How to Review a Business Transfer / Slump Sale Agreement in India

A business transfer agreement, usually called a slump sale when the tax and legal mechanics are in play, moves an entire business or business unit from one owner to another as a going concern, for one lump sum, without a price tag on each asset inside it. That last part is not a drafting style choice. Under Section 2(42C) of the Income Tax Act, 1961, a "slump sale" means "the transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer." Assign values to individual assets in the same document, and you may have accidentally turned a slump sale into an itemised asset sale, with a different, usually worse, tax result. That single sentence in Section 2(42C) is why a business transfer agreement (BTA) needs a different review checklist than a normal commercial contract.

Adira, which publishes this guide, builds contract review and CLM software, so getting this checklist right matters to our business too. Everything below stands on its own regardless. If you want to mark up a BTA clause by clause before it goes further, Weave (Adira's free browser tool) lets you do that without an account.

What actually moves in a slump sale: assets, contracts, employees, liabilities

A slump sale is not a sale of shares (which leaves the company and its contracts untouched) and not a sale of a single asset (which leaves the surrounding business behind). It sits in between: the buyer gets the plant, inventory, contracts, employees, and licences that make up a defined "undertaking," and takes on the undertaking's liabilities, all for one number.

Four categories decide whether the transfer works as a going concern, each needing its own schedule in the BTA:

• Assets. Fixed assets, inventory, receivables, IP, and goodwill tied to the undertaking. A vague description ("all assets used in the business") invites disputes over borderline items; a numbered schedule with an "as on" date does not.
• Contracts. Vendor and customer contracts, leases, and licences the undertaking depends on. Most restrict assignment without the counterparty's consent, so each material contract needs either a novation (a fresh three-party agreement under Section 62 of the Indian Contract Act, 1872) or a specific consent. See our novation versus assignment explainer for why "we're assigning it" is not always legally accurate.
• Employees. Who transfers, on what terms, and whether continuity of service is preserved, covered below since Indian labour law has a specific rule for this.
• Liabilities. Trade payables, loans, statutory dues, and contingent liabilities tied to the undertaking. This is where most BTA disputes start, since a going-concern transfer is supposed to carry the undertaking's liabilities with it, not let the seller cherry-pick which stay behind.

A test you can run: search the draft for "excluded." If assets are excluded but the liabilities schedule is silent, that asymmetry is exactly where buyers get stuck holding obligations they thought they had negotiated away.

Consideration and the slump sale tax treatment: Section 50B

Once the BTA is signed, the tax question is how much of the lump sum is taxable gain, answered by Section 50B of the Income Tax Act, 1961, "Special provision for computation of capital gains in case of slump sale." Section 50B(2) says the "net worth" of the undertaking "shall be deemed to be the cost of acquisition and the cost of improvement." Net worth, per the Explanation to Section 50B, is "the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities" per the books of account, with depreciable assets at written-down value and self-generated goodwill valued at nil. No indexation benefit applies, and since the Finance Act, 2021 amendment, the fair market value on the transfer date, not just the contract price, is deemed the "full value of consideration," to stop related-party deals from underpricing to shrink the gain.

Worked example: a business sold for a lump sum of ₹50 crore, with a net worth (per the books, on the transfer date) of ₹20 crore, produces a taxable capital gain of ₹30 crore under Section 50B, long-term if the undertaking was held for more than 36 months, short-term otherwise.

This provision exists because slump sales once fell through a gap in the law. In PNB Finance Ltd v CIT, (2008) 307 ITR 75 (SC), the Supreme Court held a slump sale of a whole undertaking could not be taxed as business income under the then Section 41(2), which needed the price allocated to specific depreciable assets, impossible in a lump-sum sale, and could not be taxed as ordinary capital gains under Section 45 either, since the "cost of acquisition" of an entire undertaking had no computable answer under the general provisions. Parliament closed the gap with Section 50B, via the Finance Act, 1999, effective 1 April 2000. Read the section in full on the Income Tax Department site and on Indian Kanoon.

The reviewer's point: whatever the BTA calls the deal, tax law asks a factual question, is this actually a lump-sum transfer without individual asset pricing. A consideration clause that assigns values per asset "for accounting purposes only" is a real risk, since it can hand the tax authority the argument that Section 2(42C)'s test fails, converting the deal into an itemised asset sale with a different, usually higher, tax bill.

