Slump Exchange

Slump Exchange Under IT Act 1961

Slump Exchange Under IT Act 1961

“Slump Sale” is defined as:

  • transfer of one or more undertakings;
  • as a result of the sale for a lump sum consideration; and
  • Without values being assigned to the individual assets and liabilities in such sales.

For the above section:

  1. “Undertaking” is as covered by Explanation 1 to clause (19AA).
  2.  The above value asset or liability is determined excluding the payment of stamp duty, registration fees or other similar taxes or fees.
Slump Sale

Judgments on Slump Sale

  1. Avaya Global Connect Ltd

The definition of slump sale under section 2(42C) of the Income Tax Act, 1961 (‘IT Act’) is restricted to only transfer resulting from sale and it does not include transfers under section 2(47) of the IT Act.

  • Cit V Equinox Solutions Pvt Ltd (Air 2017 SC 1912)

The court held that if the entire running business is sold in one go, it is also considered as slump sale. It is a long term capital gain taxable under section 50B.

How Slump Sale Is Different From Slump Exchange?

Slump sale and slump exchange are two terms which are debatable.

  1. Slump sale means where without assigning values to the individual assets and liabilities there is a transfer of undertakings. In Slump Exchange where the seller receives the consideration in any forms other than consideration as laid down by the Areva T&D Ltd[1]. This case clearly held the difference between the slump sale and slump exchange. SLUMP EXCHANGE mostly includes exchange of shares or debentures or other assets in the ambit of transfer and calling it as sale.
  2. The judgment of Areva T&D Ltd held that the use of expression “consideration of transfer” does not classify it as a sale in any arrangement of transfer.
  3. The question arose due to the computation method which is prescribed in Section 50B of IT Act 1961 for sale does not include the term exchange.
  4. As slump exchange is non monetary consideration. Whereas the term sale in Section 50B of the IT Act 1961 implies that there has to be some monetary consideration to be included a transfer via SLUMP.
How Slump Sale Is Different From Slump Exchange

Why Slump Exchange Is Not Recognized

Slump exchange has become the popular mode of restructuring as it is implemented quickly.

However, the Income Tax act has refused to recognize at it came under judicial scrutiny, due to the amendment which came in the year 2000 in the IT Act 1961. The amendment incorporated the Section 2(42C) and 50B.

  1. It lead to the disparity which arose within the transaction whether it is a sale (a sale which is a slump sale) as defined by the section 2(42C).
  2. Since the transaction which is an exchange (a slump exchange) can be covered under the section 2 (47) of the IT Act 1961 which defines the transfer but not fit under slump sale section 2(42C). Since the word sale (transfer of ownership of a price) means something which is monetary as defined by the SALES OF GOODS ACT 1930. So the relative word sale when complied with the slump sale, it has be any transfer of undertaking which is lump sum of assets or liabilities in monetary ways.
  3. Also the income tax provides the specific calculations for computing the capital gain tax for the slump sale transactions under Section 50B: “any profits or gains arising from the slump sale effected in the previous year will be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and will be considered income of the previous year in which the transfer took place”.
  4. But there is no similar provisions given for the computation of capital gain tax of Slump Exchange transactions.
Why Slump Exchange Is Not Recognised

Judgments of  The Various High Courts Where Slump Exchange Was Rejected

  1. A Consideration In Cash Was Given
  2.  CIT V M/S Bharat Bijlee Ltd (Ita No.2153 Of 2011)

In this case the court held that any transfer of undertaking for the exchange of bonds or shares of the transferee company would not constitute sale and it is thereby not slump sale and hence cannot be taxed under Section 50B.

  • Benett Colemann & Co.

In this case the court held that transfer of ongoing undertaking in consideration of the equity shares and debentures will not attract capital gain tax under section 50B. It is difficult to calculate cost of acquisition of such sale. It is neither sale nor slump sale. It is case of slump exchange.

  • Areva T&D

The issue in the above case was an exchange of assets on the fair value between the company and its subsidiary is not sale but slump exchange.

 Slump Transaction By Court Order?

After distinguishing the sale from exchange in case of slump. Another highlighted question is when the court approves no scheme of arrangement through court order which is neither consensual transfer or contract of sale.

SERI Infrastructure

In this case the Delhi High Court held that court approved scheme of arrangement is different scheme as per the companies act it is not transfer under the Income Tax Act.

As Per Gaar (General Anti-Avoidance Rules)

The rationale of entering in the slump exchange has to be cleared. Such transactions are covered mostly by the group entities, in order to unlock shareholder value, regulatory requirements etc.

The idea is to stop the itemized sale of the assets and for receiving the consideration in the format of shares.


It can be well said that slump exchange is one medium for the companies to escape the capital gains tax. The intention of the legislature while incorporating the section 2(42C) and 50B was to incorporate the transfer or accommodate the arrangement transfer where the assets or liabilities are together computed without specifying the prescribed value to each one.

Read our article:General Analysis with relation to GST on Merger and Acquisition

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