## Distribution of Capital Assets on Liquidation [Section 46]
When a company goes into liquidation and distributes its assets (cash or other assets) to shareholders, the tax treatment differs between the company and the shareholder.
### In the Hands of the Company
Not Taxable as transfer — Section 46(1) specifically provides that distribution on liquidation is not a transfer in the hands of the company.
### In the Hands of the Shareholder
The shareholder is taxed under capital gains computed as follows:
Particulars
Amount
FMV of assets received + cash received
XX
(-) Deemed Dividend u/s 2(22)(c) — Shareholder's share of accumulated profits of the company
(XX)
Sale Consideration for Capital Gains
XX
(-) Cost of Acquisition (Purchase price of shares)
(XX)
Capital Gain
XX
### Two Heads of Income
1. Income from Other Sources (IFOS): Deemed dividend portion u/s 2(22)(c) — taxed as dividend
2. Capital Gains: Balance amount (after reducing deemed dividend) less COA
Worked example
### Example 1
Example: Mr. D holds 1,000 shares of XYZ Ltd. purchased at ₹100/share (COA ₹1,00,000). On liquidation, he receives cash ₹3,00,000. Accumulated profits attributable to him = ₹1,20,000.
Deemed Dividend (IFOS): ₹1,20,000
Sale Consideration for CG: ₹3,00,000 − ₹1,20,000 = ₹1,80,000
Capital Gain: ₹1,80,000 − ₹1,00,000 = ₹80,000
⚠️ Common exam mistakes
Treating the entire amount received as either fully capital gain or fully dividend — it must be split.
Not reducing accumulated profits portion from sale consideration.
Treating distribution as taxable transfer in the company's hands — it is not.
Bare-Act text Section 46 · Income-tax Act, 1961 · click to expand
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. 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 purposes of section 48.