Section 68 — Liquidation Distribution | ITA 2025

Section 68 — DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION

Section 68 is the substantive equivalent of 1961 s. 46. Sub-section (1) — distribution of assets by a company in liquidation to its shareholders is NOT a transfer at the company's level (so no CG charge on the company). Sub-section (2) — at the shareholder level, the distribution IS a transfer: shareholder is taxed under Capital Gains on (money received + market-value of other assets received) MINUS amount assessed as 'dividend' u/s 2(40)(c). The s. 2(40)(c) carve-out replicates the 1961 s. 2(22)(c) deemed-dividend portion (accumulated profits up to date of liquidation).

Statutory text — Income-tax Act, 2025

Marginal note — Capital gains on distribution of assets by companies in liquidation

(1) Irrespective of anything contained in section 67, where the assets of a company are distributed to its shareholders on its liquidation, such distribu- tion shall not be regarded as a transfer by the company for the purposes of the said section.

(2) If a shareholder, on the liquidation of a company, receives any money or other assets from the company, then,—

(a) such shareholder 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 section 2(40)(c); and

(b) the sum so arrived at shall be deemed to be the full value of the consid- eration for the purposes of section 72.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 68	INCOME-TAX ACT, 1961 — s. 46
s. 68(1) — no transfer at company level	1961 s. 46(1)
s. 68(2) — shareholder taxed; deemed-dividend (s. 2(40)(c)) reduced	1961 s. 46(2) read with s. 2(22)(c)

STATUTORY ARCHITECTURE

The provision splits liquidation distribution into TWO tax events at the shareholder level: (a) deemed-dividend portion (to the extent of accumulated profits) — taxed under Other Sources u/s 92 and chargeable to dividend-rate. (b) capital-gains portion (excess over deemed dividend / accumulated profits) — taxed under Capital Gains u/s 67. Cost of acquisition for the CG computation is the original cost of shares (s. 72).

CASE LAW

CIT v. Madhubhai Amthalal Gandhi (SC) — distribution in specie of assets to shareholders is taxed at MV-on-distribution-date; cost-base for shareholder going forward = MV. Kartikeya V. Sarabhai v. CIT (SC) — reduction of share capital is a 'transfer' for CG purposes; 1961 s. 46(2) applies. CIT v. G. Narasimhan (SC) — cost-of-acquisition for shares received in lieu of redeemed preference / equity is FMV at allotment.

PLANNING NOTES

(i) For voluntary-liquidation under IBC / Companies Act, segregate accumulated-profits-based dividend portion from CG portion in the liquidator's distribution statement. (ii) For shareholder, maintain cost-of-acquisition records for original shares — particularly post-multiple-bonus / split situations. (iii) Liquidation distributions in kind (in specie) — value at MV-on-distribution-date. Subsequent sale by shareholder — fresh CG event with cost-base = MV-on-distribution. (iv) Note interaction with 1961 s. 46A (now s. 69) buyback regime — different mechanism for going-concern repurchase.

CROSS-REFERENCES

Section 67 — Capital Gains charge.
Section 69 — Buyback distribution (parallel regime for going concerns).
Section 2(40)(c) — Deemed dividend on liquidation.
Section 92 — Other Sources head (dividend portion).
Insolvency and Bankruptcy Code, 2016 — Liquidation procedure.

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