CBDT's revised rules for slump sale of assets

Mumbai THE Central Board of Direct Taxes (CBDT) has on May 24 notified Income-tax (16th Amendment) Rules, 2021 to further amend the Income-tax Rules, 1962, gives business fewer reasons to transfer assets.

The Amendment inserts Rule 11UAE in Income-tax Rules, which prescribes the method to compute fair market value of capital asset for the purposes of Section 50B of the Income tax Act, 1961, which includes provision for computation of capital gains in case of slump sale.

For starters, it means that businesses may have fewer tax reasons to choose the manner in which a business is to be transferred.

"Earlier, when the business unit was sold under slump sale then the fair value of capital assets such as immovable property, jewelry, artistic work, shares and securities were not separately considered. Under the new rules, businesses will have to pay tax considering the Fair Market Values of the aforesaid capital assets even if the actual sale consideration is less than the value computed," says Abhishek Aneja, Chartered Accountant.

Want to know the implication of Rule 11UAE in Income-tax Rules in question?

Well, 11UAE Computation of Fair Market Value of Capital Assets is for the purposes of section 50B of the Income-tax Act. For the purpose of clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher. The FMV1 shall be the fair market value of the capital assets transferred by way of slump sale determined in accordance with the formula –A+B+C+D.

Here 'A' means book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale as reduced by the following amount which relate to such undertaking or the division.

'B' stands for the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; 'C' means fair market value of shares and securities as determined in the manner provided in sub-rule (1) of rule 11U.

'D' is the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property. Above all, 'L' stands for book value of liabilities as appearing in the books of accounts of the undertaking or the division transferred by way of slump sale, but not including the following amounts which relates to such undertaking or division.

Besides, FMV2 shall be the fair market value of the consideration received or accruing as a result of transfer by way of slump sale determined in accordance with the formula E+F+G+H, where 'E' stands for value of the monetary consideration received or accruing as a result of the transfer;

'F' is fair market value of non-monetary consideration received or accruing as a result of the transfer represented by property referred to in sub-rule (1) of rule 11UA determined in the manner provided in sub-rule (1) of rule 11UA for the property covered in that sub-rule, and 'G' means the price which the non-monetary consideration received or accruing as a result of the transfer represented by property, other than immovable property, which is not referred to in sub-rule (1) of rule 11UA would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer, in respect of property. Again, 'H' is the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property in case the non-monetary consideration received or accruing as a result of the transfer is represented by the immovable property.

The fair market value of the capital assets under sub-rule (2) and sub-rule (3) shall be determined on the date of slump sale and for this purpose valuation date referred to in rule 11UA shall also mean the date of slump sale.

Talking to Bizz Buzz, Kumarmanglam Vijay, Partner, J Sagar Associates said, "Finance Act 2021 had amended the mechanism to tax capital gains on slump transfer of a business undertaking and proposed that the 'fair market value' of the business undertaking would be deemed to be the sale consideration for such computation. The Central Board of Direct Taxes has recently notified the methodology to determine 'fair market value' of the business undertaking. This methodology prescribes two benchmarks for such determination and the higher of the two benchmarks would be deemed the sale consideration."

The first benchmark essentially refers to the adjusted book value of the business undertaking as on the date of transfer, while the second benchmark refers to the sum of actual monetary consideration and fair value of the non-monetary consideration (to be determined in the prescribed manner). Certainty on the manner in which valuation of consideration for transfer of business undertaking is to be determined is welcome. With the proposed changes, minimum benchmark for computing gains on transfer of business and transfer of shares has been aligned. Thus, businesses may have fewer tax reasons to choose the manner in which a business is to be transferred, he added.