Sale of assets to wholly owned subsidiary

[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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