## Capital Gains on Distribution of Assets by Companies in Liquidation [Section 46]
When a company is liquidated and distributes its assets, the tax treatment splits between the company and its shareholders.
### In the hands of the company [Section 46(1)]
- The distribution of assets to shareholders is not regarded as a transfer.
- Therefore no capital gains tax liability arises on the company.
- Caveat: If the company sells the assets and distributes the proceeds, the exemption under Sec 46(1) does not apply (the sale is a normal transfer taxable in the company's hands).
### In the hands of the shareholders [Section 46(2)]
The amount received is split into two components:
1. Deemed dividend [Sec 2(22)(c)]: The portion of the distribution attributable to accumulated profits of the company is taxed as deemed dividend under "Income from Other Sources."
2. Capital gains: The balance is computed as:
FVC = (Money received + FMV of assets distributed) − Deemed dividend u/s 2(22)(c)
Capital Gains = FVC − COA
- COA = cost of purchasing the shares in lieu of which the money/assets are received.
- Whether LTCG or STCG depends on the period of holding of the shares by the shareholder.
### Subsequent sale of the asset received
When the shareholder later transfers the asset received on liquidation, its COA = FMV of the asset on the date of distribution.
Memory hook: On liquidation the company pays no tax (46(1)), but the shareholder is taxed twice over: first as deemed dividend on the accumulated-profits slice, then capital gains on the rest after removing that deemed dividend from the FVC.