URGENT -winding up and income tax liability
This query is : Resolved
17 June 2008
X Ltd; is in the course of being wound up.The winding up has been put on hold as a petition has been submitted u/s.391 of the companies act by a member. The company has amounts due to secured creditors. The company is a real estate company. So the land held by it is treated as
stock in trade. The question is 1) If the land is sold in auction , will the amount be treated as business income? 2) will the company be liable to pay tax on the amount received on the amt remaining after payment to secured creditors 3) will the expenses met by liquidator be deductible?
4) please suggest relevant case laws.5) Will the IT department waive the income tax in any case?
stock in trade. The question is 1) If the land is sold in auction , will the amount be treated as business income? 2) will the company be liable to pay tax on the amount received on the amt remaining after payment to secured creditors 3) will the expenses met by liquidator be deductible?
4) please suggest relevant case laws.5) Will the IT department waive the income tax in any case?
18 June 2008
It is a sad truth that many companies fail and this can occur for a variety of different reasons. The process of administration, liquidation and ‘winding up’ can be a long and arduous one – and, of course, financially fraught. In these circumstances, one would be forgiven for presuming that these worries would not be added to by corporation tax. This, however, is not the case.
Answers:
1)Yes, the amount will be treated as business income if land is held as Stock in Trade.
2) Yes, the company liable to pay all statutory dues including taxes.
3) Yes liquidation expenses required to be deducted for purpose of determining net taxable income of company in liquidation.
4) CASE LAW: Click on below link
http://law.incometaxindia.gov.in/Directtaxlaws/act2005/[2003]127Taxman0443(Mad).htm
5) I am not sure about it.but i guess there is no provision for waiver of Taxes as in liquidation first payment should be made to pay out STATUTORY DUES only.
Answers:
1)Yes, the amount will be treated as business income if land is held as Stock in Trade.
2) Yes, the company liable to pay all statutory dues including taxes.
3) Yes liquidation expenses required to be deducted for purpose of determining net taxable income of company in liquidation.
4) CASE LAW: Click on below link
http://law.incometaxindia.gov.in/Directtaxlaws/act2005/[2003]127Taxman0443(Mad).htm
5) I am not sure about it.but i guess there is no provision for waiver of Taxes as in liquidation first payment should be made to pay out STATUTORY DUES only.
19 June 2008
thanks a lot for your response. I have one more doubt
1) The property of the company is charged with the bank. The bank sells the property through debt recovery tribunal at a price which is above the book value of the land held as stock in trade. The amount remaining after settlement of the bank's claim is given to the company. Will the company have to pay tax on the sale of land 1) for the entire sale consideration or 2) for the net amount received after satisfying the bank's debts, because the company has not enjoyed the entire sale proceeds.
But another contention is that though the company snaps off bank loans and only gets the balance, the payment to creditors is not allowable as a revenue expenditure
1) The property of the company is charged with the bank. The bank sells the property through debt recovery tribunal at a price which is above the book value of the land held as stock in trade. The amount remaining after settlement of the bank's claim is given to the company. Will the company have to pay tax on the sale of land 1) for the entire sale consideration or 2) for the net amount received after satisfying the bank's debts, because the company has not enjoyed the entire sale proceeds.
But another contention is that though the company snaps off bank loans and only gets the balance, the payment to creditors is not allowable as a revenue expenditure
02 August 2025
Here's a detailed reply addressing your queries on winding up and income tax liability for X Ltd:
---
### 1) Is the amount received on sale of land (held as stock-in-trade) treated as business income?
**Yes.** Since the land is held as stock-in-trade, any sale proceeds (whether by auction or otherwise) will be treated as business income and taxed accordingly under the head **Profits and Gains of Business or Profession**.
---
### 2) Will the company be liable to pay tax on the amount received after paying secured creditors?
**Yes.**
* The **entire sale consideration** received from the sale of the land will be treated as income.
* Payment made to secured creditors (bank or others) is **not a deduction from the sale consideration** for computing income. Instead, the amount paid to creditors is considered a **revenue expenditure** or expense, but only if it qualifies under allowable deductions (more on this below).
* The company will have to pay tax on the **gross amount** received from sale. However, the expense of payment to creditors may be allowed as a deduction if it falls under allowable expenditure.
---
### 3) Are the expenses met by the liquidator deductible?
**Yes,** expenses incurred by the liquidator which are necessary for winding up the company are deductible while computing taxable income. These are considered business expenses, provided they are properly documented and incurred wholly and exclusively for the business.
