Budget 2021 amended the tax law on fair market value
The Income Tax Department has notified rules for computation of fair market value of capital assets (FMV) in slump sale. Experts feel that these rules will create difficulty in tax planning for some businesses.
These rules titled ‘Computation of Fair Market Value of Capital Assets for the purposes of section 50B of the Income-Tax Act’ are part of follow-up action after Finance Act 2021 amended the said section. These rules prescribe two options (FMV 1 and FMV 2). The option with higher value will be FMV of the capital assets in slump sale. It may be noted that slump sale for tax calculation means when a company or undertaking is sold without considering the individual value of the assets or liabilities within the undertaking.
FMV 1 will be calculated based on a formula – ‘A+B+C+D – L’. 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. ‘B’ is the price which the jewellery and artistic work would fetch if sold in the open market.
‘C’ is FMV of shares and securities, while ‘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. ‘L’ refers to the liabilities of the said undertaking.
For FMV 2, the formula ‘E+F+G+H’ will be used. Here ‘E’ means value of the monetary consideration received or accruing as a result of the transfer/ ‘F’ means fair market value of non-monetary consideration received or accruing as a result of the transfer represented by property.
‘G’ is the price which the non-monetary consideration received or accruing as a result of the transfer represented by property, other than immovable property. ‘H’ indicated 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.
Shailesh Kumar, Partner at Nangia & Co LLP, said that new rules provide a hybrid formula, where all assets of the business undertaking other than five specific categories of assets (immovable property, jewellery, shares, securities and artistic work) are valued, based on book value. On the other hand, FMV of these categories is determined as per the existing valuation rules for these assets, assuming the assets are being transferred individually.
“The new rules for valuation of business undertaking in slump sale cases, now make tax planning in those cases more difficult, where businesses hold high-value immovable property, shares or other specified assets in their books at low historical cost,” he said. Further, he added that in all such cases, now businesses will need to pay tax considering FMV of specified assets, irrespective of actual transaction price, if such transaction price is lower than FMV.