Direct Tax Alert

CBDT prescribed the valuation rule for computing FMV of the undertaking transferred under “Slump Sale”

June 02, 2021

Prior to Finance Act 2021, in the Section 50B of the Income Tax Act, 1961 (ITA) dealing with the provisions related to computation of capital gains in case of “Slump Sale” has no provision for the computation of the “Full Value of Consideration” in relation to the transfer of the undertaking under a slump sale. Therefore, in the case of slump sale transactions, for the purpose of calculation of capital gains, the actual consideration of capital assets in slump sale transaction considered as the full value of consideration for computing capital gains. In other words, there was no need for arriving at Fair Market Value (FMV) or requirement of a valuation exercise.

The Finance Act, 2021 has amended Section 50B of the ITA to provide that the FMV of the capital assets being an undertaking or division transferred by way of slump sale, as on the date of transfer shall be calculated in the prescribed manner.

In this regard, for the computation of FMV of capital assets for the purposes of Section 50B of the ITA, Central Board of Direct Taxes (CBDT) notified the manner of determining the FMV vide Notification No 68/2021 dated 24 May 2021. The newly inserted Rule 11UAE of the Income Tax Rules, 1962 (Rules) provides that FMV of the undertaking shall be higher of the following two (FMV1 and FMV2):

  • FMV1 provides for valuation of the undertaking transferred by way of Slump Sale based on the value of assets and liabilities - Rule 11UAE (2) of the Rules
  • FMV2 provides for valuation of the monetary and non-monetary consideration received or accruing as a result of the transfer by way of Slump Sale - Rule 11UAE (3) of the Rules

The FMV1 and FMV2 shall be determined in accordance with the formula provided in the Rule 11UAE (2) and Rule 11UAE (3) of the Rules respectively.

Last updated: 02/06/2021

Article contributed by:

Gaurav Paliwal

Sr. Manager – Direct Tax

MBG Corporate Services

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