Companies often have multiple businesses across different segments. A company may require to \”hive off\” one of its businesses/segments, with a set of assets and liabilities assigned to them. Companies may have to sell off a segment or the undertaking as a whole. This sale is called a slump sale and does not require identification of individual assets and liabilities.
From a Taxation perspective, the Slump Sale already taxable. Now, the Income Tax Department has come up with specific rules for valuation for Slump Sale. Here\’s all you need to know about the Slump Sale and its valuation under new regulations.
Summary of Sec 50B – Computation of Capital Gains in case of Slump Sale
Any profits or gains arising from the slump sale shall be chargeable to income-tax as capital gains (short term – up to 36 months and long term in case of more than 36 months):
Cost of Acquisition is the \”net worth\” of the undertaking or the division.
Net Worth = Book value of Total Assets – Book Value of Total Liabilities
While calculating Net Worth and Cost of Acquisition, it should be noted that:
(i) Change in value of assets due to revaluation is to be ignored
(ii) Depreciable assets to be valued as per WDV method as per Sec 43 (6)(c)(i)(C)
(iii) Goodwill that is not acquired in an acquisition would be considered to be NIL.
(iv) If deduction is allowed under Sec 35AD, value of such assets would be NIL.
Full Value of Consideration received or receivable is fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner i.e. Rule 11UAE
The section requires a Certificate from a practicing CA required to confirm that Net Worth has been correctly calculated. There is no mention of certificate required for Fair Market Value.
Rule 11UAE
[Notification No.68/2021/F. No.370142/16 /2021-TPL].
These rules may be called the Income- tax (16th Amendment) Rules, 2021.
“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 section 50B(2)(ii), the fair market value of the capital assets shall be the FMV1 as per sub-rule (2) or FMV2 as per 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 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.
(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 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.
(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.” (i.e. Valuer registered with Wealth Tax Act).
How does it impact value?
Earlier, companies followed a practice of concluding a transaction of internal restructuring within a group in a “tax-neutral” manner. It was common practice of giving a consideration that was aligned to the Tax Net Worth.
Given that the FMV as per Rule 11UAE would be deemed value of consideration, there is likely to be a tax impact on such transactions. This is primarily because of requirements of revaluation of assets that is required while calculating the Fair Market Value of the assets.
| Particulars | Tax Net Worth (Deemed Cost) | Fair Market Value (Deemed Consideration) | Likely Impact |
| Immovable Property | Book Value | Stamp Duty Value | Higher FMV likely |
| Shares and Securities | Book Value | Value as per Rule 11UA | Could be higher or lower |
| Artistic Work | Book Value | Value as per Rule 11UA | Higher FMV likely |
| Unascertained Liabilities | Book Value | To be excluded from Book Value | Higher FMV |
| Goodwill (not acquired in an acquisition) | Excluded from Book Value | No mention but should be excluded because it “does not represent the value of any asset” | No impact |
For enquiries on Valuation, contact valuation@omnifinsolutions.com