Distribution of assets by company in LIQUIDATION — transfer at FMV; receipts taxable to shareholders only to extent of accumulated profits.
Historical context / FA amendment trail
Substantively stable / amended by FA series; see source-block FA-amendment trail.
Operative consequences
• Operates within Chapter IV-E capital-gains computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
PART E — CAPITAL GAINS
SECTION 46 — CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION
Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)
A. SECTION SNAPSHOT
Section 46(1) provides that 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 within the meaning of Section 45. The company is therefore outside the capital-gains charge in respect of the assets so distributed.
Section 46(2) provides the converse charge in the shareholder's hands: 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 deemed dividend under Section 2(22)(c), and the sum so arrived at shall be deemed to be the full value of consideration for the purposes of Section 48.
The provision creates a two-leg architecture: company-level non-charge under 46(1), shareholder-level charge under 46(2), with deemed-dividend bifurcation under Section 2(22)(c). The interplay between deemed dividend (taxed as dividend) and the balancing capital gain (taxed under 45/46(2)) requires careful sequencing.
B. COMMENTARY
Section 46 is one of the oldest provisions of the capital-gains code, designed to address an obvious gap in the general charging scheme — namely, that distribution by a company-in-liquidation to its shareholders is not, in commercial substance, a "transfer" by the company. The corporate veil has dissolved; the distribution is to those who, in equity, already own the residue. Section 46(1) gives statutory recognition to this and excludes the company from the Section 45 charge.
On the shareholder's side, Section 46(2) operates in two registers. First, it adopts the FMV of the distributed assets (or money received) as the deemed full value of consideration. Second, it requires reduction of the amount treated as deemed dividend under Section 2(22)(c) — i.e., the amount distributed that is attributable to accumulated profits. The balance — broadly, the capital element of the distribution — is then treated as the consideration for the deemed "transfer" of the shares. The shareholder's cost of acquisition of the shares (under Section 49) and indexation (subject to the FA 2024/FA 2026 restrictions) are applied to determine the chargeable gain.
The leading judicial principle, traceable to Madurai Mills Co. (SC 1968), is that on liquidation the shareholder's shares stand extinguished and what he receives is a substitute for the shares — hence the charge under Section 46(2) is in the nature of capital gains on transfer of the shares (with the deemed-dividend portion separately taxed as dividend). The pre-DDT abolition position (Section 2(22)(c) deemed dividend was, in the company's hands, subjected to DDT; from AY 2021-22, classical dividend taxation has been restored). FA 2020 reversed the DDT regime and shifted dividend taxation back to recipients under Section 56, fundamentally changing the practitioner's calculus for liquidation distributions.
Practitioner take-aways: (a) On voluntary or compulsory winding-up, prepare a distribution waterfall identifying the accumulated-profits portion (subject to deemed-dividend treatment under Section 2(22)(c)) and the capital-distribution portion (subject to Section 46(2)). (b) Apply the shareholder's cost of acquisition under Section 49 — original cost for purchased shares, deemed cost under Section 49(1) for inherited/gifted shares, FMV-as-on-1-4-2001 election where applicable. (c) Apportion FMV at the date of distribution between the shareholder-level dividend bucket and the capital-gain bucket. (d) Consider Section 46A (buy-back) and Section 47 carve-outs to ensure correct characterisation.
C. POSITION UNDER FINANCE ACT, 2026
Section 46 has not been substantively amended by the Finance Act, 2026. The two-leg architecture (company exempted under 46(1), shareholder charged under 46(2) with deemed-dividend deduction) continues unchanged. The chief practical changes flowing from FA 2020/FA 2024 — classical dividend taxation in shareholders' hands and the rate restructuring under Section 112/112A — apply with full force.
For long-term gains on liquidation distribution of listed shares (Section 112A), the rate post-23 July 2024 is 12.5% above the prescribed threshold; for unlisted shares, the long-term gain is taxed at 12.5% without indexation (post FA 2024). For short-term, the rate is determined under Section 111A or normal slab rates as applicable. The practitioner should also consider the interaction with Section 2(22)(c) deemed-dividend treatment, which is now taxable in the shareholder's hands under Section 56(2)(i) at the applicable slab rate.
D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS
The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.
Facts: On the voluntary liquidation of a company, the shareholders received cash distributions. The Department sought to tax the distribution as capital gains in the hands of the company under the then-prevailing section.
Issue: Whether distribution by a company-in-liquidation to its shareholders constitutes a "sale, exchange, relinquishment or transfer" of the assets in the company's hands so as to attract capital-gains tax.
Held: The Supreme Court held that distribution of assets on liquidation is not a sale, exchange, relinquishment or transfer in the commercial sense; what passes to the shareholders is the residue belonging to them in equity, the corporate intermediary having dissolved. The company is therefore not liable to capital-gains tax on such distribution.
Ratio / Practitioner take-away: Established the foundational principle now embodied in Section 46(1). The legislative codification ensures that the principle stands on its own footing irrespective of the underlying common-law rationale.
