My client received agricultural land from a company in liquidation. Agricultural land is not a capital asset, so is there anything to tax under s.46(2)?
Yes. The Supreme Court held that the word 'assets' in s.46(2) is not to be read as 'capital assets' as defined in s.2(14). A shareholder who receives assets of any kind on liquidation is chargeable on the market value of those assets on the date of distribution, and the exclusion of agricultural land from the definition of capital asset does not help him.
Decided by the Supreme Court (Ruma Pal J and B.N. Srikrishna J) on 2003-01-27, reported as Civil Appeal Nos. 2606-2607 of 2001. It bears on section 46(2), section 46(1), section 2(14), section 45, section 47(viii), section 48, section 2(22)(c), section 256(1) of the Income Tax Act 1961, in Capital Gains matters.
s.46(2) is an independent charging provision with its own method of computation, and this decision is the reason a shareholder cannot import the s.2(14) exclusions into it. The Court's textual point is the useful one in argument: Parliament used 'capital asset' in ss.45(1), 47 and 48 but deliberately used the bare word 'asset' in s.46(1) and (2), and the non obstante clause in s.46(1) only makes sense if the two overlap — capital assets are a species of the genus assets. The practical reach is that on a liquidation distribution in specie the shareholder is taxed on market value on the date of distribution, reduced by whatever has been assessed as dividend under s.2(22)(c), and that figure is the full value of consideration for s.48. Read the case for its year: the assessment was 1970-71 and the Court set out s.2(14) as it stood before its 1972 amendment and s.47(viii), which exempted transfers of agricultural land effected before 1 March 1970 and has since gone from the statute. The construction of the word 'assets' in s.46(2) is what survives, not the surrounding provisions as quoted.
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The two appellants were sisters and shareholders in M/s Palkulam Estate (Private) Ltd, Nagercoil, which went into liquidation in 1964. Under a compromise decree dated 22 December 1969 in litigation between the sisters, their brother who was also a shareholder, and the company represented by the liquidator, the assets of the company including agricultural lands were distributed to the appellants and eight others. The appellants received 479.89 acres of agricultural land before 31 March 1970, the end of the accounting year relevant to assessment year 1970-71. The assessment for 1970-71 had been completed on 27 February 1971 and was reopened under s.148. The appellants contended that because agricultural land was excluded from 'capital asset' by s.2(14), it had to be excluded in computing capital gains under s.46(2). The Assessing Officer held that s.46(2) refers to money received on liquidation or the market value of the assets on the date of distribution and that the character of the asset was immaterial, and taxed the value of the share of agricultural land. The Commissioner (Appeals) allowed the appeals, holding that s.46(2) had to be read in the light of s.2(14). The Tribunal dismissed the Revenue's appeal, reasoning from ss.45, 46(2) and 48 read with s.47(viii). On a reference under s.256(1) the High Court answered against the assessees, holding s.2(14) irrelevant to the construction of s.46(2).
The appeals were dismissed without any order as to costs. The word 'assets' in s.46(2) is not to be construed by reference to the definition of 'capital assets' in s.2(14). To the extent that a shareholder receives assets, whether capital or any other, from a company in liquidation, he is liable to tax on the market value of the assets as on the date of distribution as provided in s.46(2).
The Court traced the provision to its purpose. Under s.12-B of the 1922 Act, Madurai Mills had held that a shareholder receiving money on distribution of net assets in liquidation receives it in satisfaction of the right attaching to his shares and not by any transaction amounting to sale, exchange, relinquishment or transfer, and R.M. Amin held that principle continued under the 1961 Act; s.46(1) statutorily affirms it by providing that distribution on liquidation is not a transfer by the company. s.46(2) was introduced to overcome Madurai Mills by making receipt of assets by a shareholder on liquidation a taxable event for the first time, and, as R.M. Amin explains, it both imposes the liability and prescribes the mode of computing it. The section is in terms an independent charging section and makes no reference to capital assets either in imposing the charge or in computing it. Having used 'capital asset' in ss.45(1), 47 and 48, Parliament appears deliberately to have used 'asset' in s.46(1) and (2), the ostensible intention being to bring assets of all kinds within the charge; capital assets are a species of the genus assets, and if the two expressions did not overlap there would have been no need for the non obstante clause in s.46(1). Agricultural land would have been a capital asset but for its exclusion from the definition, and what is not a capital asset may yet be an asset for s.46(2).
