CIT Vs Shri Nayan Arvind Shah (Bombay High Court)= Whether the value of the assets, for the purpose of computation of capital gains in the hands of the shareholders in respect of assets received from the liquidator of a company, should be taken at the fair market value (FMV) or at the FMV as reduced by the liabilities attached to it. It was held that the FMV, as reduced by the liabilities attached to it, forms the basis for computation of capital gains.
The HC provides useful guidance for computing capital gains in the hands of the shareholders of a liquidating company, where the liquidator undertakes in specie distribution of assets. It concludes that, in case assets are distributed with the liabilities attached to them, the value of the assets less the liabilities attached to them can be considered as ‘full value’ of the assets for the purpose of computing capital gains.
Commissioner of Income Tax Vs Shri Nayan Arvind Shah
INCOME TAX APPEAL NO. 1856 OF 2009
INCOME TAX APPEAL NO. 1857 OF 2009
INCOME TAX APPEAL NO. 1858 OF 2009
DATE : 5thJuly,2011.
CORAM : J.P. Devadhar & A.A. Sayed, JJ.
1. In all these appeals, the question raised by the Revenue is, where a shareholder on the liquidation of Company receives an asset from the Company with the liabilities attached to it, then the value of that asset for the purposes of Section 46(2) of the Income Tax Act, 1961 should be taken at the fair market value or at the fair market value as reduced by the liabilities attached to the said asset?
2. According to the Revenue, the expression “full value” in Section 46(2) clearly indicates that for the purpose of Section 48, full value of the asset should be taken into consideration without excluding therefrom any liabilities attached to the said asset.
3. In the present case, the finding of fact recorded by the Income Tax Appellate Tribunal is that the liquidator of the Company distributed the assets of the Company to the shareholders with the liabilities attached to that asset, as liquid funds were not available with the Company for discharging the liabilities attached to the asset. It was open to the liquidator to sell the assets and after discharging the liabilities attached to the asset, distribute the balance amount amongst the shareholders. In the present case, the liquidator has distributed the assets to the shareholders leaving it to the shareholder to discharge the liabilities attached to that asset. In the present case, the fact that the assets were transferred to the shareholders with liabilities attached to it is not in dispute. The fact that the shareholders have in fact discharged the liabilities attached to the asset is also not in dispute. In these circumstances, the decision of the Tribunal that where an asset of the Company in liquidation is distributed to the shareholder with a specific liability attached to it, then the value of the asset for the purposes of Section 46(2) of the Act should be the full value of the asset as reduced by the amount paid by the shareholder for discharging the liability attached to the asset cannot be faulted.
4. In this view of the matter, we see no merit in these appeals. The appeals are accordingly dismissed with no order as to costs.