Conditions precedent and consents: contracts, landlord, lender

A going-concern transfer only works if everyone whose consent the deal actually needs has given it before or at closing. The BTA's conditions precedent (CP) section should list, by name, every consent that is a genuine legal requirement, not a generic "all necessary consents obtained."

• Contract counterparties. Where a material contract bars assignment without consent (most do), the CP should require a signed novation or a written consent letter before closing, not "commercially reasonable efforts" afterward. An unconsented "assignment" of an obligation is not effective against the counterparty under ordinary Indian contract principles, since obligations cannot be shifted without the promisee's agreement; see the novation versus assignment guide.
• Landlord consent. Most leases require the landlord's written consent before the right to occupy passes to a new operator. Closing without it risks the buyer operating from premises it has no enforceable right to hold.
• Lender or secured creditor consent (NOC). If the undertaking's assets are charged to a bank or NBFC, the security documents typically require the lender's no-objection first, since the transfer changes who the security sits against. Skipping this does not remove the charge; the buyer just takes the undertaking still encumbered.
• Regulatory and sectoral consents. Trade licences, FSSAI registration, drug licences, and similar approvals are usually not transferable by contract; the buyer applies afresh, so the BTA should state who is responsible and by when.
• Competition Act notification. For larger deals, check whether the transaction is a "combination" requiring prior notification to the Competition Commission of India under the Competition Act, 2002, before crossing the specified thresholds, a separate regulatory clock from the contractual CPs.

Reps and warranties, and the indemnity that backs them

The seller's representations and warranties put the undertaking's history on paper: clean title to the assets, no undisclosed liabilities, tax returns filed and dues paid, litigation disclosed, and no material adverse change between signing and closing. Our representations versus warranties explainer covers why the two words carry different legal consequences, and our warranty clause guide covers how long a warranty should survive.

None of that protection means much without an indemnity that pays out when a warranty turns out false, an undisclosed tax demand shows up, or a pre-closing liability the seller was supposed to retain lands on the buyer's desk. See our indemnity clause explainer for the mechanics, and our guide on indemnity caps, baskets, and survival periods for how much of the deal value sits behind the seller's promises, and for how long. In a BTA specifically, watch for indemnity capped so low, or surviving so short a period, that a liability discovered eighteen months later (a tax reassessment is the classic example) has nowhere to go.

The seller's non-compete: Section 27's goodwill exception

A buyer paying for goodwill, the undertaking's customer relationships and reputation, does not want the seller opening a near-identical business next door six months later. The general rule under Indian law makes that hard to prevent: Section 27 of the Indian Contract Act, 1872 says "every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." A non-compete that would be unenforceable in an employment contract, however, is a different question in a business sale, because Section 27 carries its own built-in exception for exactly this situation.

Exception 1 to Section 27 reads: "One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business." Read the full section on Indian Kanoon. This is why a seller non-compete in a genuine business transfer, unlike a garden-variety employee non-compete, can be valid, provided the geography and time are reasonable for the business sold and the restraint lasts only as long as the buyer keeps running a like business there. See our broader non-compete enforceability guide for how courts read "reasonable" in practice.

The Delhi High Court drew a line on how far this exception reaches in Arvinder Singh & Anr v Lal Pathlabs Pvt Ltd & Ors, FAO(OS) 473/2014, decided 26 March 2015 (Nandrajog and Rani JJ). Two pathologists had sold their diagnostic business, including its goodwill, and agreed not to compete for five years. The Court held the Exception 1 goodwill carve-out lets a buyer restrain the seller from carrying on a competing business, but does not stretch to stop an individual from personally practising their profession. The appellants could not "corporatise" a rival diagnostic chain, but kept the right to practise as a pathologist and radiologist individually. Where the seller is an individual professional or a small promoter-led firm, draft the non-compete around the business activity, not the individual's right to work in their profession at all, or it risks being read down the way the broader injunction was on appeal.

