Fair market value of subsidiary firms shares: No increase in tax in presence of income from business

LAHORE: The tax department could not increase tax in the notional fair market value of the subsidiary company/s shares of a taxpayer company in presence of the term investment under the head income from business, said sources.

The taxpayer is a charitable trust which derives income from a number of industrial and commercial concerns operating in different service sectors.

A deputy commissioner of Inland Revenue, upon examination of its return, had found that the taxpayer’s certain income chargeable to tax had escaped assessment. As such, a notice was served upon the taxpayer to show cause as to why amendment of assessment should not be made under the law.

The department had pointed out in its notice that as per cash flow statement, the taxpayer had made long term investment in subsidiary companies through purchase of shares; therefore, the benefit accruing out of this exercise is taxable.

The taxpayer, on the other hand, stressed that hypothetical/ notional income could not be assessed under the income tax Ordinance, as the increase in value of the shares held as long term investment was a notional income and could only be taxed at the time of its disposal. It added that the tax machinery could not be set in motion because no income chargeable to tax had escaped assessment.

The department, while finding the objection untenable, held that the gain on account of long term investment has been reflected has been realized by the taxpayer, which was transferred to its equity/capital account so as to make it available for distribution amongst its shareholders. Therefore, it was to be treated as income.

The appellate authority held that the taxpayer’s investment in the financial statements was recorded as notional gain and not as realized gain in income, therefore, the same was not chargeable to tax.

It further clarified that the notional gain in the value of shares held by the taxpayer in its balance sheet was not an income from business. It added that the department failed to establish that what benefit or perquisite must have a fair market value and whether the taxpayer has received it or not.

Copyright Business Recorder, 2024