My client's company has gone into liquidation and the liquidator has distributed cash and one immovable property to the shareholders. Who is charged to capital gains — the company or the shareholder — and what exactly is the figure the shareholder is taxed on?
Neither limb of section 46 concerns a buy-back, so the 1 October 2024 buy-back changeover does not touch it; section 46 governs liquidation only, and it has read in identical words on departmental pages stamped Year 1966, Year 1973, Year 2009 and Year 2024 (No. 2). Section 46(1) says that where the assets of a company are distributed to its shareholders on its liquidation, that distribution "shall not be regarded as a transfer by the company for the purposes of section 45" — so the company is not charged on the distribution. Section 46(2) then charges the shareholder: he is chargeable under the head "Capital gains" on the money received plus the market value of the other assets on the date of distribution, "as reduced by the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2", and the sum so arrived at is deemed to be the full value of the consideration for section 48.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 46 of the Income-tax Act, 1961, transcribed from incometaxindia.gov.in/w/section-46-63 (heading "Capital gains on distribution of assets by companies in liquidation", Year: 2024 (No. 2)) and read again in identical words on /w/section-46 (Year: 2009), /w/section-46-26 (Year: 1973) and /w/section-46-50 (Year: 1966); the same words are reproduced by the Supreme Court in Vijay Kumar Budhia v. CIT (14 September 1993). It bears on section 46, section 46(1), section 46(2), section 45, section 2(22)(c), section 48, section 55(2)(b)(iii), section 2(17) of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
The deduction is the part that is got wrong, and it is got wrong in both directions. It is not a deduction of the whole distribution, and it is not a deduction of the accumulated profits as such: it is a deduction of the amount ASSESSED as dividend within s.2(22)(c) — that is, the part of the distribution attributable to accumulated profits immediately before liquidation, which is charged separately as dividend income. Deduct it twice, or fail to deduct it at all, and the capital gains figure is wrong. Then note what s.46(2) does NOT do: the only deduction it expressly provides is the s.2(22)(c) dividend. Everything else — cost of acquisition, indexation, expenditure on the transfer — comes in afterwards, because the sub-section directs that the resulting sum is the FULL VALUE OF THE CONSIDERATION for s.48, and it is s.48 that then allows cost and improvement. Practitioners who treat the s.46(2) figure as the capital gain itself overstate the charge by the whole cost of the shares. Two further limits matter. First, the asset side is valued at "the market value of the other assets on the date of distribution" — not the book value in the liquidator's account, and not the value on the date the shares were extinguished. Second, when the shareholder later sells the asset he received, s.55(2)(b)(iii) gives him a cost of acquisition equal to "the fair market value of the asset on the date of distribution", but only "where the assessee has been assessed to income-tax under the head 'Capital gains' in respect of that asset under section 46" — so the step-up depends on the s.46(2) charge actually having been made. Finally, s.46(1) protects the company from a s.45 charge on the DISTRIBUTION; it says nothing about the sale of assets by the liquidator to a third party, which is an ordinary transfer by the company and is chargeable in the usual way.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 46, as transcribed from the departmental page stamped Year 2024 (No. 2) and confirmed word for word on three earlier year-stamped pages, reads: "46. (1) 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. (2) 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 sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48." Section 55(2)(b)(iii), read on the Year 2024 (No. 2) page of s.55, reads: "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 ;".
Not a judgment. The statutory position is that a distribution of assets by a company to its shareholders on liquidation is, by s.46(1), not a transfer by the company for s.45; that by s.46(2) the shareholder is chargeable under the head "Capital gains" on the money received plus the market value of the other assets on the date of distribution, reduced by the amount assessed as dividend within s.2(22)(c); that the resulting figure is not the capital gain but the deemed full value of the consideration for s.48, so cost of acquisition and the other s.48 deductions are applied to it; and that where the shareholder is so assessed, s.55(2)(b)(iii) gives him a cost of acquisition for the asset received equal to its fair market value on the date of distribution.
Not a judgment; no judicial reasoning is stated for the section itself. On its operation the Supreme Court held in Vijay Kumar Budhia v. CIT (14 September 1993), at paragraph 4, that "The only deduction expressly provided by the Sub-section is 'the amount assessed as dividend within the meaning of Sub-clause (c) of Clause (22) of Section 2.'", and that "The Sub-section declares further that the sum so arrived at shall be deemed to be the full value of the consideration of the purposes of Section 48" — "of the purposes" being so printed in the report read, evidently for "for the purposes". In CIT, Gujarat-II v. R.M. Amin (26 November 1976) the Court held that s.46(2) "was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains", and that but for the sub-section it would not have been possible to charge capital gains on a liquidation distribution at all.
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 sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48.