Therefore, to the extent that a shareholder assessee receives assets whether capital or any other from the company in liquidation, the assessee is liable to pay tax on the market value of the assets as on the date of the distribution as provided under Section 46(2).
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that the word 'assets' in s.46(2) is not to be read as 'capital assets' as defined in s.2(14). A shareholder who receives assets of any kind on liquidation is chargeable on the market value of those assets on the date of distribution, and the exclusion of agricultural land from the definition of capital asset does not help him. This was decided by the Supreme Court (Ruma Pal J and B.N. Srikrishna J) and bears on section 46(2), section 46(1), section 2(14), section 45, section 47(viii), section 48, section 2(22)(c), section 256(1) of the Income Tax Act 1961. It is reported as Civil Appeal Nos. 2606-2607 of 2001. s.46(2) is an independent charging provision with its own method of computation, and this decision is the reason a shareholder cannot import the s.2(14) exclusions into it. The Court's textual point is the useful one in argument: Parliament used 'capital asset' in ss.45(1), 47 and 48 but deliberately used the bare word 'asset' in s.46(1) and (2), and the non obstante clause in s.46(1) only makes sense if the two overlap — capital assets are a species of the genus assets. The practical reach is that on a liquidation distribution in specie the shareholder is taxed on market value on the date of distribution, reduced by whatever has been assessed as dividend under s.2(22)(c), and that figure is the full value of consideration for s.48. Read the case for its year: the assessment was 1970-71 and the Court set out s.2(14) as it stood before its 1972 amendment and s.47(viii), which exempted transfers of agricultural land effected before 1 March 1970 and has since gone from the statute. The construction of the word 'assets' in s.46(2) is what survives, not the surrounding provisions as quoted. If it applies to you, the first step is this: On a liquidation distribution, compute under s.46(2) on the market value of the assets on the date of distribution, whatever their character, and do not treat land or any other asset outside s.2(14) as outside the charge.
The two appellants were sisters and shareholders in M/s Palkulam Estate (Private) Ltd, Nagercoil, which went into liquidation in 1964. Under a compromise decree dated 22 December 1969 in litigation between the sisters, their brother who was also a shareholder, and the company represented by the liquidator, the assets of the company including agricultural lands were distributed to the appellants and eight others. The appellants received 479.89 acres of agricultural land before 31 March 1970, the end of the accounting year relevant to assessment year 1970-71. The assessment for 1970-71 had been completed on 27 February 1971 and was reopened under s.148. The appellants contended that because agricultural land was excluded from 'capital asset' by s.2(14), it had to be excluded in computing capital gains under s.46(2). The Assessing Officer held that s.46(2) refers to money received on liquidation or the market value of the assets on the date of distribution and that the character of the asset was immaterial, and taxed the value of the share of agricultural land. The Commissioner (Appeals) allowed the appeals, holding that s.46(2) had to be read in the light of s.2(14). The Tribunal dismissed the Revenue's appeal, reasoning from ss.45, 46(2) and 48 read with s.47(viii). On a reference under s.256(1) the High Court answered against the assessees, holding s.2(14) irrelevant to the construction of s.46(2). The matter was decided on 2003-01-27 by the Supreme Court (Ruma Pal J and B.N. Srikrishna J). On those facts the Supreme Court held as follows. The appeals were dismissed without any order as to costs. The word 'assets' in s.46(2) is not to be construed by reference to the definition of 'capital assets' in s.2(14). To the extent that a shareholder receives assets, whether capital or any other, from a company in liquidation, he is liable to tax on the market value of the assets as on the date of distribution as provided in s.46(2).
