Section 46 of the Income Tax Act deals with Assets Distribution by a Company during Liquidation. Section 46 is a provision that does not withstand with Section 45 of the Income Tax Act. Section 46 is a section of very wider scope and therefore there are hundreds of cases laws running in the courts due to various interpretations. Here, we will cover the complete analysis of Section 46, Various important judgements from Section 46 of Income Tax Act, Conditions laid down under section 46.
Scope of Section 46 of the Income Tax
Section 46(1) provides that 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. This sub-section applies only to the distribution of capital assets in specie by a company in liquidation among its shareholders.
Shareholders – Section 46 of the Income Tax
Capital gains made by the liquidator of a company on sale of the company’s assets with the object of distributing the sale proceeds among shareholders, are asessable in the hands of the company [Kannan Rice Mills Ltd. v. C.I.T. (1954) 26 ITR 351].
Further analysis of this sub-section would reveal that if the distribution is otherwise than on liquidation of the company, this section cannot be attracted.
Moreover, the distribution of assets should have been made to the shareholders of the company. “Shareholders” would mean registered shareholders only and not the beneficial owners of shares [Howrah Trading Co. Ltd. v. C.I.T. (1959) 36 ITR 215 (S.C.)].
Sub Section 2 – Section 46 of the Income Tax
Sub-section (2) of Section 46 provides that 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 purpose of Section 48.
But for this sub-section, any cash or other assets received by a shareholder on liquidation of the company would not be assessable to tax as capital gains. [C.I.T. v. Chimanlal B. Parikh (1973) 92 ITR 59].
Wider Scope – Section 46 of the Income Tax
It is once again emphasised that but for the enlarged scope of the definition of the term ‘transfer’ in Section 2(47) and Section 46(2) of the Income-tax Act, 1961, the money received by a shareholder from the company on liquidation would not be brought to tax, as the money received by him represents only satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to the sale, exchange, relinquishment or other transfer of his shares [C.I.T. v. Madurai Mills Company Ltd. (1973) 89 ITR 45 (S.C.)].
Thus, the distributed assets and/or moneys which are, as a matter of fact not a consideration for ‘transfer’ are deemed, under Section 46(2), to be capital gains chargeable to tax.