My client received assets, not money, when the company he held shares in was wound up. He says there was no transfer, so there can be no capital gain. Is that argument open to him?
No — and note at the outset that this is a liquidation case, not a buy-back case, so nothing in it is affected by the 1 October 2024 changeover. The Supreme Court held that even though the money or assets received by a shareholder in liquidation proceedings are not received on account of any transfer of property, Parliament has chosen by s.46(2) to treat the receipt as capital gains, and the value of the assets received was rightly brought to capital gains tax. The Court also fixed the mechanism: the only deduction expressly provided by the sub-section is the amount assessed as dividend within s.2(22)(c), and the sum arrived at after that deduction is deemed to be the full value of the consideration for s.48, which is where the cost of acquisition and the other permissible deductions then come in.
Decided by the Supreme Court (B.P. Jeevan Reddy J and S.P. Bharucha J) on 1993-09-14, reported as 1994 AIR 1197; 1994 SCC (1) 289; Civil Appeal No. 2042 of 1984 and Civil Appeal No. 1411 of 1975, on appeal from the Patna High Court. It bears on section 46, section 46(2), section 2(22)(c), section 48, section 49, section 45 of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
This is the Revenue-side authority on s.46(2) and it closes the most natural line of defence. A shareholder in a winding up does not sell anything; his shares are simply extinguished as the company is dissolved. The Court did not deny that — it accepted that the receipt was "not on account of any transfer of property" — but held that the statutory deeming does the work regardless, and expressly declined to decide whether the deeming is properly called a fiction, because the validity of the provision was not in issue. So an argument built on the absence of a transfer will not defeat a s.46(2) assessment. What the decision gives the taxpayer is the shape of the computation, and it is worth insisting on: the deduction for the s.2(22)(c) dividend comes off the receipts FIRST, and what remains is the full value of the consideration, not the gain. The Court noted in terms, at paragraph 4, that s.48 "specified the permissible deductions from the full value of the consideration which includes the cost of acquisition of the asset" — "specified" as printed in the rendering at /doc/1139083/; the rendering at /doc/1309662/ prints "specifies". An assessment that treats the post-dividend figure as the chargeable gain has skipped a statutory step. The other point to carry away is the valuation rule the Court restated: the charge is on the money received or "the market value of the assets received as on the date of the distribution" — a date fixed by the statute, not by the liquidator's accounts.
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The assessee was a shareholder in a private limited company that went into liquidation. In the liquidation proceedings he received certain assets — not money — towards the shares he held. The Income-tax Officer placed his own value on those assets and charged the amount, Rs.34,040, to tax as capital gains. The assessee's contention throughout was that there had been no transfer of property and that as the income did not arise from any transfer no capital gains could arise. That plea was rejected by the Income-tax Officer. The Tribunal referred to the Patna High Court, at the instance of the Revenue, the question whether the amount of Rs.34,040 was assessable in the assessee's hands under the head "Capital gains"; the High Court reframed the question as whether the sum could be held to have been rightly included in the capital gain of the assessee under s.46 read with ss.48 and 49, and answered it in favour of the Revenue, relying on s.46(2). The assessee appealed to the Supreme Court. A second appeal, Civil Appeal No. 1411 of 1975, raised the same question.
Both appeals were dismissed, the second with no order as to costs. The Court held that in the light of the specific provision contained in s.46(2) the value of the assets received by the assessee was rightly and properly brought to capital gains tax, and that there were no grounds to interfere.
The Court set out s.46 in full and held that sub-section (2) was the provision that mattered. Even though the income received in the liquidation proceedings was not on account of any transfer of property, Parliament had chosen to treat such a receipt as capital gains, subject to a specified deduction; whether this was properly described as a fiction created by Parliament the Court left open, the validity of the provision not being in issue. On the mechanism, the sub-section charges the shareholder on the money received or on the market value of the assets received as on the date of distribution; the only deduction expressly provided is the amount assessed as dividend within s.2(22)(c); and the sub-section then declares that the sum so arrived at is deemed to be the full value of the consideration for s.48, which specifies the permissible deductions from the full value of the consideration including the cost of acquisition. The Court set out s.2(22)(c) and identified the amount it defines as the amount s.46(2) directs to be deducted.
Even though the income received by the assessee in the liquidation proceedings was not on account of any transfer of property, yet the Parliament has chosen to treat such receipt as capital gains, subject of course to certain specified deduction.
