I. Introduction
A slump sale begins with identifying the business that is to be transferred and the assets, rights and obligations that form part of it. The bargain is rarely 'take all or leave all'. The purchaser may want the operating business, but may not want an old tax dispute, an irrecoverable receivable, obsolete equipment, excess land or legacy financing. This choice is commercially ordinary, but it can make slump sale classification more difficult.
If every entry in the seller's books need not move, how much may be left behind? The answer is not supplied by counting assets or liabilities. A balance sheet records accounting items while an undertaking is an organized business activity. The useful inquiry is therefore functional: after each proposed exclusion and each substitute arrangement are given effect, what activity can the purchaser actually carry on, under whose control, and with what continuing dependence on the seller?
II. Start With the Undertaking, Not the Inventory
The Income-tax Act, 2025 (“Act”) defines a slump sale in section 2(103) of the Act by reference to the transfer of one or more undertakings for lump-sum consideration without values being assigned to the individual assets and liabilities in the transfer. Section 2(103)(b)(i) imports the meaning of “undertaking” from section 2(35)(i) of the Act, which includes a unit, division or a “business activity taken as a whole” and excludes individual assets or liabilities, or a combination of them, that does not constitute a business activity.1
Section 2(103) does not separately state “going-concern” as a condition in the manner in which the demerger provision(s) do. Yet continuity repeatedly features in precedents because it helps answer the question: whether what passed was the business activity as a whole, rather than assets associated with it.2
III. The Asset in Business Context
The contrast between Rohan Software and Manipal Health Systems shows the analysis might begin with test of “core” or “non-core”. In Rohan Software, the software business, including its intellectual property, codes, formulae, designs, computers and furniture, was transferred while the building and motor car were retained. The Tribunal accepted slump-sale treatment because the purchaser could continue the software business without those items. In Manipal Health Systems, the land and hospital buildings remained with the seller and the purchaser received only a right to use them under a lease. The Karnataka High Court nevertheless held that the whole hospital undertaking had not transferred.3
Read alongside that contrast, Mugneeram Bangur, Premier Automobiles and Triune Projects show why the analysis cannot be reduced to a take all or leave all rule. Mugneeram Bangur involved a whole-business transfer notwithstanding the exclusion of specified income-tax and similar revenue liabilities; Premier Automobiles treated the Kalyan business as transferred even though certain pre-sale receivables remained with the seller. In Triune Projects, the Delhi High Court rejected an objection based on the retention of a bad debt and a written-off asset, observing that a purchaser need not buy defunct or superfluous items merely to preserve the character of the business transfer.4
These cases do not create a fixed list of permissible carve-outs. The question is what the retained item does in the particular business and whether its exclusion leaves that business capable of continuing. The analysis should therefore shift from the category of the item to its function.
IV. The Functionality Test: Finding the Perimeter of the Undertaking
The statutory distinction is between a business activity taken as a whole and a collection of individual assets or liabilities. That distinction can be examined by identifying the functional perimeter of the business: what constitutes the activity, what enables it to operate, and whether those elements pass to the purchaser in a manner that preserves the undertaking. This is not a separate statutory test and should not be presented as one, but an analytical framework for applying that distinction to the transaction.
These questions must be answered in the context of the particular business:
- Function: what did the asset, right, person or obligation actually do in the business immediately before the transfer?
- Control: after closing, does the purchaser possess the legally effective right needed to perform that function; through ownership, assignment, lease, licence, novation, or another arrangement?
- Continuity: after giving effect to the carve-outs and substitute arrangements, does the buyer receive a business capable of continuing the identified business activity, or does the seller retain an operating function that forms part of that business activity?
The value of this approach lies in testing the business rather than treating the asset schedule as conclusive. A machine, licence, site, database, customer contract or team may be indispensable in one undertaking and replaceable in another. The question is therefore not whether an item is important in the abstract sense, but whether the function it performs has been transferred, replaced or otherwise placed under the buyer’s control in a manner that preserves the identified business activity.
When applied in practice, these functional questions give rise to a number of questions, some of which are mentioned below. These are not additional statutory conditions or separate limbs of the functionality test but factual stress-tests of whether, after the proposed exclusions and transaction mechanics are given effect, what passes to the buyer still has the commercial and operational coherence of the identified undertaking.
A. Did the business activity exist independently of the BTA?
A BTA may define the business proposed to be transferred and identify its constituent assets and liabilities. What it cannot do, by description alone, is create an undertaking that had no identifiable business existence before the transaction. The question is whether, before the transaction, the alleged undertaking was identifiable as a business activity distinct from the seller’s remaining operations.
