Under Section 17(2)(vi) of the Income-tax Act, 1961:

“Value of any specified security or sweat equity shares allotted or transferred by the employer to the employee either free of cost or at concessional rate” is treated as perquisite, taxable as income under the head ‘Salaries’ in the year of exercise.

Valuation Rule (Rule 3(8)):

For listed shares → FMV on date of exercise on stock exchange
For unlisted shares → FMV as per merchant banker’s valuation on date of exercise

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.