Valuation for slump sale

Slump Sale and Capital Gains Tax Calculation

A slump sale involves the transfer of all assets and liabilities of a business unit or an entire undertaking for a single lump sum consideration, without assigning individual values to each asset. This has specific implications for capital gains tax calculations under Section 50B of the Income Tax Act.

Key Changes and Clarifications:

• Definition of Slump Sale Broadened: The Finance Act of 2021 clarified that a "slump sale" encompasses transfers made through any means.
• Fair Market Value (FMV) as Full Value of Consideration (FVC): The FMV of the transferred assets on the transfer date is now considered the FVC for capital gains tax purposes. This replaced the previous system where the actual consideration was accepted as FVC.
• Net Worth as Cost of Acquisition and Improvement: For the purposes of Sections 48 and 49, the "net worth" of the undertaking or division is deemed to be the cost of acquisition and cost of improvement. The provisions of the second subsection to Section 48 are not considered.
• FMV Calculation: The Central Board of Direct Taxes (CBDT) notified Rule 11UAE to specify how to calculate the FMV of capital assets for Section 50B. Notification Number 68/201-Income Tax, dated May 24, 2021, outlines two methods for determining the FMV of net assets, with the higher of the two being considered the final FMV.

Methods for Calculating FMV:

Method 1: Asset-Specific Valuation

This method values different asset categories differently:

• Tangible Assets (excluding jewelry, artwork, shares, and real estate): Valued at their book value.
• Immovable Property: Valued at its stamp duty value.
• Jewelry and Artwork: Valued based on a valuation report from a registered valuer.
• Shares and Securities: Valued as per Rule 11UA(1) of the Income Tax Rules.

Method 2: Comprehensive Valuation

This method considers the overall consideration received:

• Cash Consideration: The actual cash received or accruing upon transfer.
• Non-Cash Consideration:
  • Specified Property (as per Rule 11UA(1)): Valued as per Rule 11UA(1).
  • Immovable Property (not in Rule 11UA(1)): Valued at its stamp duty value.
  • Other Property (not in Rule 11UA(1)): Valued at its readily available market price, based on a valuation report from a registered valuer.

Key Points to Remember:

• The valuation date for FMV calculation is the date of the slump sale.
• The higher of the FMV calculated using Method 1 and Method 2 is considered the final FMV for Section 50B.
• Registered valuers play a crucial role in determining the FMV of certain assets.

This explanation should provide a clearer understanding of the slump sale provisions and how FMV is calculated for capital gains tax purposes. It's crucial to consult with a tax professional for specific advice related to your situation.