Non-recognition of capital gain in the case of a gift relatives [sections 37(4a) & 79(1) (c)1

Non-recognition of capital gain in the case of a gift relatives: Prior to the Finance Act, 2018, as per clause (c) of sub-section (1) of section 79, no gain or loss was taken to arise on disposal by reason of gift of an asset.

Further, as per clause (a) of sub-section (4A) of section 37, where the capital asset became a property of a person under a gift, the fair market value of the asset, on the date of its transfer or acquisition by the person was treated as the cost of the asset.

Hence, capital gain on safe of asset could be avoided by using conduit of gift in otherwise market based sale/purchase transactions between unrelated parties.

In order to plug this loophole having potential of being used as conduit of tax evasion, amendment has been made in clause (c) of sub-section (1) of section (79) as well as in clause (a) of subsection (4A) of section 37 whereby non-recognition of capital gain is restricted to gain arising on disposal of an asset as a result of gift to a relative only as defined in subsection (5) of section 85, which, in relation to an individual encompasses:

• an ancestor, a descendent of any of the grandparents or an adopted child of such individual or his/her spouse.
• the spouse of the individual or the spouse of any person delineated in clause (i) above.

However, capital gain or loss shall be recognized and subsequently arise in case of disposal of an asset by way of gift to a person who is not a relative as defined in subsection (5) of section 85 of the Ordinance.