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Computation of FMV of capital assets under Section 50B

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The central board of direct taxes has issued the income tax (Article 16 amendment) rule 2021 (notification 68 of 2021 dated 24 May 2021). To calculate the FMV (fair market value) of capital assets transferred to the slump sale, a new rule (Rule 11UAE of the Income-tax Rules 1962) has been inserted.

The FMV of capital assets transferred under the rules above is FMV1 or FMV2, whichever is higher, where:

  • FMV1 is the fair market value of the capital asset transferred through the sale of the slump, and
  • FMV2 is the fair market value of the consideration received or accrued due to the transfer of capital assets.

The FMV determined under the new rule will be considered the total value of the consideration (FVC) to calculate the capital gains arising from the slump sales.

Computation of fair market value of capital assets

  1. For clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets must be the FMV1 determined under sub-rule(2) or FMV2 determined under sub-rule (3), whichever is higher.
  2. The FMV1 must be the fair market value of the capital assets transferred by way of slump sale determined by the formula:
    FMV1=A+B+C+D-L where,

A= The book value of all the assets (excluding jewellery, artistic work, securities, shares and fixed property) as appearing in the books of accounts of the undertaking or the division transmitted by way of slump sale will as reduced by the following amounts, which relate to such project or the division:

  • Any sum of income tax remunerated (if any) minus the amount of income tax refund claimed (if any); and
  • Any amount presented as an asset, including the unamortized amount of deferred expenditure that does not represent the value of any asset;

B= The price that artistic work and jewellery will charge if sold in the open market based on an appraisal/valuation report obtained from a registered appraiser/valuer;

C= FMV of shares and securities as regulated in the manner provided in sub-rule (1) of rule 11UA;

D= Value adopted or assessed or assessable by government authorities for payment of stamp duty in respect of the immovable property;

L= The book value of liabilities in the books of the business unit or division transferred through slump sales but does not include the following related to the business unit or division:

  • Paid-up equity share capital.
  • Amount set aside for the payment of dividends on equity shares and preference shares for which these dividends have not been declared before the company’s general meeting transfer date.
  • Reserves and surplus, under any name, even if the resulting figure is negative, except for figures set aside for depreciation.
  • Any amount that represents tax provision, other than the amount of income tax remunerated, if any, minus the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable regarding the book profits in as per the applicable law to it;
  • Any sum representing provisions made for meeting liabilities, other than ascertained liabilities;
  • All amounts that represent contingent liabilities other than arrear of dividend paid in connection with cumulative preferred stock.
  1. FMV 2 shall be the fair market value of the consideration received or accruing due to a transfer by way of slump sale determined by the formula:
    FMV 2 = E+F+G+H where,

E= value of the monetary consideration acquired or accruing as a result of the transfer;

F= FMV of non-monetary consideration acquired or accruing as a result of the transfer represented by the property mentioned in sub-rule (1) of rule 11UA regulated in the manner provided in sub-rule (1) of rule 11UA for the possessions covered in that sub-rule;

G= The value of non-monetary consideration received or accrued as a result of the transfer is represented by property other than secured property, which is not mentioned in sub-rule(1) of rule 11UA would fetch if traded in the open market based on the valuation report acquired from an enlisted valuer, in respect of the property;

H= The value adopted or assessed or assessable by government authorities for payment of stamp duty on the immovable property if the non-monetary consideration received or accrued as a result of the transfer is indicated by the fixed property.

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

The determination of the FMV of a business unit or division sold through a slump sale largely follows the mechanism outlined in the Tax Rules for determining the FMV of stock/shares.

In addition, the rule also provides a formula for determining the fair market value of the slump sale consideration as well (FMV2). According to the proposed amendments to the budget, slump exchanges are now also considered taxable transfers. The introduction of these rules also ended the dispute over how to calculate the fair market value of land and buildings transferred as part of a slump sale transaction commitment.

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, tax advisory, and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Section 50B computation of FMV of capital assets, kindly contact us.

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