Section 50B of ITA, 1961 : Section 50B: Special Provision For Computation Of Capital Gains In Case Of Slump Sale

Explanation using Example

Imagine a company, XYZ Pvt. Ltd., that has been operating a textile manufacturing division for the past 5 years. The company decides to sell this division to another company, ABC Ltd., as it wants to focus on its core business of technology services. This sale includes all assets and liabilities related to the textile division and is agreed upon for a lump sum consideration without values being assigned to individual assets and liabilities. This is known as a "slump sale".

According to Section 50B of the Income-tax Act, 1961, the profit XYZ Pvt. Ltd. makes from this sale is subject to capital gains tax. Since the textile division was held for more than 36 months, the gains are treated as long-term capital gains.

The "net worth" of the textile division, which is the total value of its assets minus liabilities as per the company's financial records, will be considered as the cost of acquisition for calculating capital gains. Any revaluation of assets will not be taken into account. Depreciable assets are considered at their written down value, while any asset on which the company has claimed a full deduction under section 35AD will be considered to have nil value.

XYZ Pvt. Ltd. is required to furnish a report from a certified accountant along with its tax return, detailing the computation of the net worth of the textile division and certifying its accuracy as per Section 50B requirements.