Tax implications in liquidation

SECTION-46 : CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION

(1) Not a Transfer : Notwithstanding anything contained in section 45, where 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 for the purposes of section 45.

But where the asset is sold in the open market and cash is distributed to the shareholder then Sec 46(1) does not get attracted for the purpose of Sec.45.

(2) Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend with in the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48.

Computation :
Money received + Market value of the asset – Deemed dividend u/s 2(22)(c) = Sale Consideration of the shares in the liquidating company.

OTHER POINTS :
a.         2(42A). Period of Holding :     In the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation should be excluded.
b.         Section 55(2)(b)(iii) :   Where the asset other than cash acquired by the shareholder on the liquidation of the company is subsequently transferred, in this case cost of acquisition of the assets shall be the fair market value of the asset on the date of distribution . No other adjustment like deemed dividend shall be made.
c.         Year of Chargeability :            Capital gain on distribution of assets to the shareholders is chargeable in his hands in the year in which the assets is distributed to him.

d. Since the dividend is exempt in the hands of shareholders the company is liable to pay dividend distribution tax @ 12.5% + 10% surcharge + 2% education cess u/s 115O. DDT including surcharge and cess = 14.025%.

e. As per section 2(22)(c ) deemed dividend is equal to percentage of holding in the company multiplied by accumulated profits or total amount distributed whichever is lower.