Capital gains on asset distribution by companies in liquidation

The excess amount that a shareholder gets from the liquidated firm over his initial investment in the share capital of that company will be subject to capital gains tax. The shareholder may be subject to tax under the title Capital gains in respect of the cash collected or the market value of other assets paid in specie upon liquidation, as reduced by the amount evaluated as a dividend under section 2(22), according to Section 46(2) of the Income-tax Act, 1961. Any money or other assets obtained by a shareholder upon the company's dissolution would not be subject to capital gains tax under section 46(2) (CIT v. Amin, 106 ITR 368).

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If the shareholder had already been taxed on the basis of the asset's market value at the time of distribution, he would be liable for the difference between the sale price realised and the asset's market value on the date of distribution by the company in liquidation if he later sold the capital asset he had previously received from the company in liquidation. If no such tax has been assessed against the shareholder and he later sells the capital asset obtained during the company's liquidation, he will be assessed based on the price at which the asset was purchased by the company, increased by the cost of any improvements made by a company or the stockholder, as the case may be.

The operation of this sub-section is not delayed until the year of the final distribution; as a result, distribution instalments made before the Act's effective date are not chargeable. Section 46(2) is appropriate in each of the years in which the allocation is made in instalments by the company in liquidation.

A firm cannot be considered to have achieved any capital gains under Section 46(1) if it simply distributes its assets to its shareholders upon dissolution. The corporation in such a situation is not even permitted to make capital gains under this subsection (CIT v. Madurai, 89 ITR 45,51). This provision only applies when a firm in liquidation distributes capital assets in kind to its shareholders.

According to Kannan Rice v. CIT (26 ITR 351), capital gains made by a business's liquidator on the sale of the company's assets with the intention of dispersing the sale proceeds among the shareholders are ascertainable in the hands of the company.

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