Employee transfer and Section 25FF

Employees do not automatically become the buyer's just because a BTA says the undertaking transfers "along with its workforce." Transferring an undertaking triggers Section 25FF of the Industrial Disputes Act, 1947, which treats a change of employer through a transfer of ownership or management as a retrenchment by default, entitling every workman with at least one year of continuous service to notice and compensation under Section 25F, unless three conditions are all met: service is not interrupted by the transfer, the post-transfer terms are "not in any way less favourable" than before, and the new employer is legally liable to pay retrenchment compensation later on the basis that service has been continuous since before the transfer.

This is why a properly drafted BTA has the buyer issue fresh offer letters recognising continuity of past service (for gratuity, leave, and provident fund purposes) rather than treating the transfer as a mass termination and rehire, with an employee schedule listing designations, current terms, and continuity commitments, since getting Section 25FF's three conditions wrong converts an intended seamless handover into a retrenchment event with compensation liability attached.

GST on a going-concern transfer

Unlike the income tax position, the GST answer is simpler, and favourable, provided the transfer genuinely qualifies. Entry 2 of Notification No. 12/2017-Central Tax (Rate), dated 28 June 2017, exempts "services by way of transfer of a going concern, as a whole or an independent part thereof" from GST. The condition doing the real work is "going concern": the undertaking must be capable of continuing to operate as the same business in the buyer's hands, without a break. Carve out enough operative assets or contracts that the buyer has to rebuild the business from parts, and the exemption is at risk on the ground that what transferred was a collection of assets, not a going concern, one more reason the assets-and-liabilities completeness point from the first section matters for tax too.

Red flags table

Normal	Red flag	Why it matters
Assets and liabilities schedules are both complete, dated, and cross-referenced	Assets are itemised but the liabilities schedule is vague, missing, or "as mutually agreed"	An incomplete going-concern transfer risks losing both slump-sale tax treatment and GST exemption
Consideration is stated as one lump sum for the whole undertaking	Consideration is broken down by asset "for accounting purposes" in the same schedule	Assigning individual values can defeat Section 2(42C)'s "without values being assigned" test
Material contracts requiring consent are listed, with novation or consent obtained as a signing or closing condition	Contract consents are left to "commercially reasonable efforts post-closing"	Buyer can close into a business whose key contracts are not actually enforceable against it
Landlord and lender consents are named CPs, evidenced in writing	Premises and secured lending arrangements are unaddressed in the CP list	Buyer may take the undertaking still encumbered, or without a right to the premises it operates from
Non-compete is scoped to the business activity sold, with reasonable time and geography	Non-compete tries to bar the individual seller from practising their profession at all	Risks being read down as exceeding Section 27's goodwill exception, per Arvinder Singh v Lal Pathlabs
Employee schedule states continuity of service and matching or better terms	BTA is silent on continuity, or terms are left to be decided post-closing	Triggers Section 25FF's default retrenchment-compensation treatment
Indemnity has a stated cap, basket, and survival period matched to the risk (longer for tax and title)	Indemnity is uncapped and open-ended, or expires with the general warranty period	A tax reassessment found 18 months later can fall outside a short survival window
BTA states the transfer is of a going concern capable of continued operation without interruption	Schedule carves out assets or contracts material to running the business	Risks the GST going-concern exemption under Notification 12/2017 being denied on facts
Regulatory licence transfer responsibility is assigned to a named party with a timeline	Silence on who applies for fresh licences the buyer needs to operate	Buyer can end up holding an undertaking it cannot legally run from day one

Bad clause versus better clause: the consideration clause

Bad: "The Purchaser shall pay to the Seller a total consideration of ₹50,00,00,000 for the Business, allocated as follows: Plant and Machinery, ₹20,00,00,000; Inventory, ₹10,00,00,000; Goodwill, ₹15,00,00,000; Other Assets, ₹5,00,00,000."

What is wrong: this looks tidy, but assigning a rupee figure to each asset class is precisely what Section 2(42C) says a slump sale must not do. A tax authority can point to this schedule and argue the transaction is an itemised asset sale, taxed asset by asset instead of once under Section 50B, and potentially losing the GST going-concern exemption too.

Better: "The Purchaser shall pay to the Seller a lump sum consideration of ₹50,00,00,000 for the transfer of the Business as a going concern on an 'as is where is, whatever there is' basis, without any value being assigned to any individual asset or liability comprised in the Business, in accordance with Section 2(42C) of the Income Tax Act, 1961."

