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Urgent Tax doubt...

Narayanan (Chartered Accountant) (189 Points)

05 November 2010

In case of liquidation of company, assets distributed are not taxed in hands of company, but are taxed for the shareholder...

When shareholder receives the assets, FMV as on that date less deemed dividend is considered as capital gain...

Now my question is, what is the implication in case of sale of the said asset... what will be the cost of acquisition... as per sec 49 it is the cost of the previous owner... if thats the case, thr seems to be a double taxation... reasonably, the cost of acq must be the FMV as on date of distribution...

Can someone help in this regard...

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14 Replies

Ninad Pandit (CA Final Student) (254 Points)
Replied 05 November 2010

FMV as on the date of distributiuon will be the COA(cost of acquisition) for the asset received (same amount is full value of consideration for the shares which were held by the shareholder)

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Narayanan (Chartered Accountant) (189 Points)
Replied 05 November 2010

Thanks Ninad, for u were the 1st one in over 40 visitors to have answered my query!!!

What u have said is precisely what i ve been thinking all these days, but section 49 says that cost of the prev owner is to be considered...

Here is section 49 for ur reference:

(1) Where the capital asset became the property of the assessee - (i) On any distribution of assets on the total or partial partition of a Hindu undivided family;

(ii) Under a gift or will;

(a) By succession, inheritance or devolution, or

(b) On any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987,

(d) Under a transfer to a revocable or an irrevocable trust, or

(e) Under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) 762a of section 47

(iv) Such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969, the cost of the acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Explanation : In this sub-section the expression "previous owner of the property" in relation to any capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv) of this sub-section.

kunal mangal (Chartered Accountant) (160 Points)
Replied 06 November 2010

dear narayanan,

you are extremely riight about the sec 49 implications, but in case when a company gets liquidated and distributes its assets to shareholders and further the asset is sold by the shareholder, the COA will be the cost to the previous owner i.e the Fair market value of the asset as on the date of distribution of such assets during liquidation process.

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Ninad Pandit (CA Final Student) (254 Points)
Replied 06 November 2010

Narayanan, i think there seems to be some conflict between the two sections. what do u think?

& just go through this :

Sec. 2(22) ⁹⁰“dividend”⁹¹ includes—

(a) any distribution⁹¹ by a company of accumulated profits⁹¹, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;

Narayanan (Chartered Accountant) (189 Points)
Replied 06 November 2010

No i dont think thr s a conflict... cos to the extent of acc profit, the distribution is treated as deemed dividend... the balance if any is treated as capital gains...

Narayanan (Chartered Accountant) (189 Points)
Replied 06 November 2010

Originally posted by : kunal mangal
	dear narayanan, you are extremely riight about the sec 49 implications, but in case when a company gets liquidated and distributes its assets to shareholders and further the asset is sold by the shareholder, the COA will be the cost to the previous owner i.e the Fair market value of the asset as on the date of distribution of such assets during liquidation process.

Kunal, cost to prev owner is FMV of asset? Dont get u... but if it is FMV, then what implication does Sec 49 have... to say that cost of prev owner is to be taken?

CA Lokesh Pokharna (CA (Ahmedabad Bhilwara Chittorgarh)) (4128 Points)
Replied 06 November 2010

agree with kunal .. in addtion (other words,but same meaning)Sec 49 SAys that consider COA of Previous Owner. And In ur Question COA of prev. owner would be The FMV on date of Distribution of Assets.........

kunal mangal (Chartered Accountant) (160 Points)
Replied 06 November 2010

dear narayanan,

In liquidation, the assets are distributed to the shareholders because they give there rights to the company. Hence capital gain tax is charged on the shareholders and not on the company.

