Non-recognition of rules under income tax ordinance

Non-recognition of rules under income tax ordinance

Non-recognition of rules under income tax ordinance has been explained by the Federal Board of Revenue (FBR).

The FBR has issued the updated Income Tax Ordinance, 2001, which incorporates various amendments brought through the Finance Act, 2021.

Among the notable sections within the ordinance is Section 79, which introduces non-recognition rules to determine the tax treatment of asset disposals in certain specific scenarios.

Section 79 of the Income Tax Ordinance, 2001 outlines the circumstances under which no gain or loss is recognized on the disposal of an asset for the purpose of the ordinance. This non-recognition of gains or losses simplifies the tax treatment in these situations, offering clarity to taxpayers.

Key provisions of Section 79 include:

Asset Disposal Between Spouses under an Agreement to Live Apart (Section 79(1)(a)): In cases where spouses enter into an agreement to live apart and dispose of assets to one another, no gain or loss will be recognized for tax purposes. This provision aims to facilitate asset division in the context of marital separation.

Asset Transmission Upon the Death of an Individual (Section 79(1)(b)): When assets are transmitted to an executor or beneficiary upon an individual’s death, no gain or loss is recognized. This provision simplifies the tax treatment of inheritance and estate distribution.

Asset Gifts to Relatives (Section 79(1)(c)): Asset gifts to relatives, as defined in sub-section (5) of Section 85, do not result in recognized gains or losses. This rule eases the tax implications of gifting assets within the family.

Compulsory Acquisition of Assets (Section 79(1)(d)): In cases where assets are compulsorily acquired under any law, and the consideration received for the disposal is reinvested in an asset of a like kind within one year of the disposal, no gain or loss is recognized. This encourages reinvestment and simplifies tax treatment in cases of asset acquisition.

Asset Disposal by a Company to Shareholders on Liquidation (Section 79(1)(e)): When a company disposes of assets to its shareholders during the liquidation process, no gain or loss is recognized. This provision streamlines the tax treatment of asset distribution during the dissolution of a company.

Asset Disposal by an Association of Persons to Members on Dissolution (Section 79(1)(f)): In situations where an association of persons disposes of assets to its members upon dissolution, and the assets are distributed to members in accordance with their interests in the capital of the association, no gain or loss is recognized. This simplifies the tax treatment of asset distribution upon association dissolution.

Non-Recognition Rules for Non-Resident Acquirers (Section 79(2)): Sub-section (1) does not apply when the person acquiring the asset is a non-resident at the time of acquisition in cases mentioned in clauses (d), (e), and (f) of sub-section (1).

Treatment of Acquired Assets (Section 79(3)): In cases where the non-recognition rules in Section 79(1) apply, the person acquiring the asset is treated as acquiring an asset of the same character as the person disposing of the asset. Additionally, the cost of the acquired asset is equal to the cost of the asset for the person disposing of it at the time of the disposal.

Cost of Replacement Asset (Section 79(4)): The cost of a replacement asset, as referred to in clause (d) of sub-section (1), is calculated by adding the cost of the asset disposed of to the amount by which any consideration given for the replacement asset exceeds the consideration received for the asset disposed of.

Section 79 aims to simplify the tax treatment of specific asset disposals by introducing non-recognition rules in various scenarios. These provisions reduce the complexity of tax calculations and offer greater clarity to taxpayers, facilitating smoother transitions and asset transfers in the specified cases.

It is essential for individuals, businesses, and professionals to be aware of the provisions outlined in Section 79 to ensure accurate tax compliance when dealing with asset disposals in the covered scenarios.