COMPUTATION OF CAPITAL GAIN IN CERTAIN CASES
1. Section 51 – Advance Money Received
2. Section 50D- Fair Market Value deemed to be full value of consideration in certain cases
3. Section 50B – Special provision for computation of capital gains in case of Slump Sale
SECTION 51 – ADVANCE MONEY RECEIVED
Q. What is the treatment of advance money received by the assessee in respect of capital asset?
• Where on any capital asset, on any previous occasion, for the subject of its transfer, any advance or other money received and retained by the assessee in respect of such negotiations, shall be deducted from the COA
– Advance or other money will be deducted from COA only if it was received and retained or forfeited by the assessee himself and not by the previous owner
– If the advance money forfeited was received by the assessee before 1-4-1981 and the assessee has assumed the FMV of the asset as on 1-4-1981 as the COA ,such advance will still be deducted from FMV.
Q. What if advance money forfeited is more than cost of acquisition?
In such a case the excess of the advance money forfeited over the cost of acquisition of such asset shall be a capital receipt not taxable. [Travancore Rubber & Tea Co. Ltd v. CIT (2000)243 ITR 158 (SC)]
Some Practical Issues
ISSUE 1 – Treatment in the hands of buyer
SECTION 50D- FAIR MARKET VALUE DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES
Prior to section 50D, capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not determinable or ascertainable, then, as the machinery provision fails, the gains arising from the transfer of such assets is not taxable and also that fair market value cannot be taken as deemed full value of consideration unless there is a specific provision in this respect. This particularly happens when shares in Indian companies are transferred ‘without consideration’ by companies as part of restructuring exercise. Obviously, these transfers are not “gifts” but consideration for them is general improvement in business/ synergies etc. which is not “ascertainable” or “quantifiable”
In order to overcome the judicial decisions, new section 50D is inserted with effect from A.Y. 201 3-14 to provide that fair market value of asset shall be deemed to be the full value of consideration if actual consideration is not attributable or determinable. This amendment takes a cue from the following observations of ITAT in Dy. CIT v. Summit Securities Ltd.  19 taxmann. com 102 (Mum.)(SB).
Provisions of Section 50D are as under as inserted by the Finance Act, 2012, w.e.f. 1-4-2013:
“Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer”.
SECTION 50 B – SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAINS IN CASE OF SLUMP SALE
Q. What is meant by slump sale?
Slump Sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities is such sales.
Q. Whether sale of undertaking be taxable as ‘Business Income’ or ‘Capital Gain’?
The Supreme Court in PNB Finance Ltd. V. CIT (175 Taxman 242) after considering Sections 41(2), and 45, held that gain from slump transactions is neither taxable as business income u/s. 41 (2) nor as Capital gains u/s. 45 of the Act.
To attract section 41 (2), the subject matter should be depreciable assets and the consideration received should be capable of allocation between various assets. In case of a slump sale, there is an undertaking which gets transferred (including depreciable and non-depreciable assets) and it is not possible to allocate slump price to depreciable assets and therefore, the same cannot be taxed u/s. 41 (2).
To attract Capital Gain, held that the charging section and the computation sections are integrated code and if one fails other fails. If the computation sections fail then even the Charging section fails.
In case of slump sale, there are bundle of assets (including intangible assets like goodwill) that are transferred and in absence of any specific provision like Section 50B, it is not possible to determine the cost of the said assets and thus, the computation mechanism fails and so does the charging section. Therefore, it was held that the gains from the transfer of a bundle of asset on a slump basis are not chargeable to capital gains also. Thus, the slump sale was held to be not chargeable to tax prior to insertion of Section 50B
Q. Is the benefit of indexation is available in case of slump sale?
As per Sec 50B, no indexation benefit is available on cost of acquisition, i.e. net worth.
Q. Whether transfer of assets without transfer of liabilities regarded as Slump Sale?
Slump sale provisions do not apply where assets of an undertaking are transferred without transfer of liabilities. This is clear from the following
Definition of ‘undertaking’: ‘include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole’
As per Explanation 1 to S. 50B: Net worth is the difference between ‘aggregate value of total assets of the undertaking or division’ and ‘value of liabilities of such undertaking or division’.
Therefore, transferring the asset without transferring the liabilities shall not be regarded as Slump Sale.
Some Practical Issues
ISSUE 1 – If the transfer of the property in goods is not pursuant to a contract but pursuant to a Court Order?
The transfer of the property in goods pursuant to an order of a court cannot be regarded as ‘Sale’. This is quite clear from definition of “Sale” that only contractual transfer is regarded as ‘Sale’ and thus, the statutory transfers or transfer effected by orders of the court or operation of law cannot be regarded as Sale.
ISSUE 2 – if undertaking is transferred for a consideration other than ‘money consideration’, say for allotment of shares in transferee company ?
The transfer of the property in goods for other than ‘money consideration’ would be regarded as ‘Exchange’ and not ‘Sale’ and therefore wouldn’t be covered in the ambit of Slump sale and consequently would not be taxable under the IT Act. Such transaction could be regarded as ‘Slump Exchange’. [Supreme Court case in CIT vs. R. R. Ramkrishna Pilai]
(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains written by CA Agarwal Sanjay ‘Voice of CA’ & Team)