Income Tax Ordinance, 2001 — Section 97: Disposal of asset between wholly-owned companies

97. Disposal of asset between wholly-owned companies.— (1) Where a resident company (hereinafter referred to as the “transferor”) disposes of an asset to another resident company (hereinafter referred to as the “transferee”), no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:

(a)Both companies belong to a wholly-owned group of 1[resident] companies at the time of the disposal;

(b)the transferee must undertake to discharge any liability in respect of the asset acquired;

(c)any liability in respect of the asset must not exceed the transferor’s cost of the asset at the time of the disposal; and

(d)the transferee must not be exempt from tax for the tax year in which the disposal takes place.

(2)Where sub-section (1) applies

(a)the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor;

(b)the transferee’s cost in respect of the acquisition of the asset shall be

(i)in the case of a depreciable asset or amortized intangible, the written down value of the asset or intangible immediately before the disposal;

(ii)in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35 2[ ], that value; or

(iii)in any other case, the transferor’s cost at the time of the disposal;

(c)if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor’s income, the amount not set off shall be added to the 1 Inserted by the Finance Act, 2003. 2 The words “at fair market value” omitted by the Finance Act, 2007. 163 Chapter V – Provisions Governing Persons deductions allowed under those sections to the transferee in the tax year in which the transfer is made; and

(d)the transferor’s cost in respect of any consideration in kind received for the asset shall be the transferor’s cost of the asset transferred as determined under clause (b), as reduced by the amount of any liability that the transferee has undertaken to discharge in respect of the asset.

(3)In determining whether the transferor’s deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of sub-section (2), those deductions shall be taken into account last.

(4)The transferor and transferee companies belong to a wholly-owned group if

(a)one company beneficially holds all the issued shares of the other company; or

(b)a third company beneficially holds all the issued shares in both companies. 1 [97A. Disposal of asset under a scheme of arrangement and reconstruction.—(1) No gain or loss shall be taken to arise on disposal of asset from one company (hereinafter referred to as the “transferor”) to another company (hereinafter referred to as the “transferee”) by virtue of operation of a Scheme of Arrangement and Reconstruction under sections 282L and 284 to 287 of the 2[Companies Act, 2017 (XIX of 2017)] or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962), if the following conditions are satisfied, namely:

(a)the transferee must undertake to discharge any liability in respect of the asset acquired;

(b)any liability in respect of the asset must not exceed the transferor’s cost of the asset at the time of the disposal;

(c)the transferee must not be exempt from tax for the tax year in which the disposal takes place; and

(d)scheme is approved by the High Court, State Bank of Pakistan or Securities and Exchange Commission of Pakistan, as the case may be, on or after first day of July, 2007.

(2)No gain or loss shall be taken to arise on issue, cancellation, exchange or receipt of shares as a result of Scheme of Arrangement and Reconstruction under sections 282L and 284 to 287 of the Companies Act, 2017 1 Inserted by the Finance Act, 2007. 2 The expression “Companies Ordinance, 1984 (XLVII of 1984)” wherever occurring substituted by “Companies Act, 2017 (XIX of 2017)” through Finance Act, 2020 dated 30th June, 2020 164 Chapter V – Provisions Governing Persons (XIX of 2017) or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962) and approved by:

(a)the High Court;

(b)State Bank of Pakistan; or

(c)Securities and Exchange Commission of Pakistan, as the case may be, on or after first day of July, 2007.

(3)Where sub-section (1) applies

(a)the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor;

(b)the transferee’s cost in respect of acquisition of the asset shall be

(i)in the case of a depreciable asset or amortised intangible, the written down value of the asset or intangible immediately before the disposal;

(ii)in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35, that value; or

(iii)in any other case, the transferor’s cost at the time of the disposal;

(c)if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor’s income, the amount not set off shall be added to the deduction allowed under those sections to the transferee in the tax year in which the transfer is made.

(4)In determining whether the transferor’s deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of sub-section (2), those deductions shall be taken into account last.

(5)Where sub-section (2) applies and the shares issued vested by virtue of the Scheme of Arrangement and Reconstruction under sections 282L and 284 to 287 of the Companies Act, 2017 (XIX of 2017) or section 48 of the Banking Companies Ordinance, 1962 (LVII of 1962) and approved by the Court or State Bank of Pakistan or Securities and Exchange Commission of Pakistan as the case may be, are disposed of, the cost of shares shall be the cost prior to the operation of the said scheme.] 165 Chapter V – Provisions Governing Persons PART V COMMON PROVISIONS APPLICABLE TO ASSOCIATIONS OF PERSONS AND COMPANIES