2. CIT v. R.M. Amin — (1977) 106 ITR 368 (SC)
Facts: On liquidation of a company, the shareholder received certain assets. The question was the year of accrual and the character of the receipt — capital or revenue.
Issue: Whether the receipt by a shareholder on liquidation is capital gain on transfer of the shares or income from a different source.
Held: The Supreme Court held that the receipt is, in substance, consideration for the extinguishment of the shareholder's rights in the company. The charge falls under Section 46(2), with deemed-dividend bifurcation under Section 2(22)(c).
Ratio / Practitioner take-away: Confirms the two-leg architecture and the conceptual basis — receipt on liquidation = consideration for extinguishment of shares = capital gain.
Facts: On the voluntary liquidation of a company, the assessee received money in respect of shares held. The Department treated the entire receipt as taxable.
Issue: Whether the entire amount received on liquidation is taxable, and the bifurcation between dividend (accumulated profits) and capital distribution.
Held: The Supreme Court recognised the dual character of the receipt — the part attributable to accumulated profits is dividend (Section 2(22)(c)) and the balance is consideration for surrender of the shareholding (capital gain). This bifurcation principle later crystallised into the present Section 46(2) reduction rule.
Ratio / Practitioner take-away: Foundational authority on the dividend-versus-capital-gain bifurcation that underlies the present Section 46(2). The reduction-of-deemed-dividend mechanism in Section 46(2) directly traces to this judicial bifurcation.
Facts: A company in liquidation distributed assets to its shareholders. The question was the proper treatment in the company's hands and the year of charge in the shareholder's hands.
Issue: The interaction of liquidation distribution with the capital-gains charge — the year of accrual and computation of consideration.
Held: The Supreme Court held that the year of accrual of capital gains under Section 46(2) is the year of distribution; the FMV on the date of distribution constitutes the gross consideration; the deemed-dividend portion is reduced therefrom; the residue is the deemed full value of consideration.
Ratio / Practitioner take-away: Settles the timing and computation rule under Section 46(2): year of distribution, FMV on that date, reduction of 2(22)(c) deemed dividend.
5. First Income-tax Officer v. Short Brothers (P) Ltd. — (1966) 60 ITR 83 (SC)
Facts: On winding-up of a company, the liquidator distributed certain assets and money. The character of the distribution and the year of taxability were in dispute.
Issue: Whether the liquidation distribution attracts capital-gains tax in the company's hands or escapes the charge.
Held: The Supreme Court reaffirmed that distribution by a company-in-liquidation is not a "transfer" in the company's hands — extending Madurai Mills. The shareholder's receipt is separately taxable.
Ratio / Practitioner take-away: Confirms the company-level non-charge. Section 46(1) codifies this rule.
6. CIT v. P. Sarada (Smt.) — (1998) 229 ITR 444 (SC)
Facts: On the liquidation of a closely-held company, the shareholder received assets and contended for benefit of indexation. The cost of acquisition computation under Section 49(1) was in dispute.
Issue: How is the shareholder's cost of acquisition computed for the purpose of Section 46(2) where shares were acquired by gift/inheritance.
Held: The Supreme Court held that for shares acquired in a manner covered by Section 49(1), the cost to the previous owner is to be adopted; the period of holding under Section 2(42A) also incorporates the period for which the previous owner held the asset (Explanation 1(i)(b)).
Ratio / Practitioner take-away: Confirms the application of Section 49(1) read with Section 2(42A) Explanation 1 to liquidation distributions — the previous owner's cost and holding period flow through to the recipient.
Facts: A shareholder on liquidation received assets that included immovable property. The valuation of the property as on the date of distribution was contested.
Issue: The valuation principles applicable to immovable property received on liquidation for the purpose of Section 46(2) FMV determination.
Held: The Allahabad High Court held that FMV under Section 46(2) is determined on ordinary valuation principles (open-market test) as on the date of distribution; reference to Valuation Officer under Section 55A may be made where the AO doubts the value adopted.
Ratio / Practitioner take-away: Application of standard valuation principles to in specie liquidation distributions. Practitioners typically commission a registered-valuer report contemporaneously with the distribution.
Facts: In the course of a company's winding-up, payments were made over several years. The taxability across years was disputed.
Issue: Whether multiple instalments of liquidation distribution are taxable in respective years of receipt or aggregated to a single year.
Held: The Karnataka High Court held that each distribution is a separate event; the FMV/cash received in each year is taxable in that year under Section 46(2), with proportionate apportionment of the original cost.
Ratio / Practitioner take-away: Confirms the year-of-distribution rule for instalment-based liquidations and the proportionate-cost apportionment.
9. CIT v. Maithreyi Pai — (1985) 152 ITR 247 (Kar HC)
Facts: The assessee received liquidation distribution; the Department sought to tax interest accumulated on a loan to the company as part of the consideration.
