Acquisition of business involves the acquisition of inherent tax exposure of
the target company or business so acquired pertaining to the period prior to
such acquisition. A question that arises is that how can a transferee be made
liable to pay income tax of a business for the period before they even acquired
it? What is the extent of such 'period' for which the liability accrues?
Transfer of Business as a Going Concern: Slump Sale.
The terms, 'business transfer' and 'slump sale' are used interchangeably in the
Indian context and both refer to transfer and sale of an entire business
undertaking of the seller on a going concern basis for a lump-sum consideration.
In India, 'Slump sale' is purely a tax concept and the Income Tax Act, 1961
defines a slump sale under Section 2 (42C) as follows:
'transfer of one or more undertakings as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and
liabilities in such sales'.
The single most important requirement of a slump sale is that the undertaking is
transferred as a 'going concern'. There should be no break or cessation in the
operations of the transferred undertaking. The transfer of the undertaking form
the seller and the vesting of the undertaking in the buyer together with all the
assets and liabilities should be simultaneous and it should not stop, hinder or
break the conduct of the business. Hence, it is important for the buyer to
ensure that the buyer has all the requisite infrastructure, licenses and
preparedness to start running the business simultaneously with the consummation
of the slump sale.
Income Tax Liabilities in a Slump Sale.
Taxability of slump sale in the hands of a seller is clearly spelled out by the
provisions of section 50B of the Income Tax Act, as follows:
- Any profits or gains arising from the slump sale effected in the
previous year shall be chargeable to income-tax as capital gains arising
from the transfer of long-term capital assets and shall be deemed to be the
income of the previous year in which the transfer took place:
Provided that any profits or gains arising from the transfer under the slump
sale of any capital asset being one or more undertakings owned and held by an
assessee for not more than thirty-six months immediately preceding the date of
its transfer shall be deemed to be the capital gains arising from the transfer
of short-term capital assets.'
When it comes to taxability of slump sale in the hands of a buyer, the law seems
to be ambiguous. With uncertainty, sometimes, the tax officer relies on section
170 of the Income Tax Act to treat such slump sale as succession of a business
and thereby apply the relevant provisions of the Income Tax Act in the case of a
Section 170 of the Income Tax Act governs the taxation in case of succession of
a business as follows:
Courts applying S.170 of Income Tax Act to cases of transfer as slump sale.
ITO vs Archroma India Pvt. Ltd
- Where a person carrying on any business or profession (such person
hereinafter in this section being referred to as the predecessor) has been
succeeded therein by any other person (hereinafter in this section referred
to as the successor) who continues to carry on that business or profession:
- the predecessor shall be assessed in respect of the income of the
previous year in which the succession took place up to the date of
- the successor shall be assessed in respect of the income of the previous
year after the date of succession.
- Notwithstanding anything contained in sub-section (1), when the
predecessor cannot be found, the assessment of the income of the previous
year in which the succession took place up to the date of succession and of
the previous year preceding that year shall be made on the successor in like
manner and to the same extent as it would have been made on the predecessor,
and all the provisions of this Act shall, so far as may be, apply
- When any sum payable under this section in respect of the income of such
business or profession for the previous year in which the succession took
place up to the date of succession or for the previous year preceding that
year, assessed on the predecessor, cannot be recovered from him, the
Assessing Officer shall record a finding to that effect and the sum payable
by the predecessor shall thereafter be payable by and recoverable from the
successor, and the successor shall be entitled to recover from the
predecessor any sum so paid.
- Where any business or profession carried on by a Hindu undivided family
is succeeded to, and simultaneously with the succession or after the
succession there has been a partition of the joint family property between
the members or groups of members, the tax due in respect of the income of
the business or profession succeeded to, up to the date of succession, shall
be assessed and recovered in the manner provided in section 171, but without
prejudice to the provisions of this section.
Explanation: For the purposes of this section, "income" includes any gain
accruing from the transfer, in any manner whatsoever, of the business or
profession as a result of the succession.'
[2020 - Mumbai Tax Appellate Tribunal, Division Bench]
Taxpayer, an Indian private limited company, entered into a Business Transfer
Agreement (BTA) with an unrelated Indian private limited company (transferor)
for purchase of an undertaking on a slump sale basis. As per the BTA, the
taxpayer acquired various assets including goodwill from the transferor company.
Consequently, the taxpayer ascertained the fair value (FMV) of these assets and
added them to the existing Written Down Value (WDV) of respective block of
assets and claimed depreciation. The tax officer treated the slump sale amounted
to succession and hence the provisions of Section 170 of the Act gets attracted.
The taxpayer filed an appeal before the First Appellate Authority against the
order of Tax Officer. The First Appellate Authority referring to the contention
raised in the ruling of Saipem Triune Engineering Pvt. Ltd3 agreed that the
taxpayer's case was not that of succession.
