Tax Treatment on Distribution of Capital Asset by Companies in Liquidation.

Tax Treatment on Distribution of Capital Asset by Companies in Liquidation.

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Section 2(22)(c) of Income Tax Act 1961

Deemed dividend includes:

Any distribution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not.

Share holders are subject to capital gains tax u/s. 46 (1) on assets distributed on liquidations. Capital Gain is calculated after deducting from consideration price or market value, the deemed dividend u/s. 2(22)(c) of Income Tax Act 1961

Section 46 of Income Tax Act 1961

 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 of Income Tax Act 1961.

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 within the meaning of section 2(22)(c) of Income Tax Act 1961and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48 of Income Tax Act 1961

Section 10(34) of Income Tax Act 1961

Dividend within the meaning of section 2(22)(c) of Income Tax Act 1961 is exempt under section10(34) of Income Tax Act 1961.

Conclusion

Thus no tax liability in the hands of company in case of distribution of asset by company in liquidation. But the amount received by shareholder is taxable as capital gain in the hands of shareholder, as reduced by the amount assessed as dividend within the meaning of section 2(22)(c) of Income Tax Act 1961.


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