Going Concern or Gone Concern? Demystifying Taxation of Slump Sales under Rule 11UAE

The author is Gurasis Singh Grover, a Fifth Year Student from Indian Institute of Management (IIM) Rohtak.

Abstract:

The taxation of slump sales is not amenable to the general computation of capital gains under Section 45 of Income Tax Act 1961 (“the Act”). Hence, Section 50B introduced a special mechanism for computation. Finance Act 2021 amended Section 50B of the Act to widen the scope of slump sales. Subsequently a CBDT Notification dated 24 May 2021 inserted Rule 11UAE into Income Tax Rules 1962. Rule 11UAE was introduced without stakeholder consultation and a clear effective date, thus raising concerns.  It prescribed two methods for calculating Fair Market Value (“FMV”) that relied on a partial look-through and itemised cost allocation method, contradicting the very essence of a slump sale. Plausible retrospective and seemingly obscure methodology have created significant uncertainty. This research seeks to demystify Rule 11UAE and draw comparative insights from Australia, where such transactions are taxed more coherently as single capital gains events.

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I. Introduction

Slump sale, as defined in Section 2(42C) of the Act refers to sale of a business undertaking as a whole for a lump-sum consideration, without assigning monetary values to individual assets and liabilities. The scope of this definition was widened by the Finance Act 2021 (“the FA”) by inclusion of “transfer of undertaking by any means”, thereby encompassing slump exchange transactions. 

Initially, the Finance Bill 2021 (“the Bill”) did not envisage amending Section 50B, which deals with computation of capital gains on slump sales; however what followed was an amendment to the said section through the FA and further elaboration through a CBDT Notification. The ambiguity arose from introduction of FMV in 50B(2) through FA and two valuation methods introduced in Rule 11UAE. 

The first method, FMV₁, breaks down the value of assets, directly contradicting the essence of slump sales. This method adopts a partial look-through approach, whereby it partially looks through the entity with respect to its underlying assets and liabilities, instead of valuing the business as an integrated whole (look-at approach). Thus, FMV₁ values some assets and liabilities as per books of accounts and other specified assets using fair valuation criteria. Herein, another questionable element is valuation of shares as per Rule 11UA, a framework meant for fair valuation of shares as a standalone asset in transfer, not as a part of a slump sale. This may cause an inflation in the share value, masking its real value, as explained further. Moreover, instances where FMV exceeds actual sale consideration, both methods overlook this disparity, thus leading to higher taxation, and a disconnect between commercial actuality and tax treatment. The second method, FMV₂, looks at monetary and non-monetary considerations received for transferring the undertaking, without necessitating itemisation of assets. 

While no specific effective date was prescribed for Rule 11UAE, it’s possible retrospective application to deals announced before May 24, 2021 but pending regulatory approvals, drew criticism from stakeholders. Thus, while the intent may have been sound, the notification appears misplaced; blurring the line between slump sales and itemised sales.

II. Tracing the Evolution and Aftermath

2.1. Genesis of the anomaly

Section 50B, which provided a safeguard to taxation of slump sales, was effected after extensive deliberations, unlike amendment to Section 50B and subsequent notification of Rule 11UAE. These amendments were not afforded the luxury of deliberation. The amendment was introduced by the Finance Minister, Ms. Sitharaman during a reply to an ongoing debate in the Parliament. Without any further stakeholder consultation and scrutiny, the amendment was enacted.

Rule 11UAE was notified at a later stage to elaborate upon the amendment. Uncertainty over statute-backed itemisation of assets and effective date could have been avoided if the amendment went through stakeholder consultation. In this context, Income Tax Act 2025 (“the 2025 Act”), may prove as a ray of hope. The contradistinction between Section 77 of the 2025 Act to Section 50B of the 1961 Act is striking. The phrase “transfer of such capital asset” in Section 50B(ii) has been replaced with “such transfer” in Section 77(3)(b), thereby omitting “capital asset” and broadening of scope. However, since the rules are yet to be notified, one can only hope that itemisation of assets will lapse and greater clarity will follow the upcoming framework.

2.2. Latent effects

Rule 11UAE, apart from its ambiguous approach, lacks a safety valve, which is another point of concern. Anti-abuse provisions such as Section 50C and Section 50CA of the Act have a ‘safety valve’ that allows taxpayers to rebut inflated normative stamp-duty valuations when the actual FMV is lower. Judicial precedents have held that when the Assessing Officer (“AO”) adopts a higher Stamp Duty Value (“SDV”) than the FMV, the AO is bound to refer the matter to a Departmental Valuation Officer (“DVO”), even though the statute uses the word “may”. Unfortunately, neither Rule 11UAE nor Section 50B offers this remedy or any opportunity for taxpayers to challenge the normative FMV determined thereunder.

A further concern is the valuation of shares in FMV₁ as per Rule 11UA. Although the amended Rule 11UA(4) introduces a 10% safe harbour to cushion minor deviations between the issue price and computed FMV, it only mitigates procedural disputes. A slump sale, driven by enterprise goodwill and future earnings, may produce notional values that diverge sharply from actual consideration, especially in distressed transfers. Using a rule meant to curb undervaluation in isolated asset transfers for transactions like slump sales risks over-taxation and undermines its core.