Before the Tax Tribunal, the main controversy involved was whether the
provisions of Section 170 of the IT Act, which pertains to succession of
business, gets attracted in case of business transferred on a slump sale basis.
After hearing both the parties, the Mumbai Tax Tribunal held:
'In the present case we find that the assessee had acquired the said assets
under slump sale. There is a business transfer agreement and by way of this
agreement the assessee has purchased an undertaking under slump sale. In our
considered opinion the facts in the present case clearly show that the assessee
company has acquired the assets under a business transfer agreement. Hence it
has succeeded the transferee company. The provisions of section 170 are clearly
applicable on the facts of the present case.'
Oriental Fire & General Insurance vs Commissioner Of Income Tax
[2000 - Delhi High Court, Division Bench]
For assessment year 1972-73, the transferee (oriental fire & general insurance)
was assessed as the successor of the business of the old company (Bharat General
Reinsurance Co. Ltd.). The old company was carrying business until and
before 13.05.1971. On and from 1.1.1974, the old company stood transferred to
and vested in the transferee company.
By applying section 170 of the Act assessment was made by the assessing officer
holding that the assessee was a successor of the old company. The assessment was
assailed before the Appellate Assistant Commissioner of Income Tax, who affirmed
the views of the assessing officer.
Delhi High Court Ruling
The High Court, while deciding on the issue of the date of applicability of
'succession' upheld the application of S.170 ITA in case of transfer of
business. It observed:
'Section 170(2) has been referred to contend that at least from 13-5-1971, the
assessee was to be treated as a successor. Learned counsel for the assessee, on
the other hand, submitted that the operation of the scheme as referred to above
became operative only with effect from 1-1-1974, and from that date the assessee
became the transferee company.
.. Succession implies that there is an end of an entity carrying on the
business, and its place has been taken by an entirely new entity to run in
continuity and as a going concern, the same business. Substantial identity and
continuity of the business must be preserved.
.. Succession has a recognised connotation. The tests of change of ownership,
integrity, identity and continuity of a business have to be satisfied before it
can be said that a person "succeeded" to the business of another. Section
170(1) of the Act prescribes not merely for liability to tax, but also the
process of computation of tax.'
Banyan & Berry vs Commissioner of Income Tax
[1995 - Gujarat High Court, Division Bench]
M/s Banyan and Berry was a partnership firm formed through a deed of
partnership. The firm was transferred to Banyan and Berry Construction Pvt. Ltd.
company through a transfer deed dated 16.04.1983. The partnership firm, through
the transfer deed, transferred all the assets and liabilities of the firm
together with the goodwill thereof with the intention that the firm's business
may be taken over as a running concern by the company. The Income Tax Tribunal,
Ahmedabad referred the matter to Gujarat High Court asking if the firm was
liable to be taxed after the transfer or not.
Gujarat High Court Ruling
The High Court, while applying S.170 to the fact of transfer of business
'Section 170 deals with the succession of business otherwise than on death, that
is to say, where a business is succeeded, as a going concern by one 'assessee
entity' to 'another assessee entity' that entity under the Act ceases to be an
the assessee in respect of business which has been succeeded by another, and the
successor assessee becomes the assessee for the purpose of taxing the income
arising from such business.
This assumes that business is not discontinued.
Under the scheme of s. 170 where persons carrying on business has been succeeded
thereon by any other person, who continues to carry on that business, the
predecessor is assessed in respect of income up to the date of succession and
the successor is assessed in respect of the income since the date of succession.
This apart, from other provisions make it clear that in the case of succession,
there is a water tight compartment of period income upto which is assessable in
the hands of the transferor, namely, upto the date the business is carried on by
it. Section 170 also does not envisage that when a transfer of business takes
place, the transferor or the predecessor must cease to exist.'
Based on the above discussed legal provisions and judicial pronouncements, the
position of law regarding the liability of a transferee to pay income tax
pending against the transferred business, as before the date of acquisition
As a general rule, where a business is transferred by any other person, who
subsequently continues to carry on that business, the transferee is assessed for
the income of the Fiscal Years prior to the date of transfer and the transferor
is assessed on the income of the Fiscal Years after the date of transfer.
However, in cases where the transferor cannot be found or where any tax
liability is not recoverable from the transferor (for example, on account of the
inadequacy of assets). In case the provision is triggered, the buyer may be held
liable for the tax liabilities of the transferor for a specific period, i.e. for
the financial year in which the transfer of business takes place and the
financial year immediately preceding the date of the transfer.
- The Income Tax Act, 1961
- ITO vs Archroma India Pvt. Ltd (I.T.A. No. 306/Mum/2019 and I.T.A. No.
6919/Mum/2018 and C.O. No. 07/Mum/2020)
- Oriental Fire & General Insurance vs Commissioner Of Income Tax (2000
244 ITR 631 Del)
- Banyan & Berry vs Commissioner of Income Tax (1996 222 ITR 831 Guj)