For the purpose of income tax act, slump sale also referred as business transfer is where the assessee transfers the entire undertaking/ division for lumpsum consideration without assigning value/ selling price of individual asset.
Taxation under the head Capital Gains
The capital gains are taxed in the year an undertaking is transferred and the capital gains tax levied is upon the difference between the sales consideration and the cost of acquisition wherein the cost of acquisition is deemed the “net worth” of the undertaking for the purpose of Section 50B.
| Held for less than 36 months | Held more than 36 months |
| Short term capital gains | Long term capital gains |
COMPUTATION OF INCOME TAXABLE UNDER CAPITAL GAINS
Section 50B was inserted to provide the computation mechanism of capital gains in case of a slump sale
| Particulars | Amount |
| Full Value of consideration (FMV as per rule no. 11UAE) | xxxx |
| Less: Transfer Expenses | (xxx) |
| Net Consideration | xxxx |
| Less: Cost of Acquisition (net- worth of undertaking) | (xxx) |
| Short Term/ Long Term Capital Gain | xxxx |
How to compute Networth of the undertaking?
Net Worth of the undertaking will be the ‘Book Value of Assets’ and ‘Book Value of Liabilities’.
| Particulars | Value |
| Depreciable Asset | Written Down Value as per Income Tax Act, 1961 |
| Add: Other Assets | Book Value |
| Less: Liabilities | (Book Value) |
| Net Worth | Xxxxx |
The key factors of computing capital gains arising out of slump sale are:
- In the case of depreciable assets, the written down value of such assets would be taken as the book value.
- Revaluation of the assets should be ignored.
- If net worth is negative, then Cost of Acquisition shall be considered as nil.
- No profit under Profits and gains from business and profession shall arise even if stock is transferred in slump sale.
- For computing net worth, if asset (on which deduction under section 35AD was claimed) is transferred, value shall be taken as NIL.
- For computing Net Worth value of self-generated goodwill of business or profession shall be considered to be NIL.
- Fair Market Value of the capital assets as on the date of transfer, calculated as per Rule 11UAE, shall be deemed to be the Full Value of the Consideration received or accruing as a result of the transfer of such capital asset.
- If the undertaking is held for more than 3 years, then the nature of capital gain shall be Long term, otherwise it shall be short term.
- In the case of slump sale, assesse shall furnish a report of a Chartered Accountant upto date referred to in section 44AB indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, has been correctly arrived at.
- An assessee can opt for “Tax savy” restructuring plans to avoid slump sale tax if the following conditions are satisfied:
- Transfer undertaking after acquiring 100% shares of transferee to not attract capital gains [Section 47(iv)]
- Transfer undertaking by way of demerger rather than slump sale [Section 47(vib)]
RULE 11UAE
For the purpose of section 50B, the fair market value of the capital assets shall be the FMV1 determined under Rule 11UAE(2) or FMV2 determined under Rule 11UAE(3), whichever is higher.
The FMV1 shall be the fair market value of the capital assets transferred by way of slump sale determined in accordance with the formula –
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 rule 11UA(1);
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 shall be the fair market value of the consideration received or accruing as a result of transfer by way of slump sale determined in accordance with the formula
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 rule 11UA(1) determined in the manner provided in rule 11UA(1) 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 rule 11UA(1) 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.
FMV1 and FMV2 shall be determined on the date of slump sale and for this purpose valuation date referred to in rule 11UA shall also mean the date of slump sale.
Post Author
Riddhi
