Section 46(1) — the law in short
What the courts have decided on section 46(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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N. Bagavathy Ammal v CIT
Supreme CourtHelps department
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.
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Statutory position — s.46(1) and s.46(2): the company is not charged on a liquidation distribution, the shareholder is, and the s.2(22)(c) deemed dividend is deducted before capital gains are computed
CBDT Circulars & InstructionsCuts both ways
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.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
