Capital gains - Distribution of assets by companies in liquidation: Clause 68 of the Income Tax Bill, 2025 vs. Section 46 of the Income-tax Act, 1961

Clause 68 Capital gains on distribution of assets by companies in liquidation.

Income Tax Bill, 2025

Introduction

Clause 68 of the Income Tax Bill, 2025, and Section 46 of the Income-tax Act, 1961, both address the taxation of capital gains arising from the distribution of assets by companies in liquidation. These provisions are significant in the context of taxation as they delineate the circumstances under which such distributions are considered transfers and how they are taxed under the head of "Capital gains." This article provides a detailed analysis of Clause 68 and compares it with the existing Section 46 to highlight any changes or continuities in the legislative approach to taxing capital gains in the context of company liquidation.

Objective and Purpose

The primary objective of both Clause 68 and Section 46 is to clarify the tax implications of asset distribution during company liquidation. Historically, the taxation of such distributions has been complex due to the dual nature of the assets being potentially considered both as capital gains and dividends. The legislative intent is to ensure that shareholders are taxed appropriately on the actual economic gain realized from such distributions, while also preventing the double taxation of the same economic benefit.

Detailed Analysis

Clause 68 of the Income Tax Bill, 2025

Clause 68(1) states that the distribution of assets by a company on its liquidation shall not be regarded as a transfer by the company for the purposes of Section 67. This provision aligns with the principle that liquidation distributions are not typical transfers since they are a return of capital to shareholders rather than a sale or exchange. Clause 68(2) specifies that shareholders receiving money or other assets during liquidation will be chargeable to income tax under "Capital gains." The calculation of this gain is based on the market value of the assets received, reduced by any amount assessed as a dividend as per Section (clause) 2(40)(c). The resulting figure is deemed the full value of consideration for the purposes of Section (clause) 72.

Section 46 of the Income-tax Act, 1961

Section 46(1) mirrors Clause 68(1) by stating that asset distribution during liquidation is not considered a transfer for the purposes of Section 45. This consistency reflects a long-standing approach to treating such distributions as non-transfers for the company involved. Section 46(2) similarly charges shareholders to income tax under "Capital gains" for money or assets received during liquidation. The calculation method is akin to Clause 68(2), with the gain determined by the market value of the assets, reduced by amounts assessed as dividends u/s 2(22)(c), and deemed the full value of consideration for Section 48 purposes.

Comparative Analysis

The primary difference between Clause 68 and Section 46 lies in the specific sections referenced for the calculation of capital gains. Clause 68 refers to Section (Clause) 72, while Section 46 refers to Section 48. This change may reflect a broader restructuring of the Income Tax Act in the 2025 Bill, potentially altering the mechanics of capital gains calculation. However, the fundamental principles and treatment of liquidation distributions remain consistent between the two provisions.

Practical Implications

For shareholders, both Clause 68 and Section 46 imply a clear tax obligation on gains realized from liquidation distributions. Companies undergoing liquidation must ensure accurate valuation of distributed assets to facilitate proper tax reporting by shareholders. The provisions also emphasize the importance of distinguishing between capital gains and dividend income to avoid potential compliance issues.

Conclusion

Clause 68 of the Income Tax Bill, 2025, and Section 46 of the Income-tax Act, 1961, reflect a consistent legislative approach to taxing capital gains arising from company liquidation. While the specific references for calculating gains differ, the core principles remain unchanged, ensuring continuity in tax treatment for shareholders. Future reforms may further refine these provisions, particularly in the context of a broader overhaul of the Income Tax Act.

Full Text:

Clause 68 Capital gains on distribution of assets by companies in liquidation.

Dated: 11-3-2025