2011 (7) TMI 378 - HC - Income Tax

Full value u/s 46(2) - Calculation of Asset value - shareholder on the liquidation of Company receives assets from the Company with the liabilities attached should be taken full value of the asset as reduced by the amount paid by the shareholder for discharging the liability - Appeal dismissed.

Summary

Issues: Interpretation of Section 46(2) of the Income Tax Act, 1961 regarding the valuation of assets distributed to shareholders during company liquidation.

Analysis:
1. The main issue in this judgment revolves around the interpretation of Section 46(2) of the Income Tax Act, 1961, specifically concerning the valuation of assets distributed to shareholders during the liquidation of a company. The question raised by the Revenue was whether the value of an asset received by a shareholder, along with the liabilities attached to it, should be considered at the fair market value or the fair market value reduced by the liabilities. The Revenue argued that the expression "full value" in Section 46(2) implies that the asset's value should be taken into account without excluding any attached liabilities.

2. The Income Tax Appellate Tribunal found that the liquidator of the Company distributed assets to shareholders with liabilities attached, as the Company did not have sufficient funds to discharge these liabilities. The Tribunal held that the value of the asset for the purposes of Section 46(2) should be the full value reduced by the amount paid by the shareholder to discharge the attached liability. It was noted that the shareholders did indeed discharge the liabilities attached to the asset, and the decision of the Tribunal in this regard was upheld.

3. The Court concurred with the Tribunal's findings and held that where an asset of a Company in liquidation is distributed to a shareholder with a specific liability attached to it, the value of the asset for the purposes of Section 46(2) should be the full value reduced by the amount paid by the shareholder to discharge the liability. Consequently, the appeals brought by the Revenue were dismissed as lacking merit, with no order as to costs.

In conclusion, the judgment clarifies the valuation methodology for assets distributed to shareholders during company liquidation under Section 46(2) of the Income Tax Act, 1961, emphasizing that the value should consider the full value of the asset reduced by the amount paid by the shareholder to discharge any attached liabilities.