III. Comparison with Australia

Australia uses the term “sale of business as a going concern” while dealing with sale of an entire business undertaking. Subject to Subdivision 38-J, Section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (“the 1999 Act”), if a business is sold as a going concern, the sale price is exempt from Goods and Services Tax (“GST”) and no additional stamp duty is levied on the transaction. However, certain conditions, inter alia registration and comprehensive supply, are required. Australia exempts such transactions from the purview of GST and adopts a less complex method of taxing such transfers by subjecting them to capital gains tax (“CGT”) which treats such transactions as a single taxable event, hence, used for  comparison with the Indian regime.

Governed by the Income Tax Assessment Act 1997, CGT in Australia applies prospectively to the sale or disposal of any assets acquired after September 19, 1985 (post-CGT assets), after adjusting for any capital losses. It, thus, proposes a simple calculation without any separate provision for such transactions. Further, generous CGT exemptions have been provided to small businesses like a 50% active asset reduction subject to certain conditions. Further, rollover relief allows capital gain from disposal of asset to be deferred, provided a replacement asset is acquired within two years, subject to turnover and net asset requirements, making the Australian regime significantly beneficial for buyer and seller looking to enhance profit margin. This has also been supported by ATO public ruling such as GSTR 2002/5 wherein the Australian Taxation Office (“ATO”) gives its views on when can supply be a going-concern and therefore GST free. Significantly, it highlights the decision of Debonne Holdings Pty Ltd v. Commissioner of Taxation and Federal Commissioner of Taxation v. Murry, which state that even when separate contracts are executed for the sale of business assets, the transaction should still be treated as one taxable event for GST purposes. When the essential nature test is fulfilled, even through separate contracts, the totality is characterised as a single supply of a going concern. Thus, the transfer of a business is treated as one taxable event in Australia, supporting an integrated approach rather than statute-backed itemisation of assets.

It is conspicuous that while India came up with a separate provision for taxing slump sales, Australia keeps it simple. While both methods may have pros and cons, Australia advantageously treats such transactions as a single taxable unit without breaking them down. The Indian framework could still benefit by providing certain exemptions and correcting course in upcoming rules. While Section 50B can reveal hidden costs, it also acts as a double-edged sword in situations wherein SDV exceeds actual consideration and FMV. This entails suggestions dealt with in subsequent section.

IV. Suggestions 

We observe from the Australian example that GST concessions align seamlessly with the concept of a sale of business as a going concern. While India rightly applies a special capital gains regime, Australia takes the kangaroo cake in its coherent application of CGT. The Indian regime can consider the following suggestive measures. 

4.1 Using FMV2 solely 

A corrective measure would be to rely solely on FMV₂, since FMV₁, as stated above, defeats the purpose of creating a separate section for computation of tax on a slump sale transaction. Even if FMV₁ is used, indexation benefits should be amenable to the calculation of net worth, as it considers individual assets. This would align with other provisions such as Section 48, which allows indexation benefits for long-term capital assets. 

Further, FMV₂ does not necessitate for a breakdown of assets, thus complying with legislative and analytical intent of a separate provision viz Section 50B.

4.2 Taking reference from the Australian example 

While India and Australia, both exempt slump sales from the purview of GST, thereby restricting procedural delays, India could benefit in correcting the course, in line with certain judicial precedents and international practices, by treating an undertaking as an indivisible commercial unit for slump sales.

Further, ATO Taxation Ruling TR 1999/16 draws on the Australian High Court’s decision in Murry (supra), which treats goodwill as a single CGT asset inherent in the business as a whole. Even where multiple essential assets are transferred, the test is whether they together constitute a functioning business; if so, the transaction is taxed as one unified CGT event rather than as asset-wise transfers. India could benefit from a similar approach by removing statute-mandated disaggregation under Rule 11UAE and allowing businesses the option to be taxed as a single unit, provided the transaction qualifies as a slump sale.

4.3 Rebuttal to normative FMV under Rule 11UAE

Reference from provisions such as Section 50C and recent judgments highlights the issue that SDVs can exceed the consideration of a transaction. It is plausible that a bonafide deal may be adversely impacted by a normative FMV that offers no opportunity to the taxpayer to rebut the artificial value. A way to address this is to provide a safety valve by amending Rule 11UAE to adopt the Section 50C(2) mechanism, allowing a DVO reference when the taxpayer disputes the SDV. This would ensure that, akin to Section 50C, Section 50B does not rest solely on the AO’s discretion but offers a judicially backed remedy.

4.4 The 2025 Act: An opportunity up for grabs

By removing the reference to “capital asset” and using the broader expression “such transfer” in Section 77, Parliament appears to be moving the slump sale regime away from itemisation. This presents a meaningful opportunity to correct the course set by Rule 11UAE, which may have been introduced with the right intent but suffers from equivocal execution. The yet-to-be-notified rules under the 2025 Act could therefore be the ideal moment to introduce small-business concessions similar to Australia and to ensure a clear, prospective application that does not undermine the nature of the transaction itself.

V. Conclusion

The near-evolution of the language in Section 77 of the 2025 Act exhibits that the issues raised in this study are not merely academic but go to the core of what slump sales are and how the domestic tax regime should treat it. While Rule 11UAE can account for both monetary and non-monetary consideration and may reduce tax leakages, there is scant reasoning, either in Parliament or in the 2021 Bill, explaining why it departs from the original intent behind creating a special provision for slump sales. FMV₂ remains relatively unproblematic, but FMV₁ relies on anti-abuse principles designed for share valuation, which have rightly concerned practitioners, as it fails to reflect the nature of slump sales and effectively turns a going concern into a gone concern.