Gain on asset disposal between companies has been explained by the Federal Board of Revenue (FBR) through an updated the Income Tax Ordinance, 2001, incorporating amendments introduced through the Finance Act, 2021.
Among the amended sections, Section 97 has undergone changes that provide detailed provisions regarding the gain or loss on the disposal of assets between wholly-owned companies.
Section 97 of the Income Tax Ordinance, 2001, outlines the conditions and implications when a resident company (referred to as the “transferor”) disposes of an asset to another resident company (referred to as the “transferee”) within a wholly-owned group of resident companies.
The key provisions of Section 97 are as follows:
Conditions for Non-Recognition of Gain or Loss: When a transferor company sells an asset to a transferee company within a wholly-owned group of resident companies, no gain or loss shall be recognized if the following conditions are met:
Both companies belong to a wholly-owned group of resident companies at the time of the disposal.
The transferee must undertake to discharge any liability in respect of the acquired asset.
The liability in respect of the asset must not exceed the transferor’s cost of the asset at the time of the disposal.
The transferee must not be exempt from tax for the tax year in which the disposal occurs.
Treatment of the Asset: If the conditions in Section 97(1) are met, the asset acquired by the transferee will be treated as having the same character as it had in the hands of the transferor. This means that the nature of the asset remains consistent throughout the transfer process.
Cost of the Asset: The transferee’s cost concerning the acquisition of the asset shall be determined as follows:
For depreciable assets or amortized intangibles, it will be the written-down value of the asset or intangible immediately before the disposal.
For stock-in-trade valued for tax purposes under Section 35(4), it will be that value.
For any other cases, it will be the transferor’s cost at the time of the disposal.
Treatment of Deductions: If the transferor has deductions allowed under specific sections (Sections 22, 23, and 24) in respect of the asset transferred, and these deductions have not been set off against the transferor’s income immediately before the disposal, the amount not set off shall be added to the deductions allowed under those sections to the transferee in the tax year in which the transfer is made.
Consideration in Kind: In cases where the transferor receives consideration in kind for the asset, the transferor’s cost of the asset shall be determined as mentioned above, reduced by the amount of any liability that the transferee has undertaken to discharge concerning the asset.
Wholly-Owned Group: The transferor and transferee companies are considered part of a wholly-owned group if one company beneficially holds all the issued shares of the other company, or if a third company beneficially holds all the issued shares in both companies.
These amendments to Section 97 of the Income Tax Ordinance, 2001 aim to provide a clear framework for the transfer of assets within wholly-owned companies. By outlining the specific conditions under which gains or losses will not be recognized, it simplifies the tax treatment of such transactions, ensuring that tax liabilities are appropriately managed within a group of related companies.
The updated provisions reflect the government’s efforts to streamline the tax system, reduce complexity, and promote transparency in tax-related matters. It also encourages businesses to invest and operate within a structured and predictable tax environment. It’s important for businesses and taxpayers to be aware of these changes and seek professional guidance to ensure compliance with the revised regulations.
