FMCG companies frequently undertake business divestitures and brand carve-outs through slump sales. Section 77 of the Income-tax Act, 2025 provides the framework for taxation of profits or gains arising from slump sale, with specific provisions for valuation and compliance. Understanding these provisions is essential for FMCG companies undertaking business divestitures.
What is a Slump Sale
Section 2(103)(a) defines a "slump sale" as the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer. The definition is broad, covering any transfer of an undertaking for a lump sum consideration where individual asset and liability values are not assigned.
For the purposes of the definition, "undertaking" shall have the meaning assigned to it in Section 35(i), which includes any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
The determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. This allows for regulatory compliance without triggering the "assignment of values" condition.
Taxation of Slump Sale Under Section 77
Section 77(1) provides that 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. However, Section 77(2) provides that 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 thirty-six months or less, immediately before the date of its transfer, shall be treated as short-term capital gains.
Section 77(3) provides that in relation to capital assets being an undertaking or division transferred by way of slump sale, the "net worth" of the undertaking or division shall be deemed to be the cost of acquisition and the cost of improvement for sections 72 and 73. The fair market value of the capital assets on the date of transfer, calculated in the manner as may be prescribed, shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.
Computation of Net Worth
Section 77(5)(a) provides that 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.
Section 77(5)(b) provides that the "aggregate value of total assets" shall, for depreciable assets, be the written down value of the block of assets determined under section 41(1)(c); 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; for capital assets for which the entire expenditure has been allowed or is allowable as a deduction under section 46, be nil; and for other assets, be the book value.
Fair Market Value of Capital Assets
Rule 53 provides for the computation of fair market value of capital assets for purposes of slump sale. The fair market value shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher.
FMV1 is 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. A is the 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, as reduced by any amount of income-tax paid and any amount shown as asset which does not represent the value of any asset. B is 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 is the fair market value of shares and securities as determined in the manner provided in rule 57. 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 is the book value of liabilities as appearing in the books of account of the undertaking or the division transferred, not including paid-up capital, reserves and surplus, provision for taxation other than income-tax paid, provisions made for meeting liabilities other than ascertained liabilities, and contingent liabilities.
FMV2 is 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. E is the value of the monetary consideration received or accruing as a result of the transfer. F is the fair market value of non-monetary consideration received or accruing represented by property referred to in rule 57. G is the price which the non-monetary consideration received or accruing represented by property, other than immovable property, not covered in rule 57 would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer. H 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.
Accountant's Report
Section 77(4) requires every assessee, in the case of a slump sale, to furnish in the prescribed form a report of an accountant before the specified date referred to in section 63. The report must include the computation of the net worth of the undertaking or division and certify that the net worth has been correctly arrived at as per the provisions of this section.
Rule 54 provides that every assessee is required to submit a report from an accountant in Form No. 28 before the specified date referred to in section 63. The report must include the computation of net worth and certification of correctness.
Fair Market Value Determination Under Rule 57
Rule 57 provides for the determination of fair market value for various types of property. For jewellery, the fair market value shall be the price which such jewellery would fetch if sold in the open market on the valuation date, or if received by way of purchase from a registered dealer, the invoice value, or if received by any other mode and its value exceeds ₹50,000, the assessee may obtain a report from a registered valuer.
For artistic work, similar provisions apply. For quoted shares and securities, if received by way of transaction carried out through any recognised stock exchange, the transaction value as recorded in such stock exchange shall be the fair market value. If received by way of transaction carried out other than through any recognised stock exchange, the fair market value shall be the lowest price quoted on any recognised stock exchange on the valuation date.
For unquoted equity shares, the fair market value is determined using the formula: (A+B+C+D—L) × (PV)/(PE). A is the book value of all the assets in the balance sheet (other than jewellery, artistic work, shares, securities and immovable property) as reduced by income-tax paid and any amount shown as asset which does not represent value. B is the price which the jewellery and artistic work would fetch. C is the fair market value of shares and securities. D is the stamp duty value in respect of immovable property. L is the book value of liabilities. PV is the paid-up value of such equity shares. PE is the total amount of paid-up equity share capital as shown in the balance sheet.
Tax Implications of Slump Sale
The profits or gains arising from slump sale are treated as capital gains, either long-term or short-term depending on the holding period. For long-term capital gains, the tax rate under Section 197 is 12.5% on the capital gains computed without indexation. For short-term capital gains, the applicable tax rate would be the normal rate applicable to the assessee.
The capital gains are computed by deducting from the full value of consideration (the fair market value of the capital assets) the net worth of the undertaking (treated as cost of acquisition) and any expenditure incurred wholly and exclusively in connection with such transfer.
Compliance Requirements
The assessee must furnish a report from an accountant in Form No. 28 before the specified date referred to in section 63. The report must include the computation of the net worth of the undertaking or division and certify that the net worth has been correctly arrived at. The report must be signed by the accountant and verified in the manner prescribed.
The assessee must also ensure that the transfer is documented through a slump sale agreement that clearly specifies the undertaking being transferred and the lump sum consideration. The agreement should not assign values to individual assets and liabilities, as that would defeat the slump sale treatment.
Best Practices for FMCG Divestitures
FMCG companies should ensure that the undertaking being transferred constitutes a business activity taken as a whole, not just a collection of individual assets. The transfer should be structured as a going concern, with all assets and liabilities relating to the undertaking being transferred.
The valuation of the undertaking should be supported by a valuation report from a registered valuer, particularly for assets such as jewellery, artistic work, shares, securities, and immovable property. The fair market value of the capital assets should be determined as per the prescribed methodology.
Documentation should be maintained to support the computation of net worth, including the aggregate value of total assets and liabilities. The accountant's report should be obtained within the prescribed time limits. The assessee should also consider the tax implications of the slump sale, including the application of tax treaties and the availability of any exemptions.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on slump sale valuation and compliance, please consult qualified legal and tax professionals.
Need Expert Legal Guidance?
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