CBDT prescribes rules for determining the “full value of the consideration” in the event of sales at a loss, for the calculation of capital gains.

The rules provide that the greater of the value determined on the basis of a book value formula (JVM1) or the actual consideration (JVM2) will be considered as the total value of the consideration.

Recently, the Central Commission for Direct Taxes (“CBDT”) published the long-awaited valuation rules for calculating capital gains resulting from a short sale (“Valuation Rules”). The valuation rules follow an amendment made at the beginning of the year via the finance law for 2021 requiring that capital gains on disposals be calculated by reference to the fair market value (“FMV”) of the business sold.

A slump sale has been defined as the transfer of one or more businesses for a lump sum consideration without placing any value on individual assets. As an alleged fiction under the provisions of the Income Tax Act 1961 (“ITA”), profits and gains from a declining sale are taxable as capital gains.1

For the purposes of calculating capital gains on disposal, the net value of the company is deemed to be the acquisition cost2. Before the 2021 finance law, there was no stipulation concerning the determination of the total value of the consideration for the calculation of capital gains in the event of declining sales. However, the 2021 finance law made an amendment in this regard which provides that the total value of the consideration will be considered as the company’s FMV to be determined in accordance with the prescribed rules (“Modification”). The rules for determining this FMV are those prescribed by the Valuation Rules.

The Valuation Rules provide for two methods of determining the FMV and the higher of the two will be considered the FMV. The two methods are:

  1. Book value-based formula (“JVM1”): Basically, under this method, value is a function of the book value of all assets (other than jewelry, works of art, stocks, securities and more. real estate (“Excluded Assets”)) less the carrying amount of all liabilities.

The value of the excluded assets should be determined as follows:

The Valuation Rules provide that the value for calculating capital gains in the event of empty sales will be determined on the date of the empty sale.


In the event of a transfer of shares and real estate, the calculation provisions under the ITA provide that if the full value of the consideration is less than the FMV, then the FM will be deemed to be the total value of the consideration for the purposes. the calculation of capital gains. .3 However, such a provision did not exist with respect to business transfers through the doldrums. As such, there was no restriction on the price at which discount sales could be made from a tax calculation point of view. This has made declining sales a very attractive tool for domestic mergers and acquisitions and restructurings, as well as for the Indian side of multi-jurisdictional mergers and acquisitions.

The amendment read with the valuation rules, providing that the greater of the actual consideration or FMV (determined in the prescribed manner) will be deemed to be the total value of the consideration for the calculation of capital gains in the declining sales, seeks to align the rules relating to the valuation of disposals of shares and real estate with that of business transfers by way of hollow disposals, thus bridging the gap on the opportunity for tax arbitration that offered hollow cessions.

As a result, businesses will now be guided by a certain sense of pricing in sales at a loss, at least in determining the tax implications. In multi-jurisdictional mergers and acquisitions involving a down sell at India level, valuation rules will also need to be taken into account when allocating the purchase price to Indian assets.

Moreover, even in terms of valuation of specific assets for FVM1, the attempt has been to align the rules with those of valuation of property for the purpose of transferring shares and real estate.

Although there were no tariff restrictions until now, most downselling was made at book value. As is evident, the formula for FVM1 is akin to book value, except that a fair valuation must be made for the shares and real estate held by the transferred business. Therefore, in the event of a transfer of businesses that do not contain real estate / shares, little has changed regarding the valuation methodology for sales at a loss. In addition, if the conservative view regarding the applicability of section 56 to loss of sight sales were to be taken into account, then even with respect to undertakings containing shares and real estate, little has been done. changed due to the valuation rules since Article 56 requires anyway a calculation similar to the valuation rules.

An additional complexity arises in the event of intra-group restructuring exercises involving declining sales. Such intra-group low-priced sales may in some cases be subject to transfer pricing regulations when considered to be “international transactions” under section 92B (2) of the ITA. In such cases, the question arises as to whether a valuation under the arm’s length standard under transfer pricing regulations will need to be undertaken for an intragroup down sale, or whether the valuation rules apply. would apply.


That being said, the key element of a discount sale, which is the main reason for its attractiveness, that is to say that the acquisition cost is considered as the “equity” of the company remains . This allows the taxpayer to disregard the acquisition cost and holding periods of each underlying asset. It allows the preferential tax rate on long-term capital gains to be claimed from a company which, as a whole, has been owned for three years or more, regardless of how long the underlying assets have been held. Due to this characteristic, despite the valuation rules and associated complexities, downward sales are likely to continue to be chosen as the preferred mode for business transfers in India.

Nishith Desai Associates 2021. All rights reserved.Revue nationale de droit, volume XI, number 193

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