed manner, to be the full value of the consideration, and Rule 11UAE prescribes that manner: the fair market value is the higher of FMV1, an asset-based value of the undertaking, and FMV2, the fair market value of the consideration actually received. The agreed price is now a floor, not the measure. The same Finance Act also widened s.2(42C) to a transfer 'by any means', so an exchange or a scheme is caught.
• Statutory position — rule 11UAE: computation of the fair market value of capital assets for s.50B(2)(ii), FMV1 on the assets transferred and FMV2 on the consideration received, the higher of the two being taken, with effect from 24 May 2021 CBDT Circulars & InstructionsCuts both ways
  We have done a slump sale and the Assessing Officer says the consideration we recorded is not the full value of the consideration. How is the fair market value computed under s.50B, and from when does that apply?
  Under rule 11UAE two figures are computed and the higher is taken. Sub-rule (1) provides: "For the purpose of clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher." FMV1 looks at what was transferred and is computed as A+B+C+D-L, where A is the book value of all assets of the undertaking or division other than jewellery, artistic work, shares, securities and immovable property, reduced by income-tax paid less income-tax refund claimed and by any amount shown as an asset, including unamortised deferred expenditure, which does not represent the value of any asset; B is the open market price of jewellery and artistic work on a registered valuer's report; C is the fair market value of shares and securities determined under rule 11UA(1); D is the stamp duty value adopted or assessed or assessable by any Government authority for immovable property; and L is the book value of the liabilities of the undertaking or division, excluding paid-up equity capital, amounts set apart for dividends on preference or equity shares not declared before the date of transfer, reserves and surplus by whatever name called, provisions for taxation, provisions for meeting liabilities other than ascertained liabilities, and contingent liabilities other than arrears of cumulative preference dividend. FMV2 looks at what was received and is computed as E+F+G+H, where E is the monetary consideration received or accruing, F is the fair market value of non-monetary consideration represented by property referred to in rule 11UA(1), determined under rule 11UA(1), G is the open market price on a registered valuer's report of non-monetary consideration being property other than immovable property and not referred to in rule 11UA(1), and H is the stamp duty value where the non-monetary consideration is immovable property. Sub-rule (4) fixes the valuation date: the fair market value under sub-rules (2) and (3) is determined on the date of slump sale, and the valuation date in rule 11UA also means the date of slump sale. The rule was inserted with effect from 24 May 2021, and the clause it serves, s.50B(2)(ii), was substituted with effect from 1 April 2021.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.