Tax provisions for Slump Sale Transactions By CA. Premlata Daga Saboo

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Tax provisions for Slump Sale Transactions By CA. Premlata Daga Saboo

Author

CA. Premlata Daga Saboo

premlata.s.daga@gmail.com

 


 

AMENDMENTS IN SLUMP SALE TRANSACTIONS
 
Background of Slump Sale Provisions:
Until 2000, there was no specific provision in the Income-tax Act, 1961 (‘Act’) that specifically dealt with taxation of slump sale. Considering that, an undertaking that gets transferred in a slump sale inter-alia includes intangible assets whose values are not determinable, it was held that surplus arising on the transfer of the undertaking will not be taxable as capital gains for reason that the computation machinery under Section 45 read with Section 48 would fail. Considering the peculiarity in a slump sale where values do not get assigned to individual assets and liabilities, it was also held that the same would not be taxable under Section 41(2) and Section 50 of the Act.
As a result, slump sale was not chargeable to tax till 2000. To plug in these loopholes, the Finance Act, 1999, inserted Section 50B and Section 2(42)(C) in the Act w.e.f. 1 April 2000 to provide for taxation of slump sale. Section 50B of the Act provides machinery for computation of capital gains in case of slump sale by deeming ‘net worth’ as cost of acquisition.
Inspite of introduction of section 50 B, Slump sale was one of the widely used mode for business restructuring and tax planning due to some loopholes in the provisions. The authorities identified the areas where there has been loss of revenue to the government and accordingly made some important amendments in section 50 Band Section 2(42)(C) of the Income Tax Act 1961, which deals with the taxability of slump sale transactions.
In this write up, we shall discuss the changes made by Finance Act 2021 in case of a slump sale, new rule for computation of fair market value of capital asset and its implications.
Widening the scope of Section 2(42)(C) to include all type of transfers
Prior to Finance Act 2021, the provisions of Section 50 B were applicable only in case of Slump Sale. Section 50B applies to ‘Slump Sale’ as defined u/s 2(42C). As per various judgements, the essence of slump sale transaction is a lump-sum monetary consideration. Where the transfer of undertaking takes place not against monetary consideration, but against other assets, it amounts to ‘Exchange’ and not sale. Such exchange transaction does not fall within the ambit of slump sale, which necessitates a sale transaction at the first place. In various judgements it was held that the provision of section 50 B is applicable to Slump Sale and not to Slump Exchange. To cover this loophole the Finance Act 2021, extended the scope of “slump sale” under section 2(42C) of the IT Act and inserted an Explanation to the said section so as to provide that the word “transfer” shall have the same meaning assigned to in section 2(47) of the IT Act. This amendment will cover all the type of transfers and not just sale.
Existing Provisions for Calculating Capital Gain in case of Slump Sale:
Before amendment to section 50B(2) of Income Tax Act, 1961, for the purpose of calculating capital gain in case of slump sale, the “net worth” of the undertaking or the division is deemed to be the cost of acquisition and cost of improvement for the purpose of section 48 and 49 with no indexation benefits. The capital gain was computed by subtracting this Net-worth with the Sale consideration.
The Capital Gain so computed will be either “Long Term” or “Short Term” depending upon the period for which the undertaking is held. If the undertaking is held for more than 36 months, the resulting Capital Gain will be “Long Term” and if it is held for less than 36 months, the resulting capital gain shall be “Short Term”.
However, in the pre-amended section 50B, there is no specific provision for deeming fair market value as sale consideration for the purpose of computation of capital gains on such slump sale.
This method of computation of capital gain has been amended by Finance Act 2021 and it is made applicable retrospectively from Assessment Year 2021-2022 onwards.
Following is the Amended Rule:
Clause 21 of The Finance Act, 2021 has substituted section 50B(2) of the Income Tax Act, 1961 as under:
‘(2) In relation to capital assets being an undertaking or division transferred by way of such slump sale,
  • the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48;
Note:
  • Finance Act, 2021 inserted a new clause to provide that the value of any self-generated goodwill of a business or profession will be considered as “Nil”, while computing the net worth of said undertaking or division transferred as a result of slump sale.
(ii) Fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.
The department via notification no 68/2021 dt 24thMay, 2021 notified the Rule 11UAE for Computation of Fair Market Value of Capital Assets for the purposes of section 50B of the Income-tax Act. As per the rule,
  • 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 – L, where,
A= 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, —
(i)
any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii)
any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
B = 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 = fair market value of shares and securities as determined in the manner provided in sub-rule (1) of rule 11UA;
D = 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;
L= 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, namely: —
(i)
the paid-up capital in respect of equity shares;
(ii)
the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
(iii)
reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv)
any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v)
any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi)
any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
  • 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 = value of the monetary consideration received or accruing as a result of the transfer;
F = 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;
G = 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;
H = 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.
Explanation. -For the purposes of this rule, the expression “registered valuer” and “securities” shall have the same meanings as respectively assigned to them in rule 11U.]
Conclusion:
Once considered as most easy to execute method of business transfer will now come with its own complications and tax implications. The value of self-generated goodwillwill now be considered as Nil. Slump Exchange which has escaped the taxation since years will now be taxable. The assets which were once transferred on book value through slump sale will now be considered at its fair price.The retrospective amendments have certainly created a frustration in the taxpayers who had concluded the business deals based on the laws prevailing at the time of entering into the transactions.There is a need for recalculating the tax liabilities for all the pending slump sale transactions as the amendments will have a significant tax impact.

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