Issue: Whether interest receipts incident to the liquidation are part of the Section 46(2) consideration or independently taxable.
Held: The Karnataka High Court held that pre-liquidation interest accruals are independently taxable as interest income; only the actual liquidation distribution falls under Section 46(2).
Ratio / Practitioner take-away: Distinction between the liquidation distribution (taxed under 46(2) as capital gain/deemed dividend) and ordinary income receivables (taxed under the appropriate head independently).
Facts: The shareholder received assets on liquidation that included shares of another company. The valuation of those shares as on the date of distribution was disputed.
Issue: How to value unquoted/restricted shares received in specie on liquidation for FMV determination under Section 46(2).
Held: The Gujarat High Court held that unquoted shares are to be valued on the break-up or yield basis as appropriate to the company's nature and circumstances, applying Rule 11UA-style principles (today, Rule 11UA itself for FMV determination).
Ratio / Practitioner take-away: Practical guidance on valuation methodology for in specie distributions of unquoted shares. Rule 11UA and the principles in CCT v. Mahadev Co-op. Bank (cognate cases) supply the methodology.
11. N. Bagavathy Ammal v. CIT — (2003) 259 ITR 678 (SC)
Facts: On liquidation of a company, payments were made over multiple years to shareholders. The shareholder's claim was that capital gains arose only once when the shares ceased to exist.
Issue: Whether capital gains under Section 46(2) arise on each distribution or as a single event on completion of winding-up.
Held: The Supreme Court held that the capital gain arises on each distribution; the language of Section 46(2) ("the money so received or the market value of the other assets on the date of distribution") points to a per-distribution computation, not aggregation at completion.
Ratio / Practitioner take-away: Authoritative SC pronouncement on the timing question — every distribution = separate computation. Practitioners should compute and report capital gain in each year of receipt.
Facts: Shareholders of a closely-held company received a mix of cash and immovable property on liquidation. The bifurcation between deemed dividend and capital distribution was contested.
Issue: How is the deemed-dividend portion under Section 2(22)(c) computed when the distribution is part-cash, part-asset.
Held: The Gujarat High Court held that the accumulated-profits-attributable portion is to be computed by reference to total accumulated profits of the company immediately preceding liquidation, then apportioned across distributions; only the residue (post-2(22)(c) reduction) constitutes Section 46(2) consideration.
Ratio / Practitioner take-away: Practical guidance on the 2(22)(c)/46(2) bifurcation. The accumulated-profits computation looks at the balance immediately preceding liquidation — not the running balance during distribution.
13. CIT v. G. Narasimhan — (1999) 236 ITR 327 (SC)
Facts: Bonus shares were received by the shareholder pre-liquidation; the company then went into liquidation and the shareholder received distribution. The cost of acquisition of bonus shares was in dispute.
Issue: Cost of acquisition of bonus shares received pre-liquidation for the purpose of Section 46(2) computation.
Held: The Supreme Court held that for bonus shares, the cost of acquisition shall be reckoned at nil (now codified in Section 55(2)(aa)(iiia)). The full liquidation distribution attributable to bonus shares thus enters the chargeable gain (after 2(22)(c) reduction).
Ratio / Practitioner take-away: Confirms the nil-cost rule for bonus shares — now expressly in Section 55(2)(aa)(iiia). Practitioners must compute capital gains on bonus shares received pre-liquidation at full FMV less nil cost.
Facts: A liquidator distributed assets of the company; the company contended that no capital gain arose to it as Section 46(1) applied.
Issue: Scope of Section 46(1) — does it cover distribution of all classes of assets, including stock-in-trade and depreciable assets, on liquidation.
Held: The Supreme Court held that Section 46(1) operates only in respect of capital assets and only as regards the capital-gains charge. Distribution of stock-in-trade may attract business-income consequences in the company's hands; distribution of depreciable assets may attract balancing-charge/Section 50 implications. The 46(1) shield is limited to capital-gains tax.
Ratio / Practitioner take-away: Important clarification — Section 46(1) is not an omnibus shield. The company must separately analyse stock and depreciable-asset distributions for business-income, balancing-charge and Section 50/41(2)-type consequences.
15. CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust — (1977) 108 ITR 555 (SC)
Facts: In the context of valuation of a private company's shares (in wealth-tax proceedings, but principles transposable), the Court examined break-up versus yield methods.
Issue: Appropriate valuation methodology for unquoted/private company shares (transposable to Section 46(2) FMV determination of in specie share distributions).
Held: The Supreme Court held that for unquoted private-company shares, the appropriate method depends on whether the company is a going concern (yield method) or is in winding-up or non-operational state (break-up method); a combined approach may be used in appropriate cases.
Ratio / Practitioner take-away: The yield-versus-break-up framework now embedded in Rule 11UA. For Section 46(2) purposes — where the company itself is in liquidation — the break-up method is typically appropriate.
