Section 46(1) – No capital gain to company on distribution of assets to shareholders on liquidation:
Wwhere the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company. Therefore, there will be no capital gain to the company.
Section 46(1) has application to distribution of assets in specie: Section 46(1) is restricted in its application to the circumstances mentioned therein, that is, where the assets of the company, in specie, are distributed to shareholders on the liquidation of the company.
If, however, the liquidator sells the assets of the company resulting in a capital gain, and distributes the funds so collected, the incidence of accrual of capital gains in the hands of the company makes it liable to pay tax on such gains. [Sri Kannan Rice Mills Ltd. v CIT (1954) 26 ITR 351 (Mad)]
Section 46(2) – Shareholders liable to capital gain tax on receiving of money and asset on the liquidation of the company:
Where a shareholder on the liquidation of a company, receives any money or other asset from the company in lieu of the shares held by him, such a shareholder shall be chargeable to income-tax under the head ‘Capital gains’ in respect of the excess money and the assets so received over the cost of the shares held by him.
Even though the income received by the assessee in the liquidation proceedings was not on account of any transfer of property, yet Parliament has chosen to treat such receipt as capital gains. Hence, it shall be treated as deemed capital gains. [CIT v Ruby Trading Co. Pvt. Ltd. (2003) 259 ITR 54 (Raj)]
In this case, the consideration price for capital gain purposes shall be money received and/or the market value of the other assets on the date of distribution minus deemed dividend within the meaning of section 2(22)(c).
Thus, section 46(2) deals with shareholders’ liability for capital gain in case of distribution of money and/or assets by a company in liquidation.
Distributed assets and/or money, which in fact do not constitute consideration and do not become payable on any transfer, are under section 46(2) deemed to be so and are directed to be subject to tax as capital gains. [ITO v Cables and Wireless Ltd. (1977) 107 ITR 297 (Bom)]