Tuesday, 7 January 2020

Unit 14: Restructuring: Conversion and Slump Sale

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Unit 14: Restructuring: Conversion and Slump Sale


Many entrepreneurs start their businesses as a sole proprietorship due to the low compliance requirements.


All the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company
The sole proprietorship is a completely separate legal form from a company and the law does not provide any process for conversion from one form to the other.


Where a firm is converted into a company and as a result of such conversion, the firm transfers any capital asset (whether tangible or intangible) to the company, such transfer will not be charged to capital gains tax if the following conditions are complied with all the assets and liabilities of the firm immediately before its succession should become the assets and liabilities of the company.

If the transfer is on a going concern basis, even though no specific exemption is spelt out, the firm shall not be taxable since there can be no inference of a sale of any specific item comprised therein.


The Income tax Act, 1961 (‘IT Act’) defines Slump Sale as ‘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’.


Slump Sale is one of the widely accepted ways of conducting business transfers.


‘Net worth’ shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account.


An assessee has to choose what is best suitable for him — an itemised sale or a slump sale.


A Holding Company is one which controls another company either by means of holding shares in that company or by having power to appoint the whole or majority directors of that company.


A “member” is any person that is entered into a company’s register of members.

In most cases a holding company will hold the majority of the voting rights in its subsidiary.


Capital Gains: An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

Company: A voluntary association formed and organised to carry on a business.

Memorandum of understanding (MOU): A memorandum of understanding (MoU) is a document describing a bilateral or multilateral agreement between parties.

Net worth: Net worth shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account.

Partners: A person who takes part in an undertaking with another or others, esp.in a business or company with shared risks and profits.

Share Capital: Share capital is the money invested in a company by the shareholders.

Slump sale: It means the 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.

Sole Proprietor: The sole proprietor is an unincorporated business with one owner who pays personal income tax on profits from the business.

Takeover: Assumption of control of another (usually smaller) firm through purchase of 51 percent or more of its voting shares or stock.

Transfer: A changing of ownership, such as real estate, a security or a financial account, from one party to another.

Valuation: Valuation is a process of determining the value of assets and liabilities of business.



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