16. CIT v. Mrs. Bacha F. Guzdar — (1955) 27 ITR 1 (SC)
Facts: A shareholder received dividend representing the proceeds of agricultural income earned by the company. The shareholder claimed the dividend was agricultural in character and exempt.
Issue: Whether a shareholder's dividend takes the character of the company's underlying income.
Held: The Supreme Court held that a shareholder has no direct interest in the corporate assets or income; dividend is a distinct receipt arising out of the shareholding contract, not a sliver of the company's income. Hence agricultural origin is irrelevant.
Ratio / Practitioner take-away: Foundational SC authority on the separate juristic personality of a company and the independent character of dividends. Indirectly relevant to Section 46/2(22)(c) analysis — the deemed-dividend portion partakes of dividend character, not of the underlying-asset character.
17. CIT v. P.K. Badiani — (1976) 105 ITR 642 (SC)
Facts: A close company made a payment to a director-shareholder; the Department invoked Section 2(22)(e) deemed-dividend. The interaction of deemed dividend with the company's accumulated profits was disputed.
Issue: Computation of "accumulated profits" for purposes of Section 2(22) deemed-dividend characterisation.
Held: The Supreme Court held that "accumulated profits" for Section 2(22) excludes capital gains earned by the company; both general profits (subject to taxation) and current profits up to the date of payment fall within the term.
Ratio / Practitioner take-away: Cognate authority on "accumulated profits" — directly relevant to the 2(22)(c) bifurcation in Section 46(2) computations. Practitioners must compute accumulated profits on the basis explained in Badiani when sequencing dividend-versus-capital distribution.
Facts: On liquidation of a company in which the trust held shares, distributions were received. The trust's computation and the year of receipt were contested.
Issue: Application of Section 46(2) to a trust as shareholder, and the timing of taxability.
Held: The Supreme Court applied the standard Section 46(2) framework — taxed in the year of each distribution, with deemed-dividend reduction and cost adjustment.
Ratio / Practitioner take-away: Reaffirms the universal applicability of the Section 46(2) framework to all categories of shareholders (individuals, HUFs, trusts, AOPs, companies). The taxpayer's legal status does not alter the section's operation.
E. CONNECTED PROVISIONS AND CROSS-REFERENCES
Section 2(22)(c) — "Deemed dividend" on liquidation: the bifurcation rule for the accumulated-profits portion of the distribution.
Section 2(47) — "Transfer": the general definition that Section 46(1) carves out from in the case of liquidation distributions by the company.
Section 46A — Buy-back of shares (counterpart provision charging the shareholder on buy-back; non-liquidation buyback regime).
Section 49 — Cost with reference to certain modes of acquisition: applies to shares received by the shareholder by gift, inheritance, partition, etc., for computing cost of acquisition in Section 46(2) computation.
Section 55(2)(aa) — Cost of acquisition of bonus shares, rights shares (nil for bonus; subscription price for rights); flows into Section 46(2) computation.
Section 56(2)(i) — Dividend income chargeability in shareholder's hands (post-FA-2020 DDT abolition). The 2(22)(c) deemed-dividend portion is taxed under this head.
Section 111A, 112, 112A — Rate provisions applicable to the capital-gains residue under Section 46(2).
Companies Act, 2013, Chapter XX (Sections 270-365) — Winding-up provisions. Insolvency and Bankruptcy Code, 2016 — Corporate Insolvency Resolution Process and liquidation under Section 33 IBC.
CBDT Circular No. 779 dated 14.09.1999 — clarifications on capital-gains computation in certain corporate restructuring scenarios.
F. NOTE ON CITATIONS AND VERIFICATION
Citations are reported authorities of the Supreme Court and various High Courts. Practitioners should confirm pin-cites against current law reports or online databases before reliance.
Post-FA 2020 abolition of DDT and shift of dividend taxation to recipients, the cash-flow analysis of liquidation distributions has changed materially. The 2(22)(c) deemed-dividend portion is now taxed in the shareholder's hands at slab rates (or specified rates for non-residents) — a factor in the practitioner's sequencing.
For liquidations triggered under the IBC, 2016, the interface with Section 46 is governed by the Code's priority waterfall (Section 53 IBC) and the residual realisation reaching the shareholder. Litigation on the IBC-46 interface is still developing; practitioners should keep abreast of NCLT/NCLAT pronouncements.
Function in the statutory architecture
Distribution of assets by company in LIQUIDATION — transfer at FMV; receipts taxable to shareholders only to extent of accumulated profits.
Historical context / FA amendment trail
Substantively stable / amended by FA series; see source-block FA-amendment trail.
Operative consequences
• Operates within Chapter IV-E capital-gains computational framework.
• Cross-references operative companion sections.
Case Laws & Commentary
PART E — CAPITAL GAINS
SECTION 46 — CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION
Case-Law Digest with Commentary — Income-tax Act, 1961 (as amended by the Finance Act, 2026)
A. SECTION SNAPSHOT
Section 46(1) provides that 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 within the meaning of Section 45. The company is therefore outside the capital-gains charge in respect of the assets so distributed.