What changed and why: the lump-sum framing, with the explicit "without any value being assigned" language, tracks the statutory test directly instead of leaving a court or tax officer to infer it from context. Internal working papers can still record how the parties arrived at ₹50 crore; they simply should not be pasted into the operative consideration clause.

How this connects to related clauses and documents

A BTA rarely stands alone. Read the assignment or novation mechanics against the novation versus assignment guide, since most material contracts need one or the other before closing, not a bare "assignment" clause. Read the reps, warranties, and recovery mechanism together with the representations versus warranties, indemnity clause, and indemnity cap and basket guides, since a BTA's protection is only as good as the cap, basket, and survival period backing it. And check the seller non-compete against the general non-compete enforceability guide for how "reasonable" geographic and time limits get tested outside the goodwill-sale context too.

Three checks the red flags table doesn't fully capture

Beyond the table above, run these before signing:

1. Effective date and handover schedule. Is there a clear effective date, with a schedule covering part-performed work, outstanding dues, and any breaches straddling the handover?
2. Stamping. Is stamp duty computed and paid for the state of execution, not carried over from a previous deal's schedule?
3. Competition Act. For larger deals, has anyone actually checked whether the transaction is a notifiable "combination" under the Competition Act, 2002, rather than assuming it is too small?

US and global contrast

US practice calls this an "asset sale," and structurally it looks similar, an entire business changing hands outside a share sale. The tax mechanics run in the opposite direction. Under Internal Revenue Code Section 1060, both buyer and seller in a qualifying US asset acquisition must file Form 8594 with the IRS, allocating the purchase price across seven defined asset classes, and both sides must report the allocation consistently. Where Indian law disqualifies a slump sale the moment individual asset values are assigned, US federal tax law requires exactly that allocation as a condition of the transaction being reported correctly. A term sheet drafted off a US asset-purchase template, with a purchase-price-allocation schedule baked in as standard practice, can accidentally cost an Indian slump sale its tax treatment if it is not stripped out or moved to a side letter.

FAQ

Is a business transfer agreement the same as a slump sale? In practice, yes, when the transaction is a lump-sum transfer of a business as a going concern without individual asset pricing. "Business transfer agreement" is the contract; "slump sale" is the tax characterisation under Section 2(42C) that decides how it is taxed. A BTA that assigns individual asset values may still be valid, just not a slump sale for tax purposes.

Can a BTA leave out specific liabilities and still qualify as a slump sale? Some carve-outs are normal, a specific disputed liability the seller retains, say, but the transfer must still leave the buyer a functioning going concern, not a business stripped of the liabilities that made it operate as one.

Do all employees automatically transfer with the business? No. Employment needs fresh offer letters or a novation, with continuity of service preserved to meet Section 25FF's conditions. Without that, the transfer defaults to a retrenchment under Section 25F, with compensation liability attached.

Is a seller non-compete in a BTA always enforceable? Not always. It is enforceable to the extent it fits Exception 1 to Section 27, restraining the seller's business activity within reasonable time and geographic limits. It cannot stop an individual seller from practising a lawful profession personally, per the Delhi High Court in Arvinder Singh v Lal Pathlabs.

Does GST apply to a slump sale in India? No, provided the transaction genuinely qualifies as a transfer of a going concern under Entry 2 of Notification No. 12/2017-Central Tax (Rate). If material assets or contracts are excluded so the buyer cannot continue the same business without interruption, the exemption is at risk.

What is the biggest single mistake reviewers miss in a BTA? Assigning individual values to assets somewhere in the document, often in an "informational" annexure, while the main clause states a lump sum. Tax authorities read the whole document, so an inconsistency here can undo the slump-sale characterisation the rest of the agreement was built around.

This guide explains how business transfer agreements and slump sales are generally structured and taxed under Indian law, and the specific statutory tests, Section 2(42C), Section 50B, Section 27, and Section 25FF, that most generic templates get wrong. It is not legal advice, and it does not tell you whether your specific BTA achieves slump sale characterisation, a valid non-compete, or a compliant employee transfer in your situation. For that, especially before signing or closing a transaction of any real size, get a lawyer and a chartered accountant to review the actual documents together.