Provision of Section 46 of The Income Tax Act ,1961 related to Liquidation is quite confusing. Let’s make it easier to understand.

  • Capital Gains treatment for the Liquidated Company

There are possibly two cases

1. If the Liquidator has distributed all the assets of the company to its shareholder without selling it that is a mere transfer, then such event is not considered as a Transfer and no further provisions of capital gains is attracted.

2. However, if the Liquidator has encased all the assets, that is sold it to third party and thereafter distributed cash to shareholders, then the company would be Liable to Pay for tax on such gains (Eventually it will not be exempt as per Point (1)

This Portion was quite easy to understand.

  • Capital Gains treatment in the hands of Shareholder

Any Asset or any money received by the Shareholder will be obviously his Income (Full Value of Consideration) but very important part is the classification into different heads of Income.

Out of the asset and money received by the member, some part consists of the Reserves and Surplus (Profits of the company as that too belongs to shareholder). Hence the Reserves part shall be taxable under the head Other sources in pursuant to Sec 2(22)(c). And the other remaining part shall be Full value of Consideration taxable under the head Capital Gains.

The Cost of Acquisition for computation of Capital Gains will be the amount paid at the time of acquisition of Shares by shareholder.

Hence in all, there will be one income under 2 Heads for Shareholder:

a) Income under the head Capital Gains

b) Income from other Sources (Reserves Part)

  • In Event of Further Sale of Capital Asset

Cost of Acquisition will be the Full value of Consideration as considered for computing Capital gains earlier.

A practical Illustration will make it easier to Understand

A practical Illustration will make it easier to Understand

 

Author Bio

Qualification: Student - CA/CS/CMA
Company: BDO
Location: Mumabi, Maharashtra, India
Member Since: 12 Aug 2022 | Total Posts: 2

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