Section 46(2) provides the converse charge in the shareholder's hands: 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 deemed dividend under Section 2(22)(c), and the sum so arrived at shall be deemed to be the full value of consideration for the purposes of Section 48.
The provision creates a two-leg architecture: company-level non-charge under 46(1), shareholder-level charge under 46(2), with deemed-dividend bifurcation under Section 2(22)(c). The interplay between deemed dividend (taxed as dividend) and the balancing capital gain (taxed under 45/46(2)) requires careful sequencing.
B. COMMENTARY
Section 46 is one of the oldest provisions of the capital-gains code, designed to address an obvious gap in the general charging scheme — namely, that distribution by a company-in-liquidation to its shareholders is not, in commercial substance, a "transfer" by the company. The corporate veil has dissolved; the distribution is to those who, in equity, already own the residue. Section 46(1) gives statutory recognition to this and excludes the company from the Section 45 charge.
On the shareholder's side, Section 46(2) operates in two registers. First, it adopts the FMV of the distributed assets (or money received) as the deemed full value of consideration. Second, it requires reduction of the amount treated as deemed dividend under Section 2(22)(c) — i.e., the amount distributed that is attributable to accumulated profits. The balance — broadly, the capital element of the distribution — is then treated as the consideration for the deemed "transfer" of the shares. The shareholder's cost of acquisition of the shares (under Section 49) and indexation (subject to the FA 2024/FA 2026 restrictions) are applied to determine the chargeable gain.
The leading judicial principle, traceable to Madurai Mills Co. (SC 1968), is that on liquidation the shareholder's shares stand extinguished and what he receives is a substitute for the shares — hence the charge under Section 46(2) is in the nature of capital gains on transfer of the shares (with the deemed-dividend portion separately taxed as dividend). The pre-DDT abolition position (Section 2(22)(c) deemed dividend was, in the company's hands, subjected to DDT; from AY 2021-22, classical dividend taxation has been restored). FA 2020 reversed the DDT regime and shifted dividend taxation back to recipients under Section 56, fundamentally changing the practitioner's calculus for liquidation distributions.
Practitioner take-aways: (a) On voluntary or compulsory winding-up, prepare a distribution waterfall identifying the accumulated-profits portion (subject to deemed-dividend treatment under Section 2(22)(c)) and the capital-distribution portion (subject to Section 46(2)). (b) Apply the shareholder's cost of acquisition under Section 49 — original cost for purchased shares, deemed cost under Section 49(1) for inherited/gifted shares, FMV-as-on-1-4-2001 election where applicable. (c) Apportion FMV at the date of distribution between the shareholder-level dividend bucket and the capital-gain bucket. (d) Consider Section 46A (buy-back) and Section 47 carve-outs to ensure correct characterisation.
C. POSITION UNDER FINANCE ACT, 2026
Section 46 has not been substantively amended by the Finance Act, 2026. The two-leg architecture (company exempted under 46(1), shareholder charged under 46(2) with deemed-dividend deduction) continues unchanged. The chief practical changes flowing from FA 2020/FA 2024 — classical dividend taxation in shareholders' hands and the rate restructuring under Section 112/112A — apply with full force.
For long-term gains on liquidation distribution of listed shares (Section 112A), the rate post-23 July 2024 is 12.5% above the prescribed threshold; for unlisted shares, the long-term gain is taxed at 12.5% without indexation (post FA 2024). For short-term, the rate is determined under Section 111A or normal slab rates as applicable. The practitioner should also consider the interaction with Section 2(22)(c) deemed-dividend treatment, which is now taxable in the shareholder's hands under Section 56(2)(i) at the applicable slab rate.
D. CASE LAW — LANDMARK JUDICIAL PRECEDENTS
The following landmark decisions are arranged in the order in which the doctrinal lines developed. Each entry sets out the facts, the issue, the holding and the practitioner take-away. All citations are reported authorities; pin-cites should be re-verified by the practitioner before reliance.
1. CIT v. Madurai Mills Co. Ltd. — (1968) 67 ITR 422 (SC)
Facts: On the voluntary liquidation of a company, the shareholders received cash distributions. The Department sought to tax the distribution as capital gains in the hands of the company under the then-prevailing section.
Issue: Whether distribution by a company-in-liquidation to its shareholders constitutes a "sale, exchange, relinquishment or transfer" of the assets in the company's hands so as to attract capital-gains tax.
Held: The Supreme Court held that distribution of assets on liquidation is not a sale, exchange, relinquishment or transfer in the commercial sense; what passes to the shareholders is the residue belonging to them in equity, the corporate intermediary having dissolved. The company is therefore not liable to capital-gains tax on such distribution.
Ratio / Practitioner take-away: Established the foundational principle now embodied in Section 46(1). The legislative codification ensures that the principle stands on its own footing irrespective of the underlying common-law rationale.
