Section 50B of the Income tax act is special provision of capital gain wherein capital gain is calculated in case of Slump sale transaction.
Now let’s under what is slump sale?
As per section 2(42C) of the Income tax act slump sale means (Before Finance Act, 2021):
““slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.”
As per section 2(42C) slump sale means (After Finance Act, 2021):
“”slump sale” means the transfer of one or more undertaking, by any means for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.”
Thus now after the above amendment the scope of slump sale has widened and now slump sale transaction which is not in the nature of sale will also be considered as slump sale which might be in nature of exchange, barter etc.
The second amendment which has been made to sub section (2) of section 50B that used to deal with calculation of cost in relation to slump sale and is as under (Before Amendment):
“(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48”
Earlier consideration received for such transaction used to be actual sale consideration received as only sale transaction would be considered as slump sale and net worth of the unit would be considered as cost of acquisition.
Now after amendment to section 50B by Finance Act 2021 same is as under:
“(2) In relation to capital assets being an undertaking or division transferred by way of such slump sale,—
(i) the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48;
(ii) Fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.”
Thus, now sub section 2 deals with cost and well as full value of consideration in case of slump sale.
Accordingly still net worth of the unit is considered as cost of the unit and fair market value of the assets will be deemed to be the full value of consideration. Thus, a deeming fiction has been created as regard to full value of consideration as we see in section 50C.
But in the above provision it has been mentioned that FMV shall be calculated in the prescribed manner and same has been now prescribed under Income tax rules as Rule 11UAE vide notification dt. 24.05.2021 which is as under:
“11UAE.Computation of Fair Market Value of Capital Assets for the purposes of section 50B of the Income-tax Act.
(1) For the purpose of clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher.
(2) The FMV1 shall be the fair market value of the capital assets transferred by way of slump sale determined in accordance with the formula –
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.
(3) 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-
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.
(4) The fair market value of the capital assets under sub-rule (2) and sub-rule (3) 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.
Explanation. -For the purposes of this rule, the expression “registered valuer” and “securities” shall have the
same meanings as respectively assigned to them in rule 11U.”
If we look at the above rule it can be said that such deeming FMV is a combination of actual consideration and fair market value and high of both will be considered as final sale consideration for the purpose of slump sale.
Also, in the second FMV formula i.e. FMV2 under sub rule 3 there is no reduction of liabilities since actual consideration received is considered but in a case where non-monetary consideration is received there also no reduction of liabilities is done even though in non monetary consideration only FMV of assets will be considered under sub rule 3 which can increase the capital gain sale consideration.
Thus, above are the new rules prescribed for the purpose of calculation of sale consideration in case of slump sale.
Disclaimer: The views presented in the above article are personal views of the author and has no legal binding. For any legal opinion consult a tax professional.
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