The Court traced the provision to its purpose. Under s.12-B of the 1922 Act, Madurai Mills had held that a shareholder receiving money on distribution of net assets in liquidation receives it in satisfaction of the right attaching to his shares and not by any transaction amounting to sale, exchange, relinquishment or transfer, and R.M. Amin held that principle continued under the 1961 Act; s.46(1) statutorily affirms it by providing that distribution on liquidation is not a transfer by the company. s.46(2) was introduced to overcome Madurai Mills by making receipt of assets by a shareholder on liquidation a taxable event for the first time, and, as R.M. Amin explains, it both imposes the liability and prescribes the mode of computing it. The section is in terms an independent charging section and makes no reference to capital assets either in imposing the charge or in computing it. Having used 'capital asset' in ss.45(1), 47 and 48, Parliament appears deliberately to have used 'asset' in s.46(1) and (2), the ostensible intention being to bring assets of all kinds within the charge; capital assets are a species of the genus assets, and if the two expressions did not overlap there would have been no need for the non obstante clause in s.46(1). Agricultural land would have been a capital asset but for its exclusion from the definition, and what is not a capital asset may yet be an asset for s.46(2). In the words reproduced by the source cited on this page: "Therefore, to the extent that a shareholder assessee receives assets whether capital or any other from the company in liquidation, the assessee is liable to pay tax on the market value of the assets as on the date of the distribution as provided under Section 46(2)." The decision followed or applied Commissioner of Income Tax, Madras v. Madurai Mills Co. Ltd. 1973 (89) ITR 45 — explained as the decision s.46(2) was enacted to overcome; Commissioner of Income Tax v. R.M. Amin 1977 (1) SCC 691 — followed; The judgment of the High Court under appeal — affirmed.
It was decided by the Supreme Court on 2003-01-27 and is reported as Civil Appeal Nos. 2606-2607 of 2001. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 46(2), section 46(1), section 2(14), section 45, section 47(viii), section 48, section 2(22)(c), section 256(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed without any order as to costs. The word 'assets' in s.46(2) is not to be construed by reference to the definition of 'capital assets' in s.2(14). To the extent that a shareholder receives assets, whether capital or any other, from a company in liquidation, he is liable to tax on the market value of the assets as on the date of distribution as provided in s.46(2). It arises in Capital Gains matters, on section 46(2), section 46(1), section 2(14), section 45, section 47(viii), section 48, section 2(22)(c), section 256(1) of the Income Tax Act 1961, and was decided by Ruma Pal J and B.N. Srikrishna J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Get the s.2(22)(c) figure first — the amount assessed as dividend, being the part attributable to accumulated profits immediately before liquidation — because s.46(2) allows it as a reduction and the balance is the full value of consideration for s.48. Fix and document the date of distribution, since market value is taken as on that date and not on the date of the liquidation order or of the compromise decree. Do not argue from s.47 exclusions: s.46(1) says the distribution is not a transfer by the company, and s.46(2) charges the shareholder independently, so the s.47 exemptions for transfers are beside the point. Check the current text of s.2(14) and s.47 before relying on anything this judgment quotes about them — both have been amended since the year in issue.
Still good law. A second, differently-worded full-text probe threw up the same documents and nothing adverse. No decision since 2003 doubts the judgment. But the single paragraph relied on is also the paragraph that distinguishes it: the Ramesh Builders Bench goes on to observe that 'in that case, no doubt what was in issue was section 46(2) and what the Apex Court was considering there was the distinction between transfer of assets and the distribution of the assets of the company under liquidation', and then decides the appeal on section 45(4) and partner retirement. So the recorded evidence is one Tribunal paragraph setting out the ratio as settled and putting it aside on the facts - not a decision resting on it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment as reported runs in continuous prose with no numbered paragraphs; a first pass asking for numbered paragraphs correctly returned that none exist, and the text was then transcribed as a whole from 'RUMA PAL, J.' to the disposal. The judgment quotes s.2(14) as it stood before its 1972 amendment and quotes s.45(1) in a form listing ss.54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, which is later than the assessment year in issue; neither is a statement of the current law. The Court also records that the second of the two referred questions was not pressed before the High Court. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed without any order as to costs. The word 'assets' in s.46(2) is not to be construed by reference to the definition of 'capital assets' in s.2(14). To the extent that a shareholder receives assets, whether capital or any other, from a company in liquidation, he is liable to tax on the market value of the assets as on the date of distribution as provided in s.46(2).
TaxSphere, “N. Bagavathy Ammal v CIT”, https://taxnotice.vittsphere.com/caselaw/case/n-bagavathy-ammal-v-cit-46-2-assets-not-capital-assets/ (validity last checked 2026-09-08)
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