Section 46 Of Indian Taxation

This post is on this topic: Capital gains on distribution of assets by companies in liquidation [Section 46] – Income Tax

This is the first time I am writing on company taxation. 

There are few references which I went through which are listed below. I Googled and went through the search results and picked those links which made reading easy. 

1. http://incometaxmanagement.com/Pages/Tax-Management-Managerial-Financial-Decisions/5-Capital-Gains-on-Distribution-of-Assets-by-Companies-in-Liquidation.html
2. http://www.financialexpress.com/archive/taxability-of-amount-received-in-specie-on-liquidation-of-a-company/79183/
3. http://vinodkothari.com/wp-content/uploads/2017/02/Voluntary_Winding-up_Taxation_aspect.pdf
4. https://indiankanoon.org/doc/115395/
5. https://taxguru.in/income-tax/in-case-of-transfer-of-an-asset-distributed-by-a-company-in-liquidation-cost-of-acquisition-of-same-has-to-be-taken-as-cost-to-previous-owner-for-purpose-of-computing-capital-gains-thereon.html

I intend to talk about the clauses in this section and about questions I have wrt (with respect to) this section. My questions  / doubts are indented.

Distribution of money and any assets by a company on liquidation to its shareholders (SH):

What is the Capital Gains (CG) accrued by the SH?

• The total capital gains is the sum of money received and market value of assets received less the amount received as dividend. The definition is for capital and not for CG since there is nothing about cost of acquisition.
• Deemed Dividend = % of shareholding in the company X (lesser of total profit or money distributed by company, whichever is lower)
• From http://www.financialexpress.com/archive/taxability-of-amount-received-in-specie-on-liquidation-of-a-company/79183/: "For section 46(2), any cash or other assets received by a shareholder on liquidation of the company would not be assessable to tax as capital gains (CIT v Amin (106 ITR 368))." Read on Sec 46(1) below. This seems to contradict the provisions of sec 46. 

What happens when the distribution of assets happens over many years?

• If the distribution is made over many years, the CG will be assessed on each year of distribution and not only on the last year as per http://www.financialexpress.com/archive/taxability-of-amount-received-in-specie-on-liquidation-of-a-company/79183/ Many articles seem to focus on the "on liquidation" meaning at the end of liquidation. Which of them is right? Do it at the end of liquidation or during each year? My belief is it should be done at the end of liquidation and not each year when the SH gets some proceeds from the liquidation.
• "Section 46(2) is applicable in each of the years in which the distribution is made in instalments by the company in liquidation, and the operation of this sub-section is not postponed till the year of final distribution; hence, instalments of distribution made prior to the coming into force of the Act are not chargeable". How will the cost of acquisition of the shares, corresponding to each year the SH received proceeds from liquidation, be calculated in such a case? Here is a quote from the link https://indiankanoon.org/doc/115395/ "In that situation, the only reasonable inference to be drawn is that the expression "on liquidation" under section 46(2) refers to the date when the affairs of the company are completely wound up and the right of the shareholder to return of capital after discharge of the liabilities of the company and preferential payments comes to an end." which negates the piecemeal calculation. 

Can the SH avoid CG by investing in 54E bonds? 

The distribution does not constitute a transfer. Hence capital gains cannot be avoided by investing in sec 54E. Quote from http://www.financialexpress.com/archive/taxability-of-amount-received-in-specie-on-liquidation-of-a-company/79183/ "As a result of the aforesaid decision, capital gains earned by shareholders in respect of their investment in a company which is wound up would not be eligible for the benefit of exemption even if they invest the amount in the notified bonds under sections 54-EC or 54-ED, in view of the provisions of section 46(1)." 

When the SH sells the assets received (after liquidation of company) at a later date, is there any CG involved?

• When the shareholder sells the assets at a later date, he will have acquired some more CG which is the sale value of the asset less the value of the asset which he received on liquidation. 

How is the CG calculated for the SH on receiving the assets and after selling the assets? Example pls.

• A SH purchases share for Rs 100, on liquidation he gets assets worth Rs 150, he sells the assets at Rs 170. The company purchased the assets for Rs 80. See this link for the calculation: https://taxguru.in/income-tax/in-case-of-transfer-of-an-asset-distributed-by-a-company-in-liquidation-cost-of-acquisition-of-same-has-to-be-taken-as-cost-to-previous-owner-for-purpose-of-computing-capital-gains-thereon.html  The written down value is not used for CG computation.

What the #$^%^%%#^ is Section 46(1)?

This only says that the mere fact of assets being transferred by a company to shareholders on liquidation does not mean that the company will be chargeable to CG. 

OK, so when is CG chargeable to the company being liquidated?

• When the company distributes its assets to shareholders, then the company shall not incur CG. But if the company liquidates its assets and distributes the money so obtained to shareholders, then the company shall incur CG. 
• From https://www.taxdose.com/capital-gains-on-distribution-of-assets-by-companies-in-liquidation-section-46-income-tax/ "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 [Section 46(1)]. The above section is restricted in its application to the circumstances mentioned therein i.e., the assets of the company must be distributed in specie 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 company will be liable to pay tax on such gains."

• Does the shareholder also incur tax on the same money (less any divided)? Is it not then a case of double taxation?

Are capital losses relevant and allowed to be set off against gains or against income?

• Yes. 
• From : https://indiankanoon.org/doc/115395/ Quote: "If the result of such computation under the head "Capital gains" is a positive balance, it is to be added in the total income chargeable to tax augmenting the same. If the balance is negative, it has to be treated under the Chapter titled, "Set off and carry forward losses" in accordance with the provisions to the extent the same are permissible."

How is CG calculated for the company when it liquidates some portion of its assets? 

• To be found

Is indexation allowed while calculating CG? 

• To be found

Additional reading:

The following case is often cited: Supreme Court in the case of CIT v. R. M. Amin [19771 106 ITR 368:  https://indiankanoon.org/doc/964607/