Asset disposal under scheme of arrangement has been explained under Section 97A of the Income Tax Ordinance, 2001.
The Federal Board of Revenue (FBR) recently issued the updated Income Tax Ordinance, 2001, incorporating amendments introduced through the Finance Act, 2021.
The key provisions of Section 97A, as outlined in the updated ordinance, address the treatment of gains or losses arising from the disposal of assets from one company (referred to as the “transferor”) to another company (referred to as the “transferee”) under a Scheme of Arrangement and Reconstruction. The scheme, governed by sections 282L and 284 to 287 of the Companies Act, 2017, or section 48 of the Banking Companies Ordinance, 1962, is subject to specific conditions for tax considerations.
The conditions stipulated in Section 97A(1) are as follows:
Liability Undertaking: The transferee must undertake to discharge any liability related to the acquired asset.
Liability Limitation: The liability in respect of the asset must not exceed the transferor’s cost of the asset at the time of disposal.
Tax Exemption: The transferee must not be exempt from tax for the tax year in which the disposal takes place.
Approval: The scheme must be approved by the High Court, State Bank of Pakistan, or Securities and Exchange Commission of Pakistan, as applicable, on or after the first day of July 2007.
Additionally, Section 97A(2) specifies that no gain or loss shall be recognized on the issue, cancellation, exchange, or receipt of shares resulting from a Scheme of Arrangement and Reconstruction, provided it is approved by the High Court, State Bank of Pakistan, or Securities and Exchange Commission of Pakistan on or after the first day of July 2007.
Furthermore, the section outlines the treatment of assets acquired by the transferee, emphasizing that they shall be treated with the same character as they had in the hands of the transferor. The transferee’s cost in acquiring the asset is determined based on various criteria, including the written down value of depreciable assets, stock-in-trade valuation, or the transferor’s cost at the time of disposal.
In cases where the transferor has deductions under specific sections that have not been set off against income, Section 97A(3)(c) stipulates that the amount not set off shall be added to the deduction allowed to the transferee in the tax year of the transfer.
The comprehensive provisions of Section 97A aim to provide clarity and consistency in the tax treatment of asset disposals under schemes of arrangement and reconstruction. This initiative aligns with the broader goal of creating a transparent and efficient tax system within the country.
As with any legislative information, it is essential to note the disclaimer provided, emphasizing that the text is for informational purposes, and the team PkRevenue.com is not responsible for any errors or omissions.