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Handle my notice → Ask a CA on WhatsAppNeither limb of section 46 concerns a buy-back, so the 1 October 2024 buy-back changeover does not touch it; section 46 governs liquidation only, and it has read in identical words on departmental pages stamped Year 1966, Year 1973, Year 2009 and Year 2024 (No. 2). Section 46(1) says that where the assets of a company are distributed to its shareholders on its liquidation, that distribution "shall not be regarded as a transfer by the company for the purposes of section 45" — so the company is not charged on the distribution. Section 46(2) then charges the shareholder: he is chargeable under the head "Capital gains" on the money received plus the market value of the other assets on the date of distribution, "as reduced by the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2", and the sum so arrived at is deemed to be the full value of the consideration for section 48. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 46, section 46(1), section 46(2), section 45, section 2(22)(c), section 48, section 55(2)(b)(iii), section 2(17) of the Income Tax Act 1961. It is reported as Section 46 of the Income-tax Act, 1961, transcribed from incometaxindia.gov.in/w/section-46-63 (heading "Capital gains on distribution of assets by companies in liquidation", Year: 2024 (No. 2)) and read again in identical words on /w/section-46 (Year: 2009), /w/section-46-26 (Year: 1973) and /w/section-46-50 (Year: 1966); the same words are reproduced by the Supreme Court in Vijay Kumar Budhia v. CIT (14 September 1993). The deduction is the part that is got wrong, and it is got wrong in both directions. It is not a deduction of the whole distribution, and it is not a deduction of the accumulated profits as such: it is a deduction of the amount ASSESSED as dividend within s.2(22)(c) — that is, the part of the distribution attributable to accumulated profits immediately before liquidation, which is charged separately as dividend income. Deduct it twice, or fail to deduct it at all, and the capital gains figure is wrong. Then note what s.46(2) does NOT do: the only deduction it expressly provides is the s.2(22)(c) dividend. Everything else — cost of acquisition, indexation, expenditure on the transfer — comes in afterwards, because the sub-section directs that the resulting sum is the FULL VALUE OF THE CONSIDERATION for s.48, and it is s.48 that then allows cost and improvement. Practitioners who treat the s.46(2) figure as the capital gain itself overstate the charge by the whole cost of the shares. Two further limits matter. First, the asset side is valued at "the market value of the other assets on the date of distribution" — not the book value in the liquidator's account, and not the value on the date the shares were extinguished. Second, when the shareholder later sells the asset he received, s.55(2)(b)(iii) gives him a cost of acquisition equal to "the fair market value of the asset on the date of distribution", but only "where the assessee has been assessed to income-tax under the head 'Capital gains' in respect of that asset under section 46" — so the step-up depends on the s.46(2) charge actually having been made. Finally, s.46(1) protects the company from a s.45 charge on the DISTRIBUTION; it says nothing about the sale of assets by the liquidator to a third party, which is an ordinary transfer by the company and is chargeable in the usual way. If it applies to you, the first step is this: Set the computation out in the statutory order: (money received + market value of other assets on the date of distribution) MINUS the amount assessed as dividend under s.2(22)(c) = full value of consideration; then apply s.48 to deduct cost of acquisition and indexation. Do not collapse the two steps.
Section 46, as transcribed from the departmental page stamped Year 2024 (No. 2) and confirmed word for word on three earlier year-stamped pages, reads: "46. (1) 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. (2) 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 sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48." Section 55(2)(b)(iii), read on the Year 2024 (No. 2) page of s.55, reads: "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 ;". It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that a distribution of assets by a company to its shareholders on liquidation is, by s.46(1), not a transfer by the company for s.45; that by s.46(2) the shareholder is chargeable under the head "Capital gains" on the money received plus the market value of the other assets on the date of distribution, reduced by the amount assessed as dividend within s.2(22)(c); that the resulting figure is not the capital gain but the deemed full value of the consideration for s.48, so cost of acquisition and the other s.48 deductions are applied to it; and that where the shareholder is so assessed, s.55(2)(b)(iii) gives him a cost of acquisition for the asset received equal to its fair market value on the date of distribution.
Not a judgment; no judicial reasoning is stated for the section itself. On its operation the Supreme Court held in Vijay Kumar Budhia v. CIT (14 September 1993), at paragraph 4, that "The only deduction expressly provided by the Sub-section is 'the amount assessed as dividend within the meaning of Sub-clause (c) of Clause (22) of Section 2.'", and that "The Sub-section declares further that the sum so arrived at shall be deemed to be the full value of the consideration of the purposes of Section 48" — "of the purposes" being so printed in the report read, evidently for "for the purposes". In CIT, Gujarat-II v. R.M. Amin (26 November 1976) the Court held that s.46(2) "was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains", and that but for the sub-section it would not have been possible to charge capital gains on a liquidation distribution at all. In the words reproduced by the source cited on this page: "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 sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48." The decision followed or applied Vijay Kumar Budhia and Smt. Anusuiya v. CIT, Patna, Supreme Court, 14 September 1993 — construes the s.2(22)(c) deduction and the deemed full value of consideration; CIT, Gujarat-II v. R.M. Amin, Supreme Court, 26 November 1976 — s.46(2) is itself a charging provision, not merely machinery.
