Sub-section (1) overrides section 67: where the assets of a company are distributed to its shareholders on its liquidation, that distribution is not regarded as a transfer by the company for the purposes of section 67.
Sub-section (2) puts the charge on the shareholder instead. A shareholder who receives money or other assets from the company on its liquidation is chargeable under the head "Capital gains" on the money received or the market value of the other assets on the date of distribution, reduced by the amount assessed as dividend within the meaning of section 2(40)(c); and clause (b) deems the sum so arrived at to be the full value of the consideration for the purposes of section 72.
Why it is there
A liquidating distribution has the outward form of a transfer by the company, and without sub-section (1) a company in liquidation would face a capital gains charge on assets it is merely handing back. The section moves the incidence to the shareholder and stops the same receipt being taxed twice by removing the part already assessed as dividend.
Who it applies to
A company distributing its assets to shareholders on liquidation
A shareholder receiving money or other assets from a company on its liquidation
What this means in practice
The portion assessed as dividend within the meaning of section 2(40)(c) is taken out first; what is left is the full value of the consideration under section 72, against which the cost of acquisition of the shares is set. Non-cash assets are valued at market value on the date of distribution, so a later change in their value does not affect the charge. The company itself offers nothing on the distribution, whatever gain is embedded in the assets it hands over.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
A company in liquidation distributes Rs. 50 lakh in cash to a shareholder whose shares cost him Rs. 12 lakh, and Rs. 20 lakh of that is assessed as dividend within the meaning of section 2(40)(c). The full value of the consideration is Rs. 30 lakh, against which the cost is set under section 72.
Where you meet this section
You meet it in the shareholder's return for the tax year of distribution, where the receipt is split between the part assessed as dividend and the balance shown under "Capital gains".
The words themselves
such distribution shall not be regarded as a transfer by the company for the purposes of the said section
Section 68(1), Income-tax Act, 2025.
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(40)(c)
Section 68(2)(a), Income-tax Act, 2025.
What people get wrong
Computing capital gains in the company's hands on the distribution. Sub-section (1) says it is not a transfer by the company for the purposes of section 67.
Charging the whole receipt as capital gains. Sub-section (2)(a) deducts the amount assessed as dividend within the meaning of section 2(40)(c) first.
Valuing non-cash assets on the date of the winding-up order or of receipt. Sub-section (2)(a) uses market value on the date of distribution.
Forgetting that the reduced amount is only the full value of the consideration. Sub-section (2)(b) feeds it into section 72, so the cost of acquisition of the shares remains deductible.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
46 - Capital gains on distribution of assets by companies in liquidation
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 262 — 1218. Board’s instruction contained in Circular dated 15-7-1963 to the effect that no penalty be levied if, at the time of appear 1979-09-14
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Notification No. 216 — Wealth-tax (First Amendment) Rules, 2007 - Amendments in rule 4A, substitution of rule 4AA and Form DA; insertion of Form DAA 2007-08-07
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 68. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
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What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.