Now subsequently when they sell the said asset to someone else, the capital gains will be calculated as follows:

sale consideration --- **

less: selling expense---- (**)

net sale consideration **

less: cost of acquisation (**)

capital gain **

Here the cost of acquisation should have been the cost which the shareholder har incurred in buying it, but because the shareholder has actually not bought it and infact has taken the asset in against the rights which he gave, you cannot determine it COA.

hence, the COA will be the Cost to the previous owner i.e the FMV of the asset as on the date of distribution.

By this, both sections i.e 46 and 49 donot conflict each other

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kunal mangal (Chartered Accountant) (160 Points)
Replied 06 November 2010

In the above , long term capital gains will be calculated on the subsequent sale of the asset if and in the foll manner ,

1. the period of holding is more than 3 yrs, here for the purpose of calculating the period of holding, the period for which the asset was hold by the company will also be taken into consideration

eg : the comapny holds an asset for 2 yrs and after distribution of the said asset , the shareholder holds the asset for 2yrs. now when he sells the asset, the period of holding will be 4 yrs and not 2 yrs , thus long term capital gains vil b calculated

2. the indexation vil be taken of the yr in which the asset was distributed to the shareholder

eg : the co. buys as asset in 2005 and distribute it to the shareholder in 2007.

the shareholder than sells it in 2009. thus here long term capital gains will be calculated but the indexation vil be taken of yr 2007 i.e 551 and not of 2005 i.e 497

For more clarifiaction read section 46,49 and 55

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Narayanan (Chartered Accountant) (189 Points)
Replied 06 November 2010

Thanks Kunal for a detailed explanation, but one fact stumps me...

In case of a gift, the cost of the person who gifted, that is considered- covered by section 49
In case of inheritance, the father's cost is considered- again covered by section 49
In case of partition of HUF, cost to the HUF is taken, again covered by section 49
But in case of distribution of company, FMV considered- is it against section 49...

kunal mangal (Chartered Accountant) (160 Points)
Replied 07 November 2010

dear narayanan,

I guess ur doubt is that why the cost incurred by the company in buying the asset is not the COA of the asset when it is subsequently sold by the shareholder??

I will explain via an example,

1. The book value of a land as shown in the balance sheet of a company is rs 10 lakhs.

2. The FMV of the land as on the date of distribution is rs 25 lakhs.

3. Now assuming that the whole land is distributed to the shareholder, the shareholder will be charged with capital gains on rs 25 lakhs less the deemed dividend.

4. Now if the assessee i.e the shareholder sells the land further, the COA as per the Act should be rs 25 lakhs, but as per your doubt the COA should be rs 10 lakhs.

5. If rs 10 lakhs will be taken as the COA, than it will lead to double taxation in the hands of the assessee who has sold the land.

6. Thus the COA is taken as the FMV of the asset as on the date of distribution under liquidation,

and because the shareholder doesnot actually buys it, its FMV is considered as cost to the previous owner, thus the liquidation case is not against sec 49

kunal mangal (Chartered Accountant) (160 Points)
Replied 07 November 2010

In transfers other than liquidation u/s 49, the assessee is not taxed with any capital gains when any asset is transferred to him.

He is taxed only when he subsequently sells the asset,

eg: in inheritence, when a father passes an asset to his son, the son is not taxed with capital gains.

Only when he sells it further he will be liable to tax. At this point the COA will be taken as the cost incurred by the father in buying the asset plus any cost of improvement on the asset.

*** In case of liquidation, the assessee is already taxed on the FMV of the asset, the COA has to be the FMV when the asset is sold further, otherwise that will lead to double taxation.

Narayanan (Chartered Accountant) (189 Points)
Replied 07 November 2010

Kunal,

Small development, may be this closes the heated discussion...

Normally in case of gift/inheritance etc, where we take the prev owners cost, we take it becos of the deemed cost u/s 49.

For this case, we need to refer to Section 55 (2) (b)(iii), which goes as follows:

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under section 46, means the fair market value of the asset on the date of distribution:

So, the treatment of FMV as cost of prev owner, is on account of this section... but for this section, it wud ve been cost of the company,,, so thr is no double taxation