The Income Tax Ordinance, 2001

Section

95.   Disposal of business by individual to wholly-owned company.-

(1)    Where a resident individual (hereinafter referred to as the “transferor”) disposes of all the assets of a business of the transferor to a resident company, no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:–  

(a)    The consideration received by the transferor for the disposal is a share or shares in the company (other than redeemable shares);  

(b)    the transferor must beneficially own all the issued shares in the company immediately after the disposal;  

(c)    the company must undertake to discharge any liability in respect of the assets disposed of to the company;  

(d)    any liability in respect of the assets disposed of to the company must not exceed the transferor’s cost of the assets at the time of the disposal;  

(e)    the fair market value of the share or shares received by the transferor for the disposal must be substantially the same as the fair market value of the assets disposed of to the company, less any liability that the company has undertaken to discharge in respect of the assets; and  

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

(2)    Where sub-section (1) applies –  

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

(b)    the company’s cost in respect of the acquisition of the assets 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 ("at fair market value" omitted by Finance Bill 2007) , 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 assets transferred which have not been set off against the transferor’s income, the amount not set off shall be added to the deductions allowed under those sections to the company in the tax year in which the transfer is made; and  

(d)    the transferor’s cost in respect of the share or shares received as consideration for the disposal shall be –  

(i)      in the case of a consideration of one share, the transferor’s cost of the assets transferred as determined under clause (b), less the amount of any liability that the company has undertaken to discharge in respect of the assets; or  

(ii)     in the case of a consideration of more than one share, the amount determined under sub-clause (i) divided by the number of shares received.  

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