In Asea Brown Boveri, the “transportation business” comprised railway-related manufacturing carried on within the Baroda factory, where goods were also manufactured for other customers. It had no separate location or recognition in the books, no separately drawn accounts or identified profits, and was recognized as an independent undertaking for the first time in the agreement. On the other hand, the materials available on record indicated itemization of the assets and liabilities as also the item-wise value of the assets transferred. Accordingly, the transaction was held not to constitute a slump sale.5
The absence of separate books, however, is not by itself conclusive. In Devi Sea Foods, the windmill operations were accepted as separate undertakings although separate books had not been maintained. The distinction was that separate ledgers existed, the income and expenditure of the windmill operations could be separately ascertained, and the income had already been treated as arising from separate units. The Tribunal described a separate undertaking as one capable of being separated from the other business and operated independently of it.6
The above precedent suggests that the enquiry should focus on whether the alleged undertaking had an identifiable business existence before the transfer, supported by evidence independent of the BTA. Separate books, accounts or other internal records may assist in establishing that identity, but they are evidentiary factors rather than the enquiry itself. The BTA may delineate the perimeter of an existing business activity; it cannot, merely by grouping assets and liabilities together, give separate business identity to an activity that did not previously possess one.
B. Test the function, not title - can a substitute right preserve the undertaking?
The next question is whether the function must move through legal title or whether any substitute right is enough. Max India shows why title is not invariably conclusive. Proprietary rights in technical know-how remained with the seller for a period, but the purchaser had the right to use the know-how and carried on the business without interruption. The Punjab and Haryana High Court upheld the conclusion that the division had been transferred as a slump sale.
On the other hand in Manipal Health Systems, the purchaser received a right to use an asset instead of title, but the Karnataka High Court considered the retained land and hospital buildings significant to the hospital undertaking and held that the whole undertaking had not transferred. The two decisions should not be reduced to a licence-versus-lease distinction. They ask a deeper question: did the substitute right place the relevant operating function under the purchaser's effective control?7
A functionality analysis should therefore examine the following:
- Whether the quality of the substitute right is sufficiently long, enforceable and exclusive for the purchaser to operate the acquired business?
- Can the seller terminate or materially restrict it?
- Does the purchaser need the seller's continuing discretion to use the asset?
- If the retained item is a regulatory permission, is it legally transferable, or must a replacement approval be obtained before closing?
- If it is a customer contract, has consent or novation occurred, or is the purchaser merely performing behind the seller while the seller remains the contracting party?
These pointers help determine whether the purchaser remains materially dependent on rights controlled by the seller. The greater that dependence, the harder it is to conclude that the relevant function has moved with the undertaking.
C. When is functionality tested - at closing, after closing, or across a staged transfer?
Post-closing conduct is relevant evidence, but it should not be confused with the legal character of the transfer. Premier Automobiles relied, among other matters, on the purchaser's continuation of automobile manufacturing after the sale date. Max India likewise records that the transferee carried on the acquired business without disruption. Those facts supported the conclusion that an operating business had moved.8
But a strategic buyer may acquire a complete business and immediately integrate it: discontinue the acquired brand, migrate customers to its own platform, combine teams or change suppliers. Those later choices should not by themselves alter what was transferred at closing. The more useful distinction is between capability and evidence. The character of the transaction should be tested by the rights, resources and obligations placed under the purchaser's control at the relevant time; subsequent operation may confirm or contradict that assessment.
The same approach helps with staggered legal transfers. In Premier Automobiles, a later conveyance of land and building did not convert the overall arrangement into an itemized asset sale; the Bombay High Court read the agreements and implementation steps as part of the transfer of the Kalyan business. By contrast, BYD India involved identified plant and machinery sold item-wise on different dates for separately identified consideration, while the record did not establish that the manufacturing undertaking itself had moved. The Tribunal treated those disposals as sales of individual assets.9
Different dates are therefore not decisive. The question is whether a later document merely perfects one business transfer, or whether the parties are independently disposing of assets over time. A further difficulty arises where the delayed item is itself necessary to operate. If a critical licence, premises right or customer contract remains outside the purchaser's control after the stated transfer date, the issue is not merely documentation. It therefore bears on whether, at the point of transfer, the buyer had received the undertaking in a form capable of carrying on the identified business activity.
V. Liabilities: Apply the Same Functional Distinction
Liabilities should be tested differently from assets, but by the same logic. A historical tax exposure, financing repaid at closing, an accrued trade payable and a continuing customer warranty may all be described as retained liabilities, yet their relationship with the continuing business is different.
The first distinction concerns attribution: whether the liability relates to the period or conduct before the transfer, or to the business that continues afterwards. Mugneeram Bangur shows that specified tax liabilities could remain with the seller notwithstanding the transfer of the business. Premier Automobiles similarly recognized that pre-sale economic items could remain outside the transferred business.10
The second distinction concerns what the obligation requires the parties to do. A liability may arise before closing but still require continuing performance. If the seller remains responsible for warranties, customer commitments, supplier obligations or another obligation through which the business is carried on, that may indicate that part of the activity remains with the seller. On the contrary, a historical monetary exposure may have little bearing on whether the buyer received the operating business.
