Agarwal Shraff & Co.

Issues in Transfer of ‘Division Circle Club’ from Circle Club & Resorts Pvt. Limited to
Space Circle Pvt. Ltd.

1) Issue of Capital Gains under the Income Tax Act.

2) Formalities to be observed under the Companies Act.
3) Issue of Stamp Duty.
4) Membership Deposit agreement
5) Issue of mode, amount & manner to be adopted for consideration in respect of
such transfer.
6) Accounting treatment of such transfer both in transferee company as well as
transferor company.
Opinion
The above transfer is possible either as ‘demerger’ or as ‘slump sale’.
‘Demerger’ is exempt from ‘Capital Gains’ taxation by virtue of section 47 of The
Income Tax Act. However for such exemption under the IT Act formalities under section
391 to 394 of the Companies Act will be required to be observed. As the observance of
formalities under section 391 to 394 will be cumbersome & time taking, so considering
the urgency of the matter it will be better to go for ‘slump sale’.
Section 50B of the Income Tax Act provides special provision for computation of capital
gains in case of slump sale.
Before discussing the tax implications of slump sale under above provision it is necessary
to understand the definition of “Slump Sale”.
Section 2(42C) 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. It has however been clarified that the determination of
the value of an asset or liability for the sole purpose of payment of stamp duty,
registration fees or similar taxes or fees shall not be regarded as assignment of values to
individual assets or liabilities.
“Undertaking” has been defined in section 19AA as any part of an undertaking or a unit
or division of an undertaking or a business activity taken as a whole, but does not include
individual assets or liabilities or any combination thereof not constituting a business
activity.
As the transfer of “Division Circle Club” will satisfy the condition of definition of
“undertaking” Circle Club & Resorts Pvt Ltd. can take the advantage of special provision
for computation of capital gains in case of slump sale.
Section 50B of the Income Tax Act in relation to computation of capital gains in case of
slump sale provides that any profit or gains arising from slump sale shall be chargeable to
income tax as capital gains.
Agarwal Shraff & Co.

In relation to capital assets being an undertaking transferred by way of such sale, the “net
worth” of the undertaking shall be deemed to be the cost of acquisition and cost of
improvement.
“net worth” shall be the aggregate value of total assets of the undertaking as reduced by
the value of liabilities of such undertaking as appearing in its books of account.
For computing the “net worth”, the aggregate value of total assets shall be –
a) in case of depreciable assets, the written down value of the block of assets.
b) In case of other assets the book value of such assets.
The “Net Worth” of Division Circle Club as it appears from the face of Balance Sheet as
at 31st March, 2002 is as follows:-
Total Assets
Fixed Assets – WDV – Rs. 470 lacs
P&L A/cs - Rs. 140 lacs
Misc Expenditure - Rs. 10 lacs
Rs. 620 lacs
Members Deposit - WDV – Rs. 593 lacs
Net Worth - Rs. 27 lacs
Now if assume Rs. 27 lacs as consideration for such transfer than there will be a situation
of no profit & no loss. However actual assets & liabilities directly attributable to
“Division Circle Club” needs to be ascertained.

The above transfer referred to as “slump sale” under the Income Tax Act will be governed
by provision of section 293(1)(a) of the Companies Act which will require ordinary
resolution by Share Holders to be passed.

However before going ahead with the above scheme issues of membership deposit
agreement, stamp duty, Amount & mode of consideration & any incidental issues arising
out of above transfer needs to be addressed.
Moreover it will be advisable to take an opinion from an Income Tax, Company Law as
well as accounting expert to examine all the relevant issues.