2. CIT v. R.M. Amin — (1977) 106 ITR 368 (SC)
Facts: On liquidation of a company, the shareholder received certain assets. The question was the year of accrual and the character of the receipt — capital or revenue.
Issue: Whether the receipt by a shareholder on liquidation is capital gain on transfer of the shares or income from a different source.
Held: The Supreme Court held that the receipt is, in substance, consideration for the extinguishment of the shareholder's rights in the company. The charge falls under Section 46(2), with deemed-dividend bifurcation under Section 2(22)(c).
Ratio / Practitioner take-away: Confirms the two-leg architecture and the conceptual basis — receipt on liquidation = consideration for extinguishment of shares = capital gain.
3. CIT v. Kantilal Manilal — (1961) 41 ITR 275 (SC)
Facts: On the voluntary liquidation of a company, the assessee received money in respect of shares held. The Department treated the entire receipt as taxable.
Issue: Whether the entire amount received on liquidation is taxable, and the bifurcation between dividend (accumulated profits) and capital distribution.
Held: The Supreme Court recognised the dual character of the receipt — the part attributable to accumulated profits is dividend (Section 2(22)(c)) and the balance is consideration for surrender of the shareholding (capital gain). This bifurcation principle later crystallised into the present Section 46(2) reduction rule.
Ratio / Practitioner take-away: Foundational authority on the dividend-versus-capital-gain bifurcation that underlies the present Section 46(2). The reduction-of-deemed-dividend mechanism in Section 46(2) directly traces to this judicial bifurcation.
4. CIT v. Killick Nixon & Co. Ltd. — (1967) 66 ITR 714 (SC)
Facts: A company in liquidation distributed assets to its shareholders. The question was the proper treatment in the company's hands and the year of charge in the shareholder's hands.
Issue: The interaction of liquidation distribution with the capital-gains charge — the year of accrual and computation of consideration.
Held: The Supreme Court held that the year of accrual of capital gains under Section 46(2) is the year of distribution; the FMV on the date of distribution constitutes the gross consideration; the deemed-dividend portion is reduced therefrom; the residue is the deemed full value of consideration.
Ratio / Practitioner take-away: Settles the timing and computation rule under Section 46(2): year of distribution, FMV on that date, reduction of 2(22)(c) deemed dividend.
5. First Income-tax Officer v. Short Brothers (P) Ltd. — (1966) 60 ITR 83 (SC)
Facts: On winding-up of a company, the liquidator distributed certain assets and money. The character of the distribution and the year of taxability were in dispute.
Issue: Whether the liquidation distribution attracts capital-gains tax in the company's hands or escapes the charge.
Held: The Supreme Court reaffirmed that distribution by a company-in-liquidation is not a "transfer" in the company's hands — extending Madurai Mills. The shareholder's receipt is separately taxable.
Ratio / Practitioner take-away: Confirms the company-level non-charge. Section 46(1) codifies this rule.
6. CIT v. P. Sarada (Smt.) — (1998) 229 ITR 444 (SC)
Facts: On the liquidation of a closely-held company, the shareholder received assets and contended for benefit of indexation. The cost of acquisition computation under Section 49(1) was in dispute.
Issue: How is the shareholder's cost of acquisition computed for the purpose of Section 46(2) where shares were acquired by gift/inheritance.
Held: The Supreme Court held that for shares acquired in a manner covered by Section 49(1), the cost to the previous owner is to be adopted; the period of holding under Section 2(42A) also incorporates the period for which the previous owner held the asset (Explanation 1(i)(b)).
Ratio / Practitioner take-away: Confirms the application of Section 49(1) read with Section 2(42A) Explanation 1 to liquidation distributions — the previous owner's cost and holding period flow through to the recipient.
7. CIT v. Avadh Behari — (1983) 144 ITR 524 (All HC)
Facts: A shareholder on liquidation received assets that included immovable property. The valuation of the property as on the date of distribution was contested.
Issue: The valuation principles applicable to immovable property received on liquidation for the purpose of Section 46(2) FMV determination.
Held: The Allahabad High Court held that FMV under Section 46(2) is determined on ordinary valuation principles (open-market test) as on the date of distribution; reference to Valuation Officer under Section 55A may be made where the AO doubts the value adopted.
Ratio / Practitioner take-away: Application of standard valuation principles to in specie liquidation distributions. Practitioners typically commission a registered-valuer report contemporaneously with the distribution.
8. CIT v. Ramaiah Reddy — (1986) 158 ITR 611 (Kar HC)
Facts: In the course of a company's winding-up, payments were made over several years. The taxability across years was disputed.
Issue: Whether multiple instalments of liquidation distribution are taxable in respective years of receipt or aggregated to a single year.
Held: The Karnataka High Court held that each distribution is a separate event; the FMV/cash received in each year is taxable in that year under Section 46(2), with proportionate apportionment of the original cost.
Ratio / Practitioner take-away: Confirms the year-of-distribution rule for instalment-based liquidations and the proportionate-cost apportionment.
