When Distributions are to be made during Liquidation, the same can be taxable in the form of Deemed Dividend in the hands of Contributory or as Capital Gains.
Section 22 (2) (c) states that dividend includes:
“Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not.”
but “dividend” does not include—
– a distribution made in accordance with sub-clause (c) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets.
– a distribution made in accordance with sub-clause (c) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders.
– Accumulated profits do not include capital gains earned by the company.
Fair Market Value of the asset shall be taken for the purpose of computing the deemed dividend u/s 2(22)(c). Section 2(22B) defines FMV in relation to a capital asset to mean the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date. Where FMV is not ascertainable on the basis of such hypothetical sale, it would be determined in accordance with the Rules.
Earlier, any domestic company which had declared dividends on or before March 31, 2020, were required to pay DDT at the rate of 15% on the gross amount of dividends as mandated under Section 115-O. However, the liability to pay the tax on dividend has now been shifted from the Company to the shareholder w.e.f. from April 01, 2020.
Section 2 (22) (c) uses the terms “to the extent to which the distribution is attributable to the accumulated profits”. Thus, where a company is in liquidation and if there are no accumulated profits available with the company, then the company will not be liable to dividend distribution tax.
BALANCE SHEET of a Company:
| Liabilities | Amount (INR) |
| Share Capital | 1,00,000 |
| Reserves and Surplus | 1,00,000 |
| Assets | Amount (INR) |
| Fixed Assets* | 1,40,000 |
| Cash and Bank balances | 60,000 |
*Fair Market Value – INR 20,000.
As per Section 2 (22) (c) the distribution of assets, being cash, is treated as deemed dividend, to the extent of accumulated profits. In the given case, assets distributed amounts to INR 80,000 (assuming the Fixed Assets was sold at INR 20,000) and accumulated profit stands at INR 1,00,000. Thus, deemed dividend would amount to INR 80,000 taxable in hands of the shareholders.
Now as per Section 46, the transfer of assets, would be taxable in the hands of the shareholder as capital gains, where such transfer of assets is over and above the deemed dividend been computed u/s 2(22) (c). In the given case, the money received by the shareholder and deemed dividend amounts to INR 80,000, thus there is no surplus to calculate capital gain.
Had the company distributed certain assets, the fair market value of which would have been INR 500,000, the capital gains would be-
Full value of consideration:
Monetary receipt 80,000
Add: Fair Market Value of Asset 5,00,000
Less: Deemed Dividend 80,000
5,00,000
Less: Cost of Acquisition 1,00,000
Capital Gain 4,00,000
To know more on taxability of Capital Gains, please click here.
Whether any taxes to be charged while making repatriation of balance share capital after liquidation.
Dear Reader,
If it is limited to return of Capital, then there is no need to charge any taxes while making repatriation of balance share capital.
– Accumulated profits do not include capital gains earned by the company. That means the accumulated profit includes the Capital Gain earned by the company – 5 years back (can be identified) and is not treated as deemed a dividend in the hands of the shareholders.
Dear Reader,
Please note that capital gain will be excluded for the determination of deemed dividend as per the provisions of the Income Tax Act, 1961.