Before the amendment made vide Finance Act, 2021 under section 50B of the income Tax Act, 2021 (Act), capital gain on slump sale i.e. 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 was provided to be calculated by taking actual lump sum consideration to be full value of consideration.

However, vide the amendment in Finance Act, 2021 a major amendment has been made which provides that “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”. Calculation shall be in the following manner:

Capital Gain= Fair market value of capital asset transferred- Net Worth

Cost of Acquisition = Net worth of the undertaking

Net Worth= Total Asset – Total Liabilities

Total Asset shall be calculated as follows:

1. in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;
2. in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and
3. in the case of other assets, the book value of such assets. 

Total Liabilities= Book Value of liabilities

Also, no indexation of cost of acquisition is allowed.

Revaluation of assets shall not be considered while computing the “net worth”

A report of a Chartered accountant as defined in the Explanation below sub-section (2) of section 288 before the due date of filing return under section 139 indicating the computation of the net worth of the undertaking or division and certifying that the net worth of the undertaking or division has been correctly arrived.

Therefore, now for the purpose of capital gain the full value of consideration shall be fair market value, to be determined in the manner prescribed, and not the actual lump sum consideration received in respect of slump sale for of one or more undertakings and the capital gain shall be computed in the following manner:

Capital Gain on slump sale = fair market value of capital asset transferred- Net worth of the undertaking.

Now vide the Notification No. 68/2021 dated 24-05-2021 the manner has been prescribed by the CBDT to calculate the fair market value of capital asset transferred via insertion of a new Rule 11UAE under the Income Tax Rules, 1962. The manner of calculation of such fair market value shall be as follows:

The Fair Market Value shall be higher of the following two calculations i.e. FMV1 or FMV2 whichever is higher:

1. FMV1= A+B+C+D – L

Particulars	Amount	Amount
Calculation of A
Book value of all assets (other than jewellery, artistic work, shares, securities and immovable property) – (i)	XXX
Less: Income tax paid- income tax refund claimed (ii)	XXX
Less: Any value of asset which does not represent any value including unamortized amount of deferred expenditure (iii)	XXX
A=(i)-(ii)-(iii)		XXX
Calculation of B
B=Market value of Jewellery and artistic vale as per report of registered valuer		XXX
Calculation of C
C=Fair market value of shares calculated as per Rule 11UA(1)		XXX
Calculation of D
D=Value of immovable property determined for stamp duty		XXX
Calculation of L
Book value of all liabilities (iv)	XXX
Less: paid up equity share capital (v)	XXX
Less: Dividend set apart for preference and equity shares if not declared in the general meeting (vi)	XXX
Less: Reserves and surplus (other than depreciation reserve) (vii)	XXX
Less: provision for tax (not including income tax paid)- tax claimed as refund. This shall be to the extent of excess over the tax payable with reference to the book profits. (viii)	XXX
Less: provision made for unascertained liabilities (ix)	XXX
Less: contingent liabilities if included in the books (dividend arrears for cumulative preference shares) (x)	XXX
L= (iv)-(v)-(vi)-(vii)-(viii)-(ix)-(x)		XXX
FMV1= A+B+C+D – L		XXX

 

2. FMV2= E+F+G+H

Particulars	Amount
E= Actual monetary consideration received on transfer	XXX
F= Value of the following as per  Rule 11UA if these are received as non-monetary consideration: (i)Jewellery- (ii)Archaeological collections, drawings, paintings, sculptures or any work of art (iii)Shares and securities	XXX XXX XXX
G=Market Value as per registered valuer report of asset received as non-monetary consideration (other than asset given in F above and immovable property)	XXX
H= Value of immovable property determined for stamp duty if such immovable property is received as non-monetary consideration	XXX
FMV2= E+F+G+H	XXX

 

Also, clarification has been given by inserting the provision that the value of goodwill in case of slump sale shall be NIL, if it is not acquired from any previous owner that if it is self-generated goodwill of the undertaking transferred.

Therefore, capital gain shall be calculated as follows:

Particulars	Amount
FMV1 or FMV2 (calculated above) whichever is higher	XXX
Less: Net worth of undertaking (Total Asset – Total Liabilities)	XXX
STCG/LTCG for transfer of undertaking as slump sale	XXX

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