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

Prior to the Finance Act 2021, Section 50B of the Income Tax Act, 1961 (ITA), dealing with the provisions related to the computation of capital gains in the case of a “slump sale,” had 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 a slump sale transaction is 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 of 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, the 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 the FMV of the undertaking shall be the higher of the following two (FMV1 and FMV2):

• FMV1 provides for valuation of the undertaking transferred by way of a 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.

Additional Resources:

• Direct Tax Alert: Extension of various Income Tax due dates by CBDT vide Notification No. 10/2021
• SC directed CBDT to decide on the relief to be provided to NRIs in lieu of COVID-19
• Decoding the Revised Rent-Free Accommodation Valuation Rules
• Tax Treatment of Capital Assets and Depreciation
• Income Tax Implications for NRIs in India

Article contributed by Gaurav Paliwal, Sr. Manager – Direct Tax, MBG Corporate Services