Income Tax Update: Transfer Expense under Slump Sale-Allowed

We at AKM Global understand the complexities of tax implications in slump sale transactions, particularly regarding the deductibility of transfer-related expenses. A recent ruling by the Mumbai ITAT in the Larsen & Toubro case has clarified that legal fees, consultancy charges, and transaction costs incurred during the transfer of a business division under slump sale are allowable as deductions under Section 48 while computing capital gains under Section 50B of the Income-tax Act, 1961. The tribunal reinforced that while Section 50B determines capital gains based on net worth as the cost of acquisition, it does not override Section 48(i), which permits deductions for expenses incurred wholly and exclusively in connection with the transfer.

Issue:

Whether the transfer expenses incurred in relation to a transfer of a business division can be deducted while calculating capital gains under a slump sale?

Summarised Analysis:

The Mumbai Bench of the ITAT, in the matter of Larsen and Toubro , held that expenses incurred on the transfer of an asset under a slump sale are allowable as deductions for computing capital gains under Section 50B of the Income-tax Act, 1961. These expenses include legal fees, consultancy charges, transaction costs, and other transfer-related expenses.
In the present case, Larsen & Toubro Ltd. (assessee) entered into a business transfer agreement to sell its Ready-Mix Concrete Business Undertaking as a going concern via a slump sale. The assessee has incurred transfer-related expenses of INR 27.07 crores. The Revenue contended that these expenses should not be allowed as a deduction while computing capital gains under Section 50B of the Income-tax Act, 1961, stating that this section focuses solely on the taxability of capital gains arising on slump sale which is calculated as a difference between the sale consideration and the net worth of the undertaking. Conversely, the assessee argued that such expenses are deductible under the first limb of Section 48, which allows deductions for expenditures incurred wholly and exclusively in connection with the transfer.
The Mumbai ITAT examined the provisions of Sections 2(42C), 48, and 50B, noting that Section 50B governs the computation of capital gains in a slump sale by considering the net worth as the cost of acquisition. However, the tribunal held that this does not exclude the application of Section 48(i), which permits deductions for transfer-related expenses.
The ITAT emphasized that excluding such expenses would contradict the legislative intent and render Section 48 partially ineffective for slump sale transactions. Upholding the assessee’s claim, the tribunal allowed the deduction of transfer expenses and clarified that the legislative framework supports such deductions while computing capital gains under Section 50B.

Conclusion:

Hon’ble Mumbai ITAT allowed the deduction of transfer-related expenses while computing capital gains under Section 50B stating that expenses incurred exclusively and wholly for business transfer are not excluded for calculating capital gains under slump sale transaction. The legislature had specifically excluded the indexed cost of acquisition and indexed cost of improvement for the purpose of calculating capital gains in case of slump sale transactions, therefore disallowing transfer-related expenses would go against the legislative intent.
 

AKM Comment:

The tax treatment of transfer expenses in a slump sale transaction has long been a grey area, with ambiguity surrounding their deductibility. However, the Mumbai ITAT’s ruling in this case has provided much-needed clarity. The judgment aligns with the legislative intent of Sections 48 and 50B, reaffirming that transfer-related expenses are allowable in slump sales and not excluded.
This ruling is a helpful precedent for guiding clients in structuring transactions effectively while ensuring compliance and optimizing tax outcomes. This decision is a pivotal development in interpreting tax laws surrounding slump sales.
 

How we can Assist you?

As a consulting advisory firm, we can help you navigate the complexities of slump sale transactions and optimize tax efficiency in the following ways:

• Transaction Structuring & Tax Planning: Provide expert guidance on tax-efficient structuring of mergers, acquisitions, and business transfers, ensuring alignment with the latest judicial interpretations and legislative intent to optimize tax outcomes.
• Due Diligence & Risk Assessment: Perform tax due diligence for buyers and sellers in slump sale transactions, identifying potential risks and developing strategic mitigation measures to ensure compliance and optimize tax efficiency.
• Regulatory Compliance & Documentation: Assist in preparing comprehensive documentation to substantiate the deductibility of transfer-related expenses while ensuring compliance with Income-tax Act provisions, thereby minimizing litigation risks.
• Litigation & Representation Support: Represent clients before tax authorities and tribunals in slump sale disputes, ensuring strong legal advocacy and compliance.

For any feedback or queries, feel free to reach out to us at info@akmglobal.in.