It was decided by the CBDT Circulars & Instructions and is reported as Section 46 of the Income-tax Act, 1961, transcribed from incometaxindia.gov.in/w/section-46-63 (heading "Capital gains on distribution of assets by companies in liquidation", Year: 2024 (No. 2)) and read again in identical words on /w/section-46 (Year: 2009), /w/section-46-26 (Year: 1973) and /w/section-46-50 (Year: 1966); the same words are reproduced by the Supreme Court in Vijay Kumar Budhia v. CIT (14 September 1993). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 46, section 46(1), section 46(2), section 45, section 2(22)(c), section 48, section 55(2)(b)(iii), section 2(17), 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 cuts both ways and is cited by both sides. Not a judgment. The statutory position is that a distribution of assets by a company to its shareholders on liquidation is, by s.46(1), not a transfer by the company for s.45; that by s.46(2) the shareholder is chargeable under the head "Capital gains" on the money received plus the market value of the other assets on the date of distribution, reduced by the amount assessed as dividend within s.2(22)(c); that the resulting figure is not the capital gain but the deemed full value of the consideration for s.48, so cost of acquisition and the other s.48 deductions are applied to it; and that where the shareholder is so assessed, s.55(2)(b)(iii) gives him a cost of acquisition for the asset received equal to its fair market value on the date of distribution. It arises in Capital Gains and How Tax Law Is Read matters, on section 46, section 46(1), section 46(2), section 45, section 2(22)(c), section 48, section 55(2)(b)(iii), section 2(17) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. 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 liquidator's statement showing how much of the distribution is attributable to accumulated profits immediately before liquidation. That figure is the s.2(22)(c) dividend and it is the only deduction s.46(2) itself allows. Check that the s.2(22)(c) amount was actually ASSESSED as dividend. Section 46(2) deducts the amount assessed as dividend, so if the officer has not brought it to tax as dividend he cannot also refuse the deduction; put the point to him in writing. Value the non-cash assets as at the date of distribution and support the figure — a valuation report, a registered-valuer certificate, or the stamp duty value for immovable property. The market value on that date, not the book value, is the statutory measure. If the client later sells an asset received in the liquidation, claim cost under s.55(2)(b)(iii) at the fair market value on the date of distribution, and keep the earlier s.46(2) assessment order on file — the sub-clause conditions the step-up on that assessment having been made. If the officer is trying to charge the COMPANY on the distribution itself, cite s.46(1); but do not use s.46(1) to resist a charge on the liquidator's sale of assets to an outsider, which s.46(1) does not cover.
Still good law. The text is current and stable: four departmental pages carrying different "Year:" stamps (1966, 1973, 2009 and 2024 (No. 2)) print sub-sections (1) and (2) identically, and the Supreme Court set the same words out in 1993. I probed suffixes -26, -50 and -63 and the bare page only; a still later departmental version cannot be excluded, though the 2024 (No. 2) stamp is the latest available on this route. I did not trace judicial treatment of s.46 beyond the two Supreme Court decisions named above, and I did not check whether any High Court has construed the phrase "market value of the other assets on the date of distribution". 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.
`decided_on` is null deliberately. Section 46 was in the Income-tax Act, 1961 from the outset and I could not source a commencement date from any footnote — the departmental pages for this section print no amendment footnotes at all, only a page-vintage line. What I can say is that the text has not moved: the Year 1966, Year 1973, Year 2009 and Year 2024 (No. 2) departmental pages print sub-sections (1) and (2) in identical words, and the Supreme Court reproduced the same words in Vijay Kumar Budhia v. CIT on 14 September 1993. Two things in this entry come from a different page and are labelled as such: s.55(2)(b)(iii) and the list of clause letters under s.55(2) were read on incometaxindia.gov.in/w/section-55-63, heading "Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'", Year 2024 (No. 2). On that page s.55(2)(b) runs (i), (ii), (iii), (iv) [omitted, printed as '[***]'] and (v); there is no free-standing clause "55(2)(v)", and sub-clause (v) fixes cost on consolidation, conversion, re-conversion, sub-division and conversion of one kind of share into another — it does NOT mention a reduction of share capital. I have not checked judicial treatment of s.46 beyond the two Supreme Court decisions named in `followed`. 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.
Not a judgment. The statutory position is that a distribution of assets by a company to its shareholders on liquidation is, by s.46(1), not a transfer by the company for s.45; that by s.46(2) the shareholder is chargeable under the head "Capital gains" on the money received plus the market value of the other assets on the date of distribution, reduced by the amount assessed as dividend within s.2(22)(c); that the resulting figure is not the capital gain but the deemed full value of the consideration for s.48, so cost of acquisition and the other s.48 deductions are applied to it; and that where the shareholder is so assessed, s.55(2)(b)(iii) gives him a cost of acquisition for the asset received equal to its fair market value on the date of distribution.
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