Understand Slump Sale

1. What is slump sale?

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.

2. Taxability:
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 of the Income Tax Act.

3. Calculation of capital gains:
Capital gains is calculated in the following manner:
Fair Market Value (determined as per Rule UAE
(-) Transfer Expenses
(-) Cost of acquisition (net worth of undertaking)

4. Calculation of fair market value:
A. CBDT vide Notification No.68/2021 dated 24/05/2021 notified Rule 11UAE of the Income Tax Rules, 1962 to compute the Fair Market Value (FMV) of Capital Assets for the purposes of section 50B of the Income-tax Act, 1961 for the purpose of computing the capital gains in case of an transfer of assets in a slump sale.

B. The new devised method of valuation, distinguishes the types of assets and categorically defines the computation of every sort of asset.
As per the method under FMV 1, firstly (A), the book value of all the assets excluding the jewelry, artistic work, shares, securities and immovable property, secondly (B), the open market value of jewelry, thirdly (C), the fair market value of shares and securities as described under Rule 11UA of the Income Tax Rules, and fourthly (D), the value of immovable property as per the stamp duty value are added. Then lastly (E), the liabilities are reduced from the above value which is devised as per the book of accounts. The end value given by the formula A + B + C + D - E gives the FMV 1.

Sub Rule 3 of rule 11UAE defines the method of calculation of FMV 2 by simple addition of components including, firstly (W), value of monetary consideration paid for the transfer, secondly (X), fair market value of non-monetary consideration which for the part of sub rule (1) of rule 11UA, thirdly (Y), open market value of the remaining non-monetary consideration which is not included in sub rule (1) of rule 11UA excluding the immovable property, and lastly (Z), the value of immovable property as per the stamp duty value. The end value given by the formula W + X + Y + Z gives the FMV2.
Further the higher of the FMV 1 and FMV 2 is to be taken into consideration for the purpose of arriving at the fair value, which would be regarded as the fair market value of the undertaking.

5. Net Worth:
Net Worth of the undertaking will be the ‘W.D.V. of the Depreciable Assets’ plus ‘Book Value of other Assets’ less ‘Book Value of Liabilities’