Digital Insight sharpens this distinction. The agreement provided that pre-completion tax and statutory liabilities would be borne by the seller, coupled with an indemnity in favour of the buyer. The CIT(A) treated this as evidence that part of the liabilities of the undertaking had been retained. The Tribunal rejected that reading. It considered the provision together with the broader clause under which the buyer was required to pay, satisfy and discharge the debts, liabilities and obligations arising from the conduct of the business and ownership of its assets, including liabilities accrued up to completion. Read as a whole, the agreement did not establish that liabilities forming part of the undertaking had been excluded merely because the economic burden of specified pre-completion exposures was allocated to the seller.11
The enquiry should therefore focus not merely on which party ultimately bears the cost of a liability, but on its relationship with the business that is transferred. A historical or pre-completion exposure may be allocated to the seller without necessarily affecting the transfer of the undertaking; a different question arises where the seller retains an obligation through which the continuing business itself is performed. The closer the liability is to the future operation of the transferred activity, the more significant its retention becomes in determining whether the business has moved as a whole.
VI. Conclusion
A slump sale does not require the purchaser to inherit every entry on the seller’s balance sheet. The authorities permit assets to be excluded, historical exposures to remain with the seller, substitute rights to be used and different elements of the transaction to be implemented at different times. But none of those propositions supplies a general safe harbour. The transfer must still leave the purchaser with the business activity taken as a whole, rather than the individual components from which that business may be carried on.
The difficult cases therefore lie at the boundary between carving something out of an undertaking and carving up the undertaking itself. That boundary cannot be located by the number or value of the items retained. It depends on what those items do in the particular business, what rights and obligations the purchaser actually receives, and what remains dependent on the seller after the transaction takes effect. At what point, then, does a carve-out stop being an exclusion from the undertaking and become evidence that the undertaking itself was never transferred?
Footnotes
1 Income-tax Act, 2025, No. 30 of 2025, §§ 2(35)(i), 2(103) (India), as amended by Finance Act, 2026.
2 Income-tax Act, 2025, No. 30 of 2025, §§ 2(35)(f), 2(35)(i), 2(103)(b)(i) (India).
3 Rohan Software (P.) Ltd. v. Income Tax Officer, 115 I.T.D. 302, ¶¶ 28–29 (ITAT Mum. 2007) (India); Principal Commissioner of Income Tax v. Manipal Health Systems (P.) Ltd., 2023 SCC OnLine Kar 1671, ¶¶ 9–11 (Kar. H.C. 2023) (India).
4 Commissioner of Income Tax v. Mugneeram Bangur & Co. (Land Department), 57 I.T.R. 299, ¶¶ 3, 17 (S.C. 1965) (India); Premier Automobiles, 264 I.T.R. 193, ¶¶ 5, 38; Triune Projects (P.) Ltd. v. Deputy Commissioner of Income Tax, 291 C.T.R. 268, ¶¶ 10–13 (Del. H.C. 2016) (India).
5 Assistant Commissioner of Income Tax v. Asea Brown Boveri Ltd., 14 S.O.T. 18, ¶¶ 89–92 (ITAT Mum. 2007) (India).
6 Assistant Commissioner of Income Tax v. Devi Sea Foods Ltd., 183 I.T.D. 341, ¶¶ 6.1–6.2 (ITAT Visakhapatnam 2020) (India).
7 Max India, 319 I.T.R. 68, ¶ 4; Manipal Health Systems, 2023 SCC OnLine Kar 1671, ¶¶ 9–11.
8 Premier Automobiles, 264 I.T.R. 193, ¶ 38; Max India, 319 I.T.R. 68, ¶ 4.
9 Premier Automobiles, 264 I.T.R. 193, ¶ 38; Deputy Commissioner of Income Tax v. BYD India (P.) Ltd., IT(TP)A No. 60/Chny/2023, ¶¶ 11–15 (ITAT Chennai Apr. 16, 2026) (India).
10 Mugneeram Bangur, 57 I.T.R. 299, ¶¶ 3, 17; Premier Automobiles, 264 I.T.R. 193, ¶ 5.
11 Digital Insight India Products (P.) Ltd. v. Assistant Commissioner of Income Tax, ITA No. 5048/Mum/2024, ¶¶ 4.5–4.10 (ITAT Mum. Apr. 29, 2025) (India) (reading the pre-completion tax-allocation provisions together with the buyer’s broader assumption of business liabilities
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The views expressed in this article are solely those of the author in her personal capacity and are based on her understanding of the applicable legal and regulatory framework. They do not necessarily represent the views, policies or practices of organisation with which the authors is associated.
