Sale of assets to wholly owned subsidiary

[Star]

Dear All,


Are the provisions of section 97 of ITO are obligatory to follow or optional?

Can assets be sold to wholly owned subsidiary at fair value and loss or gain can be recognised?

Pleased comment.


Regards,


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[faisal_desperado]

Dear,

Your query reveals, as I observed, that the transaction has been taken place in between wholly-owned companies(Reference exhibit Section 97 – 4a.), hence the said section is obligatory for you.

No gain or loss will be recognized in such a case, as section 97 – 1a specifically reveals the same that if both the companies belongs to the wholly owned companies then no loss or gain shall be taken to arise on the disposal.

Thanks for your email brother, if you had not emailed probably I would not have replied, since for a long time, I am out of touch.

Best Regards,

Faisal.

[Star]

Dear Faisal,

I understand that you in tax profession and will be well aware of with the reasons of introducing the section 97 and 97A.

Let me refresh it please. As per my knowledge, it was introduced to facilitate the mergers and corporate restructurings. Previously, when any restucturing was done and assets were transferred from one company to its wholly owned subsidiary, gains (losses) were used to recognise on such sale of assets which resulted into tax incidences on those groups which already were in financial crises and planning for restructuring.

Let me come to the specific point provision and conditions mentioned in section 97 which goes on....

.....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.

We understand that if the asset is transferred at fair value the condition (c) mentioned above is not fulfilled. If there is misunderstanding at our end please explain.

Other members are also requested to comment.


Regards,

*

[faisal_desperado]

Dear,

There would have very rare cases in which Condition C remains unfulfilled, since it requires transferee to extinguish the liability against that asset which is acquired (The liability of which could be in favour of third party rather than transferor). In most of the cases, liability against any asset remains lower than its cost unless liability is not paid off in time or time lag in payment is longer than the time period in which asset may be depreciated or amortized, or asset has been obsolete before the liability could have been extinguished by the transferor.

Transferor’s Cost, in this case does not mean the cost at which asset was acquired rather Transferor’s cost means;

[code]In Case of Depreciable/Amortizable Asset, Written down value will be treated its cost.
In Case of Inventory, its Fair value will be treated as cost.
And In case of other assets, cost will be the same at which these were acquired.[/code]

Whether the asset is transferred at Fair Value or Cost, the only thing to understand is that, this is a deferment of gain and taxation thereof, furthermore the actual purpose of this section is not to tax the gain arises within the same group of person. Any subsequent sale of the asset to a third party(by Transferee) will attract tax consequence, and in that case gain will be recognized by considering the difference between the fair value at which asset is sold and cost to the transferee.

Best Regards,

Faisal.

[Star]

Dear Faisal,

Please answer following question by considering section 97.

Suppose

• A owns 100% to B
• Paid up capital of B is Rs. 100 divided in 10 shares of Rs. 10 each

A transfer its one asset to B, information about the asset at transfer date are given below;

Cost of asset = 100
WDV of asset = 40
Liability related to asset transferred along with asset = 20

This asset is transferred to B at fair value Rs. 480 and liability is also assumed by B then total consideration comes as Rs. 500 (480+20). Balance sheet of B was;

Asset 500
Cash 100

Total assets 600

Liability related to asset 20
Liability towards A 480
Share capital 100

Total capital + liabilities 600

Now the share holding of B is sold to a third party C against total consideration of Rs. 600. Following were the terms share purchase agreement between A and C.

Break up of the consideration is given below;

• Rs. 100 against share capital
• Rs. 500 against the outstanding liabilities in the books of B towards A.

Now the question is;

• What would be the amount of gain in the books of A?
• Whether the gain would be classified as capital gain or income from business?

I want to know an unbiased opinion from you people therefore I am not writing my answer and understanding.

Regards,

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