In a company liquidation, the distribution of assets to shareholders is treated as the “transfer” or “realization” of the capital asset (i.e. the shares held). Although the process of winding up is distinct from a typical share sale, the Income-tax Act, 1961 treats the receipt of assets on liquidation in a manner similar to a sale or exchange.

Relevant Sections and Concepts:

1. Capital Asset and Transfer:

   • Section 2(14) of the Act defines “capital asset” without any qualification on the mode of holding. Shares, irrespective of the holding mode, are treated as capital assets.

   • Section 45 and Section 48 set out the framework for computing capital gains on the transfer of a capital asset. In a liquidation, the distribution is considered as full or partial consideration received in exchange for the shares.

2. Computation of Capital Gains on Liquidation:

   • Full Value of Consideration:
     In liquidation, the “consideration” is the aggregate of the assets distributed (which may be in cash or kind) by the company to the shareholder.

   • Cost of Acquisition:
     The cost of acquisition of the shares is that which was initially paid (or deemed to have been paid) on acquiring those shares.

     Section 48 specifies that capital gain is the difference between the “full value of the consideration received” and the “cost of acquisition (plus any expenses on transfer).”

3. Holding Period and Nature of Gain:

   • Under Section 2(42A), the holding period of shares is considered from the date of purchase to the date of liquidation distribution.

   • Depending on whether the holding period meets the thresholds (more than 12 months for listed shares or more than 24 months for unlisted shares), the resulting gain will be classified as either short-term or long-term. This classification determines the applicable tax rates.

Step-by-Step Computation Method:

Step 1: Determine the Total Consideration Received

The total consideration is the aggregate market value of all assets (cash and non-cash) received by the shareholder in the liquidation process.

Example: If you receive cash of ₹80,000 and assets (e.g., property, investments) valued at ₹20,000, the total consideration is ₹1,00,000.

Step 2: Ascertain the Cost of Acquisition

This is the original amount paid (or the deemed cost) for the shares acquired in the company.

Example: Suppose your cost of acquisition for these shares was ₹70,000.

Step 3: Compute the Capital Gain

Using the formula from Section 48:

Capital Gain = (Total Consideration Received) – (Cost of Acquisition + Expenses on Transfer)
If there are no additional transfer expenses: Capital Gain = ₹1,00,000 – ₹70,000 = ₹30,000

Step 4: Adjust for Holding Period and Tax Rates

• For Listed Shares:

  • Long-Term Capital Gains (LTCG) apply if the shares are held for more than 12 months.

  • Short-Term Capital Gains (STCG) apply if held for 12 months or less.

• For Unlisted Shares:

  • The holding period threshold is 24 months.

Indexation benefits (if applicable) may be considered in the case of long-term capital gains, thereby adjusting the cost of acquisition to reflect inflation.

No, due to Section 10(34A) of the Income-tax Act:

“Any income arising to an assessee, being a shareholder, on account of buy-back of shares (not being listed on a recognised stock exchange) by the company as referred to in section 115QA, shall be exempt.”

Thus, no capital gain tax is payable by the shareholder if buy-back is covered under Section 115QA.

As per Section 115QA(1):

“A domestic company, in case of buy-back of shares from a shareholder, shall be liable to pay additional income-tax at the rate of 20% (plus applicable surcharge and cess) on the distributed income.”

As per Section 47(vib) of the Income-tax Act, 1961:

“Any transfer of a capital asset in a demerger by the demerged company to the resulting company shall not be regarded as a transfer if the resulting company is an Indian company.”

Similerly Section 47(vid) says that:“Any transfer or issue of shares by the resulting company to the shareholders of the demerged company in consideration of the demerger shall not be regarded as a transfer.”

Hence, When shares are received under a demerger, no capital gain is triggered at the time of receipt. The transaction is not treated as a transfer, and hence not taxed at that point.

Tax is levied only when the shareholder transfers (sells) the shares allotted under the scheme of demerger.

​Yes, under the Indian Income Tax Act, certain insurance claim receipts are treated as capital gains and are taxable accordingly. Here’s a detailed breakdown:

Taxability of Insurance Claims under Section 45(1A)

Section 45(1A) of the Income Tax Act, 1961, addresses the tax implications of insurance compensation received due to the damage or destruction of a capital asset. This section was introduced to tax such receipts as capital gains, even though there’s no actual transfer of the asset.

✅ Applicability Conditions:

1. The insurance compensation is received due to the damage or destruction of a capital asset (e.g., building, machinery, land).​

2. The cause of damage or destruction is one of the following:​

   • Natural calamities (e.g., flood, cyclone, earthquake)

   • Riot or civil disturbance​

   • Accidental fire or explosion

   • Action by an enemy or measures taken to combat such action​

If both conditions are met, the insurance compensation is deemed as consideration received for the transfer of the asset, and capital gains tax is applicable. ​