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Handle my notice → Ask a CA on WhatsAppNo — and note at the outset that this is a liquidation case, not a buy-back case, so nothing in it is affected by the 1 October 2024 changeover. The Supreme Court held that even though the money or assets received by a shareholder in liquidation proceedings are not received on account of any transfer of property, Parliament has chosen by s.46(2) to treat the receipt as capital gains, and the value of the assets received was rightly brought to capital gains tax. The Court also fixed the mechanism: the only deduction expressly provided by the sub-section is the amount assessed as dividend within s.2(22)(c), and the sum arrived at after that deduction is deemed to be the full value of the consideration for s.48, which is where the cost of acquisition and the other permissible deductions then come in. This was decided by the Supreme Court (B.P. Jeevan Reddy J and S.P. Bharucha J) and bears on section 46, section 46(2), section 2(22)(c), section 48, section 49, section 45 of the Income Tax Act 1961. It is reported as 1994 AIR 1197; 1994 SCC (1) 289; Civil Appeal No. 2042 of 1984 and Civil Appeal No. 1411 of 1975, on appeal from the Patna High Court. This is the Revenue-side authority on s.46(2) and it closes the most natural line of defence. A shareholder in a winding up does not sell anything; his shares are simply extinguished as the company is dissolved. The Court did not deny that — it accepted that the receipt was "not on account of any transfer of property" — but held that the statutory deeming does the work regardless, and expressly declined to decide whether the deeming is properly called a fiction, because the validity of the provision was not in issue. So an argument built on the absence of a transfer will not defeat a s.46(2) assessment. What the decision gives the taxpayer is the shape of the computation, and it is worth insisting on: the deduction for the s.2(22)(c) dividend comes off the receipts FIRST, and what remains is the full value of the consideration, not the gain. The Court noted in terms, at paragraph 4, that s.48 "specified the permissible deductions from the full value of the consideration which includes the cost of acquisition of the asset" — "specified" as printed in the rendering at /doc/1139083/; the rendering at /doc/1309662/ prints "specifies". An assessment that treats the post-dividend figure as the chargeable gain has skipped a statutory step. The other point to carry away is the valuation rule the Court restated: the charge is on the money received or "the market value of the assets received as on the date of the distribution" — a date fixed by the statute, not by the liquidator's accounts. If it applies to you, the first step is this: Do not run a "no transfer" defence to a s.46(2) assessment. The Supreme Court accepted the premise and held it makes no difference; put the effort into the computation instead.
The assessee was a shareholder in a private limited company that went into liquidation. In the liquidation proceedings he received certain assets — not money — towards the shares he held. The Income-tax Officer placed his own value on those assets and charged the amount, Rs.34,040, to tax as capital gains. The assessee's contention throughout was that there had been no transfer of property and that as the income did not arise from any transfer no capital gains could arise. That plea was rejected by the Income-tax Officer. The Tribunal referred to the Patna High Court, at the instance of the Revenue, the question whether the amount of Rs.34,040 was assessable in the assessee's hands under the head "Capital gains"; the High Court reframed the question as whether the sum could be held to have been rightly included in the capital gain of the assessee under s.46 read with ss.48 and 49, and answered it in favour of the Revenue, relying on s.46(2). The assessee appealed to the Supreme Court. A second appeal, Civil Appeal No. 1411 of 1975, raised the same question. The matter was decided on 1993-09-14 by the Supreme Court (B.P. Jeevan Reddy J and S.P. Bharucha J). On those facts the Supreme Court held as follows. Both appeals were dismissed, the second with no order as to costs. The Court held that in the light of the specific provision contained in s.46(2) the value of the assets received by the assessee was rightly and properly brought to capital gains tax, and that there were no grounds to interfere.
The Court set out s.46 in full and held that sub-section (2) was the provision that mattered. Even though the income received in the liquidation proceedings was not on account of any transfer of property, Parliament had chosen to treat such a receipt as capital gains, subject to a specified deduction; whether this was properly described as a fiction created by Parliament the Court left open, the validity of the provision not being in issue. On the mechanism, the sub-section charges the shareholder on the money received or on the market value of the assets received as on the date of distribution; the only deduction expressly provided is the amount assessed as dividend within s.2(22)(c); and the sub-section then declares that the sum so arrived at is deemed to be the full value of the consideration for s.48, which specifies the permissible deductions from the full value of the consideration including the cost of acquisition. The Court set out s.2(22)(c) and identified the amount it defines as the amount s.46(2) directs to be deducted. In the words reproduced by the source cited on this page: "Even though the income received by the assessee in the liquidation proceedings was not on account of any transfer of property, yet the Parliament has chosen to treat such receipt as capital gains, subject of course to certain specified deduction." The decision followed or applied CIT, Gujarat v. R.M. Amin, (1977) 1 SCC 691 : 1977 SCC (Tax) 234 : (1977) 106 ITR 368 — cited by the Court as taking the same view.
