FBR clarifies how tax liabilities are handled when an association of persons changes, dissolves or when a business is transferred to another person.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the tax liabilities arising in certain circumstances under the Income Tax Ordinance, 2001, covering changes in the constitution of an association of persons (AOP), discontinuance or dissolution of an AOP, and succession to a business or profession other than on the death of the predecessor.
The provisions are contained in Sections 98A, 98B and 98C of the Income Tax Ordinance, 2001, updated up to June 30, 2026.
Section 98A: Change in Constitution of AOP
Under Section 98A, where the constitution of an association of persons changes during a tax year, the AOP as constituted at the time of filing the tax return is responsible for filing the return for that tax year.
However, the income of the AOP is apportioned among the members who were entitled to receive it.
Where tax assessed on a member cannot be recovered from that member, the outstanding amount may be recovered from the AOP as constituted at the time the return was filed.
The provision therefore establishes continuity of tax filing responsibility despite changes in the membership or constitution of an AOP during the tax year.
Section 98B: Discontinuance or Dissolution of AOP
Section 98B deals with the tax consequences where a business or profession carried on by an AOP is discontinued or the association is dissolved.
Subject to Section 117, the provisions of the Income Tax Ordinance continue to apply, as far as possible, as though the discontinuance or dissolution had not taken place.
Every person who was a member of the AOP at the time of its discontinuance or dissolution is jointly and severally liable for the tax payable by the association.
This means the tax liability of the dissolved or discontinued AOP can continue to be enforced against its members.
The legal representative of a member who has died is also liable in accordance with the applicable provisions of the law.
Section 98C: Succession to Business or Profession
Section 98C establishes the tax treatment where a person carrying on a business or profession is succeeded by another person during a tax year, except where the succession results from the predecessor’s death.
Where the successor continues the same business or profession, the predecessor remains liable for tax on income earned from the business or profession up to the date of succession during that tax year.
The predecessor also remains liable for tax relating to the tax year or years preceding the year in which succession takes place.
The successor, meanwhile, is liable for tax on income earned from the business or profession after the date of succession during the relevant tax year.
Tax Liability Where Predecessor Cannot Be Found
The law also provides a specific mechanism where the predecessor cannot be found.
In such circumstances, the successor assumes responsibility for the tax liability relating to the tax year in which the succession occurred up to the date of succession, as well as the tax year or years preceding that year.
The successor is liable in the same manner and to the same extent as the predecessor would have been liable, with the relevant provisions of the Income Tax Ordinance applying accordingly.
Recovery of Unpaid Tax
Section 98C also addresses the recovery of unpaid tax.
Where tax payable in respect of the business or profession cannot be recovered from the predecessor, the outstanding amount may be recovered from the successor.
However, the successor is entitled to recover the amount paid from the predecessor.
The provision therefore creates a mechanism to protect tax recovery where a business changes hands and the original taxpayer is unable to meet the outstanding liability.
Tax Liability Continues After Business Changes
Sections 98A, 98B and 98C provide specific rules for maintaining tax liability when the structure or ownership of a business changes.
The provisions cover changes in AOP membership, discontinuance or dissolution of an AOP, and succession to a business or profession.
They also clarify which person or persons remain responsible for tax relating to income earned before and after a change, as well as the circumstances in which unpaid tax can be recovered from another liable person.
The provisions are intended to ensure that changes in business structure, ownership or constitution do not by themselves prevent the assessment and recovery of tax legally due under the Income Tax Ordinance, 2001.