Section 2(42C): The Rule That Defines What a ‘Slump Sale’ Really Means

When a company decides to sell an entire division instead of individual assets, the Income Tax Act has a very specific way to define that. It’s called a Slump Sale.
This concept is not new, but it often confuses business owners, especially when they’re restructuring or selling one unit to focus on another.

In simple terms, Section 2(42C) defines how such a sale is treated for tax purposes and ensures both the seller and buyer are clear about their responsibilities.

What Exactly Is a Slump Sale?

Under Section 2(42C) of the Income Tax Act, a slump sale means the transfer of one or more undertakings for a lump-sum consideration, without assigning individual values to the assets and liabilities.

Imagine this: You run a textile company with two units—one manufacturing cotton and another producing synthetic fiber. You decide to sell the synthetic unit completely for ₹50 crores. You don’t specify how much of that is for the building, machinery, or goodwill. You simply sell the whole division as it stands.

That’s what the law calls a slump sale. The Act treats the division as a single business undertaking instead of a bundle of separate items.

Why Was Section 2(42C) Introduced?

Before this section came in through the Finance Act 1999, companies had no clear guidance on how to treat such transfers. Some called it an asset sale, others a business sale, and the tax impact changed drastically based on the interpretation.

To eliminate confusion, Section 2(42C) formally defines the term Slump Sale, while Section 50B explains how capital gains from such a sale will be taxed.

The aim was simple—clarity, consistency, and fairness.

Breaking It Down: Key Components

Let’s unpack the law in plain English:

1. Transfer of Undertaking
   The section covers the transfer of one or more independent business units that can function on their own.
2. Lump-Sum Consideration
   The buyer pays one single price for everything—land, machinery, goodwill, employees, debts, etc.—without separate valuations.
3. No Individual Valuation
   The deal does not split amounts asset-by-asset. The entire transfer is treated as one block for tax purposes.

This holistic approach simplifies taxation but also makes accurate record-keeping essential.

Also Read: Slump Sale Taxation Demystified

Real-Life Example

Picture ABC Foods Ltd., which runs two divisions—Dairy Products and Snacks Manufacturing. The company sells its snacks division to XYZ Foods for ₹80 crores.

Since the transaction is for a single lump-sum and no individual asset values are mentioned, it’s a slump sale under Section 2(42C).
The profits from this transfer are taxed under Section 50B, which deals with capital gains arising from a slump sale.

How Is a Slump Sale Different from an Asset Sale?

In short, a slump sale is “all-in-one,” while an asset sale is “piece-by-piece.”

Tax Treatment Under Section 50B

When an undertaking is sold as a slump sale, capital gains are computed as:

Capital Gain = Sale Consideration – Net Worth

Here’s how it works:

• Sale Consideration: The total price agreed between buyer and seller.
• Net Worth: The book value of total assets – liabilities of that undertaking.

If the unit was held for more than 36 months, the gain is long-term; otherwise, short-term.
No indexation is allowed while computing the net worth.

Example of Capital Gain Calculation

Let’s say PQR Ltd. sells its pharma division to another company for ₹120 crores.
The book value of assets is ₹100 crores, and liabilities amount to ₹20 crores.

Net Worth = ₹100 crores – ₹20 crores = ₹80 crores
Capital Gain = ₹120 crores – ₹80 crores = ₹40 crores

This ₹40 crores will be taxed as capital gains from slump sale.

Also Read: Tax-Free Benefits from Provident Funds and Sukanya Samriddhi Account

What Qualifies as an Undertaking?

The term “undertaking” refers to a business activity capable of functioning independently.
It could be a branch, unit, or division—anything with its own assets, staff, and operations.

Even if it’s part of a larger company, as long as it can stand alone, it qualifies.

Judicial Interpretations

Several court rulings have clarified what counts as a slump sale:

• CIT v. Equinox Solutions Pvt. Ltd. (2017) – The court said that even if internal valuations exist, as long as the deal is for a lump sum and the undertaking transfers as a whole, it’s still a slump sale.
• CIT v. Bharat Bijlee Ltd. (2014) – The judgment reinforced that it’s the substance of the transaction that matters, not the form.

So, labeling a deal differently doesn’t change its tax treatment—its true nature does.

Slump Sale vs Slump Exchange

If a company transfers a business unit in exchange for shares instead of cash, it’s a slump exchange, not a slump sale.

Finance Act 2021 Amendment

Earlier, slump sale covered only monetary consideration. Some companies used non-cash structures to avoid taxes.
The Finance Act 2021 plugged this gap by expanding Section 2(42C) to include “transfer by any means”, even if it involves non-monetary consideration.

That means, whether you get cash, shares, or other assets—it’s still taxable as a slump sale if the undertaking transfers as a whole.

Also Read: What You Must Know About Income from Other Sources

Compliance Requirements

Before filing your income tax return, the seller must:

1. Get a CA Certificate (Form 3CEA) confirming the computation of net worth.
2. Maintain records of all liabilities and assets of the undertaking.
3. Report the transaction details in the return of income.

Ignoring these can invite penalties or scrutiny.

Common Practical Scenarios

• A large conglomerate sells its old cement unit to focus on renewable energy.
• A manufacturing firm transfers a loss-making plant to a new buyer for a lump sum.
• A tech startup sells one vertical to an investor for cash to raise working capital.

All of these can fall under Section 2(42C) if the transfer includes assets and liabilities as a whole.

Why Understanding Section 2(42C) Matters

Many taxpayers unknowingly misclassify such deals. The result? Wrong tax filings, delayed refunds, or avoidable notices.
Knowing how a slump sale works helps both sides plan better—minimizing tax impact while staying compliant.

FAQs People Usually Ask

1. Is GST applicable on slump sale?
   Generally no. Since the undertaking is a going concern, it’s treated as neither supply of goods nor services under GST.
2. Can intangible assets be part of a slump sale?
   Absolutely. Goodwill, brand value, and licenses are often included.
3. Is stamp duty levied on slump sale?
   Yes, if immovable property is part of the transaction.

Key Takeaways

• Section 2(42C) defines what a slump sale is and provides clarity for tax purposes.
• The transfer must be of an entire undertaking for a lump sum amount.
• Capital gains are computed under Section 50B.
• Both cash and non-cash considerations are covered post-2021.
• Sellers must obtain a CA certificate and report accurately to avoid penalties.

In simple words: if you’re selling a whole business division, not just bits and pieces, you’re entering the territory of a slump sale.

Also Read: Interest on Borrowed Capital

Conclusion

Section 2(42C) of the Income Tax Act brings structure to how business transfers are taxed in India. By defining the term slump sale, it ensures that such transactions are treated fairly and uniformly.

Whether you’re a buyer looking to acquire a profitable unit or a seller planning to exit one division, understanding this section can save you time, money, and compliance headaches.

Planning to restructure your company or sell a business division?
Before signing that agreement, talk to a tax professional who knows the numbers and the law.
Visit Callmyca.com — our CAs specialize in slump sale transactions, capital gain planning, and compliance strategy that saves you more than it costs.