It was decided by the Supreme Court on 1993-09-14 and is reported as 1994 AIR 1197; 1994 SCC (1) 289; Civil Appeal No. 2042 of 1984 and Civil Appeal No. 1411 of 1975, on appeal from the Patna High Court. 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, section 46(2), section 2(22)(c), section 48, section 49, section 45, 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. Both appeals were dismissed, the second with no order as to costs. The Court held that in the light of the specific provision contained in s.46(2) the value of the assets received by the assessee was rightly and properly brought to capital gains tax, and that there were no grounds to interfere. It arises in Capital Gains and How Tax Law Is Read matters, on section 46, section 46(2), section 2(22)(c), section 48, section 49, section 45 of the Income Tax Act 1961, and was decided by B.P. Jeevan Reddy J and S.P. Bharucha 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. Insist on the two-stage computation: receipts (money plus market value of assets on the date of distribution) minus the s.2(22)(c) dividend equals the full value of the consideration; then s.48 deductions, including cost of acquisition. Identify and quantify the s.2(22)(c) dividend from the liquidator's statement of accumulated profits immediately before liquidation, and check that it has been assessed as dividend — the sub-section deducts the amount assessed as dividend. Value non-cash assets as at the date of distribution and be ready to support the figure; the officer's own valuation was accepted in this case because it was not effectively displaced. If the client later sells an asset received in the liquidation, claim its cost under s.55(2)(b)(iii) at fair market value on the date of distribution, which is available where he has been assessed under s.46 in respect of that asset.
Still good law. The judgment is lightly cited, and it is carried on indiankanoon under two document numbers: the copy at document 1139083 records 2 citing decisions and the copy at document 1309662 records 5, seven in all. The Rajasthan High Court applied it in CIT v Ruby Trading Co. (P) Ltd. (9 July 2002), reasoning from this decision that even though what the shareholder receives in liquidation is not received on account of any transfer of property, Parliament has chosen to treat the receipt as capital gains, and holding for that reason that section 54E, which presupposes a transfer, could not apply. The Mumbai Tribunal applied section 46(2) on the same footing in Videsh Sanchar Nigam Ltd. (8 July 2015). The Chennai Tribunal in Ashley Holdings Ltd. (11 July 2011) distinguished the case on its facts, the assessee there having received nothing in liquidation. Nothing overruling or doubting it was found, and the statutory foundation is unchanged: section 46(2) reads today in the words the Court set out in 1993. 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.
Two renderings of this judgment exist on indiankanoon and they number the paragraphs differently. The rendering at /doc/1139083/ runs to nine numbered paragraphs, with the reference to CIT v. R.M. Amin standing alone as paragraph 7 and the disposal at paragraph 8; the rendering at /doc/1309662/, which carries the citation line "1994 AIR 1197, 1994 SCC (1) 289", runs to eight, with the R.M. Amin sentence inside paragraph 6 and the disposal at paragraph 7. The quotation in this entry is taken from the paragraph numbered 4 in BOTH renderings, which is why that paragraph was chosen. The two renderings also differ in trivial ways — "Maybe it is a case of a fiction created by Parliament maybe not" in one and "May be, it is a case of a fiction created by Parliament-may be not" in the other, and "specifies" against "specified" — so no locator or wording outside paragraph 4 should be relied on without re-checking. The judgment states that its conclusion "is also the view taken by this Court in CIT v. R.M. Amin"; R.M. Amin in fact held that a liquidation distribution by a company outside s.2(17) could NOT be charged, and the sentence should be read as endorsing that decision's analysis of s.46(2) as the source of the charge, not as saying that R.M. Amin upheld a charge. The second appeal, Civil Appeal No. 1411 of 1975, was dismissed for the same reason with nobody appearing for the appellant. The assessment year is not stated in either rendering. 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.
Both appeals were dismissed, the second with no order as to costs. The Court held that in the light of the specific provision contained in s.46(2) the value of the assets received by the assessee was rightly and properly brought to capital gains tax, and that there were no grounds to interfere.
TaxSphere, “Vijay Kumar Budhia v CIT (Supreme Court) — assets received on a company's liquidation are chargeable as capital gains under s.46(2) even though nothing was transferred, and the only deduction the sub-section allows is the s.2(22)(c) dividend”, https://taxnotice.vittsphere.com/caselaw/case/vijay-kumar-budhia-46-2-charges-the-shareholder-and-the-only-deduction-is-the-2-22-c-dividend/ (validity last checked 2026-09-09)
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