In today`s day and age amalgamation, merger, business combination, transfer of undertaking etc, have become a much more frequent activity than before and therefore there is a need for special provisions to counter such challenging actions of the assesses.
To manage such situations section 50B of the income tax act 1961 comes in handy as the assessee is not required to calculate capital gain on each and every item of the undertaking that is being sold under the process of merger, amalgamation or business combination. The capital gain of the undertaking is calculated as a whole as opposed to calculating capital gain for individual capital assets comprised in the undertaking. Also, the assessee is not required to calculate the individual period of holding for each capital asset as, if the undertaking is held for more than 36 months then the gain arising from such transfer shall be categorised as long-term capital gain. Similarly, when the Undertaker is held for less than 36 months it shall be categorised as short-term capital gain.
Tax under long-term capital gain will be charged at the rate of 20% along with applicable surcharge and cess. Whereas short-term capital gain shall be taxed as per the normal rates applicable to the assessee. However, it is worth noting that the benefit of indexation is not available even in the case of long-term capital gain. Exemption from Capital Gain can be obtained by purchasing residential house property in accordance with section 54F.
Now let`s come to the computation part of slump sale. Entire gain arising on account of slump sale shall be taxed under the head CAPITAL GAINS. Even if the transferred undertaking includes stock in trade the profit element of the stock shall also be taxed under the head of capital gains.
Full value of consideration (FVOC)
(-) Transfer expenses
(-) Cost of Acquisition/Improvement (ie. Net worth of undertaking)
(+) OTHER ASSETS
— However, if the Net worth comes out to be negative then the cost of acquisition shall be taken as NIL
— In case of assets on which 100% deduction has been taken u/s 35AD (specified business) and self-generated goodwill, the value of assets shall be taken as nil.
FULL VALUE OF CONSIDERATION (FVOC) (AS PER RULE 11UAE)-
Book value of all assets appearing in books excluding income tax paid and unamortized deferred revenue expenditure
Value of monetary consideration received
(+) Open market value of jewellery and artistic work on basis of registered valuer’s report
(+) FMV as per rule 11UA (1) of non-monetary consideration referred under rule 11UA (1)
(+) FMV of shares and securities as per rule 11UA (1)
(+) Price of non-monetary consideration in respect of movable property received not mentioned under rule 11UA (1)
(+) Payment of stamp duty on immovable property as assessed by government authority
(+) Stamp duty value of immovable property received
(-) Book value of liabilities appearing in books excluding provision for taxation, provision for unascertained liabilities and contingent liabilities
— While calculating FVOC/ Net worth provisions of section 50C shall not apply.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
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