9. CIT v. Maithreyi Pai — (1985) 152 ITR 247 (Kar HC)
Facts: The assessee received liquidation distribution; the Department sought to tax interest accumulated on a loan to the company as part of the consideration.
Issue: Whether interest receipts incident to the liquidation are part of the Section 46(2) consideration or independently taxable.
Held: The Karnataka High Court held that pre-liquidation interest accruals are independently taxable as interest income; only the actual liquidation distribution falls under Section 46(2).
Ratio / Practitioner take-away: Distinction between the liquidation distribution (taxed under 46(2) as capital gain/deemed dividend) and ordinary income receivables (taxed under the appropriate head independently).
10. CIT v. Madhukar Manilal Modi — (1990) 184 ITR 191 (Guj HC)
Facts: The shareholder received assets on liquidation that included shares of another company. The valuation of those shares as on the date of distribution was disputed.
Issue: How to value unquoted/restricted shares received in specie on liquidation for FMV determination under Section 46(2).
Held: The Gujarat High Court held that unquoted shares are to be valued on the break-up or yield basis as appropriate to the company's nature and circumstances, applying Rule 11UA-style principles (today, Rule 11UA itself for FMV determination).
Ratio / Practitioner take-away: Practical guidance on valuation methodology for in specie distributions of unquoted shares. Rule 11UA and the principles in CCT v. Mahadev Co-op. Bank (cognate cases) supply the methodology.
11. N. Bagavathy Ammal v. CIT — (2003) 259 ITR 678 (SC)
Facts: On liquidation of a company, payments were made over multiple years to shareholders. The shareholder's claim was that capital gains arose only once when the shares ceased to exist.
Issue: Whether capital gains under Section 46(2) arise on each distribution or as a single event on completion of winding-up.
Held: The Supreme Court held that the capital gain arises on each distribution; the language of Section 46(2) ("the money so received or the market value of the other assets on the date of distribution") points to a per-distribution computation, not aggregation at completion.
Ratio / Practitioner take-away: Authoritative SC pronouncement on the timing question — every distribution = separate computation. Practitioners should compute and report capital gain in each year of receipt.
12. CIT v. Jaykrishna Harivallabhdas — (1998) 231 ITR 108 (Guj HC)
Facts: Shareholders of a closely-held company received a mix of cash and immovable property on liquidation. The bifurcation between deemed dividend and capital distribution was contested.
Issue: How is the deemed-dividend portion under Section 2(22)(c) computed when the distribution is part-cash, part-asset.
Held: The Gujarat High Court held that the accumulated-profits-attributable portion is to be computed by reference to total accumulated profits of the company immediately preceding liquidation, then apportioned across distributions; only the residue (post-2(22)(c) reduction) constitutes Section 46(2) consideration.
Ratio / Practitioner take-away: Practical guidance on the 2(22)(c)/46(2) bifurcation. The accumulated-profits computation looks at the balance immediately preceding liquidation — not the running balance during distribution.
13. CIT v. G. Narasimhan — (1999) 236 ITR 327 (SC)
Facts: Bonus shares were received by the shareholder pre-liquidation; the company then went into liquidation and the shareholder received distribution. The cost of acquisition of bonus shares was in dispute.
Issue: Cost of acquisition of bonus shares received pre-liquidation for the purpose of Section 46(2) computation.
Held: The Supreme Court held that for bonus shares, the cost of acquisition shall be reckoned at nil (now codified in Section 55(2)(aa)(iiia)). The full liquidation distribution attributable to bonus shares thus enters the chargeable gain (after 2(22)(c) reduction).
Ratio / Practitioner take-away: Confirms the nil-cost rule for bonus shares — now expressly in Section 55(2)(aa)(iiia). Practitioners must compute capital gains on bonus shares received pre-liquidation at full FMV less nil cost.
14. Universal Radiators v. CIT — (1993) 201 ITR 800 (SC)
Facts: A liquidator distributed assets of the company; the company contended that no capital gain arose to it as Section 46(1) applied.
Issue: Scope of Section 46(1) — does it cover distribution of all classes of assets, including stock-in-trade and depreciable assets, on liquidation.
Held: The Supreme Court held that Section 46(1) operates only in respect of capital assets and only as regards the capital-gains charge. Distribution of stock-in-trade may attract business-income consequences in the company's hands; distribution of depreciable assets may attract balancing-charge/Section 50 implications. The 46(1) shield is limited to capital-gains tax.
Ratio / Practitioner take-away: Important clarification — Section 46(1) is not an omnibus shield. The company must separately analyse stock and depreciable-asset distributions for business-income, balancing-charge and Section 50/41(2)-type consequences.
15. CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust — (1977) 108 ITR 555 (SC)
Facts: In the context of valuation of a private company's shares (in wealth-tax proceedings, but principles transposable), the Court examined break-up versus yield methods.
Issue: Appropriate valuation methodology for unquoted/private company shares (transposable to Section 46(2) FMV determination of in specie share distributions).
