Slump Sale – New Tax Rules – Simplified with example

By CA. Mit Gaglani, Senior Manager, TransPrice

The CBDT vide notification number 68/2021 dated 24^th May, 2021 notified Rule 11UAE for the computation of Fair Market Value for the purposes of section 50B (Slump Sale) of the Income-tax Act, 1961.

Section 50B of the Income-tax Act, 1961 deals with special provisions for the computation of capital gains incase of slump sale. To put it simplistically, capital gains (as per the earlier section) were computed using the following formula:

• Sales consideration (A)
• Less: Net worth of the undertaking (Cost of acquisition + Cost of Improvement) (B)

Further, every transferor is required to furnish a report from an Accountant certifying the net worth of the undertaking transferred.

The Finance Act, 2021 introduced an amendment to section 50B of the Act and specified that from Assessment year 2021-22 onwards, slump sale shall now be carried at Fair Market Value (mechanism now prescribed vide Rule 11UAE) instead of the actual sales consideration. Therefore, this amendment replaces the actual sales consideration received by the transferor of the undertaking with the higher of the FMV of capital assets and the FMV of the consideration. The revised formula for calculating the capital gains on slump sale is as follows:

• FMV as on the date of transfer (A)
• Less: Net worth of the undertaking (Cost of acquisition + Cost of Improvement) (B)

The methodology for computing the FMV under Section 50B was not prescribed earlier, which has now been prescribed vide the aforementioned circular by inserting Rule 11UAE of the Income-tax Rules, 1962.

As per Rule 11UAE, the FMV to be considered for the purpose of computation shall be the higher of the following two:

1. FMV1 – The fair market value of the capital assets transferred by way of slump sale 

• All assets other than jewellery, artistic work, shares, securities and immovable property to be valued at their book values whereas jewellery, artistic work, shares, securities and immovable to be valued as per their existing valuation rules assuming they are being individually transferred.

• Book values of liabilities as on the date of transfer to be reduced from the above.

• FMV2 – The fair market value of the consideration received (Monetary + Non-Monetary)

• Non-monetary consideration to be valued as per the existing valuation rules.

Let us now understand the impact of the amendment to section 50B of the Act along with the introduction of Rule 11UAE by way of an example:

Scenario 1: Prior to the amendment to section 50B of the Act.

Sales consideration – Rs. 100;

Net worth of the undertaking transferred – Rs. 80 (Certified by a Chartered Accountant- 50B);

FMV of the assets transferred – Rs. 120

Capital Gains computation as per section 50B:

Scenario 2: Post the amendment to section 50B of the Act and introduction of Rule 11UAE

Sales consideration – Rs. 100;

Net worth of the undertaking transferred – Rs. 80 (Certified by a Chartered Accountant – 50B);

FMV of the assets transferred – Rs.150;

FMV of the consideration received – Rs.130 (Rs. 30 is received as non-monetary consideration)

Capital Gains computation as per section 50B:

*Higher of FMV of the assets transferred and FMV of the consideration received.

Concluding remarks:

Now, with the introduction of FMV in the equation along with the reference to the FMV of the sale consideration results in a closure of tax planning strategies followed by businesses in India. Further, it also places responsibility on the professionals to value the net worth as well as the FMV of the Assets as well as the non-monetary consideration. 

A professional may like to use the principles embedded in the arm’s length price determination in the transfer pricing rules of India to derive the FMV of the assets.

In case you are thinking of undertaking a Slump Sale for your division or needed further information, feel free to reach out at info@transprice.in