Income Tax 2025

Appearance

Special provision for computation of capital gains in case of slump sale. ​

77(1) ​

Any profits or gains arising from the slump sale effected in the tax year shall be chargeable to income-tax as long-term capital gains and shall be deemed to be the income of the tax year in which the transfer took place, subject to the provisions of sub-section (2).

77(2) ​

The profits and gains arising from a slump sale involving the transfer of a capital asset, being one or more undertakings or divisions owned and held by an assessee for 36 months or less, immediately before the date of its transfer, shall be treated as short-term capital gains.

77(3) ​

In relation to capital assets, being an undertaking or division transferred by way of slump sale,—

  • (a) the “net worth” of the undertaking or division shall be deemed as the cost of acquisition and the cost of improvement for sections 72 and 73; and
  • (b) the fair market value of the capital assets on the date of transfer, calculated in such manner, as prescribed, shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

77(4) ​

Every assessee, in the case of slump sale, shall furnish in the prescribed form a report of an accountant, before the specified date referred to in section 63, and the report shall––

  • (a) include the computation of the net worth of the undertaking or division; and
  • (b) certify that the net worth has been correctly arrived at as per the provisions of this section.

77(5) For the purposes of this section,–– ​

  • (a) the “net worth” shall be the “aggregate value of total assets” of the undertaking or division, as reduced by the value of its liabilities as appearing in the books of account, and for computing net worth, any change in the value of assets due to revaluation shall be ignored;
  • (b) the “aggregate value of total assets” shall,— (i) for depreciable assets, be the written down value of the block of assets determined under section 41(1) (Table: Sl. No.3); (ii) for capital asset being goodwill of a business or profession, which was not acquired by the assessee by purchase from a previous owner, be nil; (iii) for capital assets for which the entire expenditure has been allowed or is allowable as a deduction under section 46, be nil; and (iv) for other assets, be the book value
Explanation

Section Summary: ​

This section provides specific rules for calculating capital gains in the case of a slump sale, which is the sale of an entire business or division as a whole, rather than selling individual assets. The section determines whether the gains from such a sale are treated as long-term capital gains (LTCG) or short-term capital gains (STCG) based on the holding period of the undertaking or division. It also defines how to calculate the cost of acquisition and fair market value for tax purposes.

Key Changes: ​

  1. Classification of Gains: Gains from a slump sale are now classified as LTCG or STCG based on whether the undertaking or division was held for more than 36 months (LTCG) or 36 months or less (STCG).
  2. Net Worth as Cost of Acquisition: The net worth of the undertaking or division is deemed to be the cost of acquisition and improvement for tax purposes.
  3. Fair Market Value: The fair market value of the assets on the date of transfer is deemed to be the full consideration received.
  4. Reporting Requirement: A report from a chartered accountant is mandatory, certifying the computation of net worth.

Practical Implications: ​

  1. Taxpayers: Sellers of businesses or divisions must determine whether the sale qualifies as LTCG or STCG based on the holding period. This affects the applicable tax rate.
  2. Businesses: Companies selling divisions or undertakings must calculate the net worth of the sold entity, excluding revaluation gains, to determine the cost of acquisition.
  3. Compliance: Sellers must obtain a chartered accountant’s report certifying the net worth computation and ensure it is submitted by the specified date.

Critical Concepts: ​

  1. Slump Sale: The sale of an entire business or division as a whole, without assigning individual values to assets or liabilities.
  2. Net Worth: Calculated as the aggregate value of total assets minus liabilities. Revaluation gains are ignored.
  3. Fair Market Value (FMV): The value of the assets on the date of transfer, determined as per prescribed methods.
  4. Holding Period: Determines whether gains are LTCG (held for >36 months) or STCG (held for ≤36 months).

Compliance Steps: ​

  1. Calculate Net Worth: Determine the net worth of the undertaking or division by subtracting liabilities from the aggregate value of assets. Ignore revaluation gains.
  2. Determine FMV: Compute the fair market value of the assets on the transfer date.
  3. Classify Gains: Check the holding period to classify gains as LTCG or STCG.
  4. Obtain CA Report: Engage a chartered accountant to compute the net worth and certify its accuracy.
  5. File Report: Submit the CA report by the specified date along with the tax return.

Examples: ​

  1. Scenario 1: Company A sells its manufacturing division, held for 40 months, for ₹10 crore. The net worth of the division is ₹6 crore. The gains (₹10 crore - ₹6 crore = ₹4 crore) are treated as LTCG.
  2. Scenario 2: Company B sells its IT division, held for 24 months, for ₹8 crore. The net worth is ₹5 crore. The gains (₹8 crore - ₹5 crore = ₹3 crore) are treated as STCG.

In both cases, the net worth is calculated excluding revaluation gains, and a CA report is required to certify the computation.