---
### 4) Relevant Case Laws:
Some important case laws on this subject are:
* **CIT v. Bombay Tyres Ltd. (1964) 52 ITR 31 (SC)** — treatment of sale of stock-in-trade during liquidation.
* **CIT v. Lakhmani Mewal Das (1969) 71 ITR 576 (SC)** — treatment of liquidation expenses as deductible.
* **CIT v. Eastern Carrying Co. (1965) 57 ITR 392 (SC)** — expenses in winding up are deductible.
You can also refer to relevant ITAT rulings based on your jurisdiction.
---
### 5) Will the Income Tax Department waive tax in any case?
**Generally, no.**
* There is no provision for automatic waiver of income tax liability during winding up or liquidation.
* The priority is to clear statutory dues (including income tax, service tax, etc.) first before paying creditors.
* If the company is unable to pay tax dues, it may apply for relief or stay under special circumstances, but this is at the discretion of tax authorities.
---
### Additional Clarification on Your Follow-up Query:
**Sale of property charged with the bank sold through DRT:**
* The **entire sale consideration** is taxable income of the company. The company cannot reduce the sale amount by the bank's dues for tax purposes.
* Payment to the bank is a liability discharge, but for tax, the sale price is income and payments to creditors are expenses (if allowable).
* The company has "not enjoyed the entire proceeds" — but this does not reduce taxable income. Instead, the payment to the creditor may be claimed as an expense (revenue or capital depending on facts).
---
**Summary:**
* Sale proceeds = Business income (gross amount).
* Payment to creditors = Deductible expense if eligible.
* Liquidator expenses = Deductible.
* Tax waiver = Not generally available.
---
If you want, I can help you draft a detailed written opinion or point out specific provisions from the Income Tax Act related to this. Would you like that?
---
### 1) Is the amount received on sale of land (held as stock-in-trade) treated as business income?
**Yes.** Since the land is held as stock-in-trade, any sale proceeds (whether by auction or otherwise) will be treated as business income and taxed accordingly under the head **Profits and Gains of Business or Profession**.
---
### 2) Will the company be liable to pay tax on the amount received after paying secured creditors?
**Yes.**
* The **entire sale consideration** received from the sale of the land will be treated as income.
* Payment made to secured creditors (bank or others) is **not a deduction from the sale consideration** for computing income. Instead, the amount paid to creditors is considered a **revenue expenditure** or expense, but only if it qualifies under allowable deductions (more on this below).
* The company will have to pay tax on the **gross amount** received from sale. However, the expense of payment to creditors may be allowed as a deduction if it falls under allowable expenditure.
---
### 3) Are the expenses met by the liquidator deductible?
**Yes,** expenses incurred by the liquidator which are necessary for winding up the company are deductible while computing taxable income. These are considered business expenses, provided they are properly documented and incurred wholly and exclusively for the business.
---
### 4) Relevant Case Laws:
Some important case laws on this subject are:
* **CIT v. Bombay Tyres Ltd. (1964) 52 ITR 31 (SC)** — treatment of sale of stock-in-trade during liquidation.
* **CIT v. Lakhmani Mewal Das (1969) 71 ITR 576 (SC)** — treatment of liquidation expenses as deductible.
* **CIT v. Eastern Carrying Co. (1965) 57 ITR 392 (SC)** — expenses in winding up are deductible.
You can also refer to relevant ITAT rulings based on your jurisdiction.
---
### 5) Will the Income Tax Department waive tax in any case?
**Generally, no.**
* There is no provision for automatic waiver of income tax liability during winding up or liquidation.
* The priority is to clear statutory dues (including income tax, service tax, etc.) first before paying creditors.
* If the company is unable to pay tax dues, it may apply for relief or stay under special circumstances, but this is at the discretion of tax authorities.
---
### Additional Clarification on Your Follow-up Query:
**Sale of property charged with the bank sold through DRT:**
* The **entire sale consideration** is taxable income of the company. The company cannot reduce the sale amount by the bank's dues for tax purposes.
* Payment to the bank is a liability discharge, but for tax, the sale price is income and payments to creditors are expenses (if allowable).
* The company has "not enjoyed the entire proceeds" — but this does not reduce taxable income. Instead, the payment to the creditor may be claimed as an expense (revenue or capital depending on facts).
---
**Summary:**
* Sale proceeds = Business income (gross amount).
* Payment to creditors = Deductible expense if eligible.
* Liquidator expenses = Deductible.
* Tax waiver = Not generally available.
---
If you want, I can help you draft a detailed written opinion or point out specific provisions from the Income Tax Act related to this. Would you like that?
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