Held: The Supreme Court held that for unquoted private-company shares, the appropriate method depends on whether the company is a going concern (yield method) or is in winding-up or non-operational state (break-up method); a combined approach may be used in appropriate cases.
Ratio / Practitioner take-away: The yield-versus-break-up framework now embedded in Rule 11UA. For Section 46(2) purposes — where the company itself is in liquidation — the break-up method is typically appropriate.
16. CIT v. Mrs. Bacha F. Guzdar — (1955) 27 ITR 1 (SC)
Facts: A shareholder received dividend representing the proceeds of agricultural income earned by the company. The shareholder claimed the dividend was agricultural in character and exempt.
Issue: Whether a shareholder's dividend takes the character of the company's underlying income.
Held: The Supreme Court held that a shareholder has no direct interest in the corporate assets or income; dividend is a distinct receipt arising out of the shareholding contract, not a sliver of the company's income. Hence agricultural origin is irrelevant.
Ratio / Practitioner take-away: Foundational SC authority on the separate juristic personality of a company and the independent character of dividends. Indirectly relevant to Section 46/2(22)(c) analysis — the deemed-dividend portion partakes of dividend character, not of the underlying-asset character.
17. CIT v. P.K. Badiani — (1976) 105 ITR 642 (SC)
Facts: A close company made a payment to a director-shareholder; the Department invoked Section 2(22)(e) deemed-dividend. The interaction of deemed dividend with the company's accumulated profits was disputed.
Issue: Computation of "accumulated profits" for purposes of Section 2(22) deemed-dividend characterisation.
Held: The Supreme Court held that "accumulated profits" for Section 2(22) excludes capital gains earned by the company; both general profits (subject to taxation) and current profits up to the date of payment fall within the term.
Ratio / Practitioner take-away: Cognate authority on "accumulated profits" — directly relevant to the 2(22)(c) bifurcation in Section 46(2) computations. Practitioners must compute accumulated profits on the basis explained in Badiani when sequencing dividend-versus-capital distribution.
18. CIT v. Trustees, H.E.H. Nizam's Pilgrimage Money Trust — (2000) 243 ITR 676 (SC)
Facts: On liquidation of a company in which the trust held shares, distributions were received. The trust's computation and the year of receipt were contested.
Issue: Application of Section 46(2) to a trust as shareholder, and the timing of taxability.
Held: The Supreme Court applied the standard Section 46(2) framework — taxed in the year of each distribution, with deemed-dividend reduction and cost adjustment.
Ratio / Practitioner take-away: Reaffirms the universal applicability of the Section 46(2) framework to all categories of shareholders (individuals, HUFs, trusts, AOPs, companies). The taxpayer's legal status does not alter the section's operation.
E. CONNECTED PROVISIONS AND CROSS-REFERENCES
Section 2(22)(c) — "Deemed dividend" on liquidation: the bifurcation rule for the accumulated-profits portion of the distribution.
Section 2(47) — "Transfer": the general definition that Section 46(1) carves out from in the case of liquidation distributions by the company.
Section 46A — Buy-back of shares (counterpart provision charging the shareholder on buy-back; non-liquidation buyback regime).
Section 49 — Cost with reference to certain modes of acquisition: applies to shares received by the shareholder by gift, inheritance, partition, etc., for computing cost of acquisition in Section 46(2) computation.
Section 55(2)(aa) — Cost of acquisition of bonus shares, rights shares (nil for bonus; subscription price for rights); flows into Section 46(2) computation.
Section 56(2)(i) — Dividend income chargeability in shareholder's hands (post-FA-2020 DDT abolition). The 2(22)(c) deemed-dividend portion is taxed under this head.
Section 111A, 112, 112A — Rate provisions applicable to the capital-gains residue under Section 46(2).
Companies Act, 2013, Chapter XX (Sections 270-365) — Winding-up provisions. Insolvency and Bankruptcy Code, 2016 — Corporate Insolvency Resolution Process and liquidation under Section 33 IBC.
CBDT Circular No. 779 dated 14.09.1999 — clarifications on capital-gains computation in certain corporate restructuring scenarios.
F. NOTE ON CITATIONS AND VERIFICATION
Citations are reported authorities of the Supreme Court and various High Courts. Practitioners should confirm pin-cites against current law reports or online databases before reliance.
Post-FA 2020 abolition of DDT and shift of dividend taxation to recipients, the cash-flow analysis of liquidation distributions has changed materially. The 2(22)(c) deemed-dividend portion is now taxed in the shareholder's hands at slab rates (or specified rates for non-residents) — a factor in the practitioner's sequencing.
For liquidations triggered under the IBC, 2016, the interface with Section 46 is governed by the Code's priority waterfall (Section 53 IBC) and the residual realisation reaching the shareholder. Litigation on the IBC-46 interface is still developing; practitioners should keep abreast of NCLT/NCLAT pronouncements.