Direct Tax Alert - CBDT notifies Slump Sale Amendment Rules

Background

Section 2(42C) of the Income-tax Act, 1961 (IT Act) defines ‘slump sale’ as transfer of one or more undertakings for a lumpsum consideration without the value being assigned to individual assets and liabilities in such cases. The computation mechanism is contained in Section 50B of the IT Act. As per section 50B of the IT Act, the gains arising from slump sale shall be taxed as Capital Gains. Depending upon the period of holding of the undertaking, the gain/(loss) could either be long-term or short-term. There was an ambiguity on application of section 50B to slump exchange. In order to address this, Finance Act, 2021 brought an amendment in section 2(42C) and section 50B to provide the term slump sale would include transfer of undertaking by any means. Section 50B of the IT Act is amended to provide that Fair Market Value (FMV) of the undertaking on the date of transfer shall be taken as full value of consideration. The methodology for determining FMV was to be prescribed by the Central Board of Direct Taxes (CBDT). In this regard, recently CBDT has issued a notification¹ introducing a new Rule 11UAE in the Income-tax Rules, 1962 (IT Rules).  

We, at BDO in India, have analysed and summarised the said notification hereunder:  

Computation mechanism

1. For purpose of section 50B(2)(ii) of the IT Act, the FMV of capital assets shall be higher of following:

• FMV1 as determined under Rule 11UAE(2) of IT Rules; or

• FMV2 as determined under Rule 11UAE(3) of IT Rules

2. For arriving at FMV1, following formula is to be applied:

FMV1= A+B+C+D-L, where,

A = book value of all the assets (except jewellery, artistic work, shares, securities and immovable property) as appearing in the books of accounts of the undertaking/division by way of slump sale as reduced by the following amount relating to such undertaking/division:

• Income-tax paid after reducing income-tax refund (if any)

• Amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset

B = Price at which jewellery and artistic work can be sold in open market (based on valuation report obtained from a registered valuer²)

C= FMV of shares and securities as per Rule 11UA(1) of the IT Rules

D= Stamp duty value in respect of the immovable property

L= book value of liabilities as appearing in the books of accounts of the undertaking/division transferred by way of slump sale, but excluding following:

• Paid up equity share capital

• Dividend amount on preference and equity shares set apart where such dividends have not been declared before the date of transfer at a general body meeting of the company

• Reserves and surplus by whatever name called, other than those set apart towards depreciation

• Provision for taxation, other than income-tax paid after reducing income-tax refund (if any), to the extent of the excess over the tax payable with reference to the book profits;

• Provision for unascertained liabilities

• Contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares

3. For computing FMV2, following formula is to be applied:

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

E= Monetary consideration received or accruing on transfer

F= FMV of non-monetary consideration received or accruing on transfer represented by property (referred to and in the manner provided in Rule 11UA(1) of the IT rules)

G= Open market price (based on valuation report obtained from a registered valuer) of non-monetary consideration received or accruing on transfer represented by property, other than immovable property (not referred to in Rule 11UA(1) of the IT Rules)

H= Stamp duty value of non-monetary consideration received or accruing on transfer represented by the immovable property

4. For the purpose of determining FMV1 and FMV2, the valuation date shall be the slump sale date

BDO Comments

While the Finance Act, 2021 has brought slump exchange to tax from FY 2020-21, the Rules for computing the acquisition cost is prescribed only now. The Notification does not specifically mention as to the date from which the Rule 11UAE shall be effective. Hence, it is possible to contend that this Rule should be applicable only from the date of publication in the Official Gazette. Hence, in respect of slump sale concluded prior to the rule being notified, one could contend that there should not be any tax liability and to that extent the amendment is infructuous.

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