New Version of Slump Sale

New Version of Slump Sale

The Finance Act 2021 always came up with several amendments to the existing provisions. One new amendment has beenintroduced by the Finance Act 2021with respect to the scope of Slump Sale and Computation of Capital Gain in the case of Slump Sale. With this amendment, the Central Board of Direct Tax (CBDT) has brought some significant changes related to Slump Sale under the provisions of Income Tax Law.

Slump Sale (Before amendment)

Earlier, under the provisions of section 50B (which provides for taxation of slump sale), the actual transaction value was considered as the Full Value of Consideration for computing Capital Gains, which means, there was no requirement for calculation of Fair Market Value (FMV).

Slump Sale (After amendment)

Owing to the amendment made by the Finance Act 2021, the FMV of undertaking/division/capital asset as of the date of the transaction will be regarded as Full Value Consideration. Therefore, it becomes a mandate to calculate FMV, irrespective of the transaction value.

Correspondingly new rule 11UAE has been inserted in income tax rules, which prescribe two formulas for arriving at FMV of the transaction and the higher FMV will be considered as full value of consideration. The two formulae are as under:

“ FMV1 = A+B+C+D – L, where,

A= book value of all the assets (other than jewellery, artistic work, shares, securities, and immovable property)as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale as reduced by the following amount which relate to such undertaking or the division, —

(i)   any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii)   any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer;

C = fair market value of shares and securities as determined in the manner provided in sub-rule (1) of rule 11UA;

D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property;

L= book value of liabilities as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale, but not including the following amounts which relates to such undertaking or division, namely: —

(i)   the paid-up capital in respect of equity shares;
(ii)   the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
(iii)   reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv)   any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v)   any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi)   any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

FMV2 = E+F+G+H, where,

E = value of the monetary consideration received or accruing as a result of the transfer;

F = fair market value of non-monetary consideration received or accruing as a result of the transfer represented by property referred to in sub-rule (1) of rule 11UA determined in the manner provided in sub-rule (1) of rule 11UA for the property covered in that sub-rule;

G = the price which the non-monetary consideration received or accruing as a result of the transfer represented by property, other than immovable property, which is not referred to in sub-rule (1) of rule 11UA would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer, in respect of property;

H = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property in case the non-monetary consideration received or accruing as a result of the transfer is represented by the immovable property.

Further, FMV shall be calculated on the date of slump sale.

The most important thing to be notedabout this amendment is that it would come into force from AY 2021-2022.In consequence, any Slump Sale transaction that took place during FY 2020-2021 i.e. from April 01, 2020, would be impacted and would require fresh calculation of tax liability.

This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

Posted by:

CA Ruchika Gupta

AKGVG & Associates

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