Section 46 of the IT Act deals with ‘capital gains on distribution of assets by companies in liquidation’. As per clause (2) of Section 46 of the IT Act, where a shareholder of a company receives any money or other assets from the company upon liquidation, the money/ assets so received, would be subject to capital gains in the hands of such shareholder, as reduced by amount assessed as dividends under Section 2(22)(c) of the IT Act. Section 2(22)(c) of the IT Act 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 capitalised or not’ within the definition of ‘dividend’.

An issue that arises often is whether the provisions of Section 46 of the IT Act would apply in case of liquidation of a foreign subsidiary of an Indian company. Incidentally, this question was dealt with by the Supreme Court^[1], where the Court, after considering the definition of the term ‘company’ under Section 2(17) of the IT Act, as applicable then, held that the provisions of Section 46 of the IT Act would not apply in case of liquidation of a foreign company. However, the decision of the Court pertained to Assessment Year 1962-63, during which the provisions of Section 2(17) of the IT Act provided that ‘company’ means ‘(i) any Indian company, or (ii) any association, whether incorporated or not and whether Indian or non-Indian, which is or was assessable or was assessed under the Indian Income-tax Act, 1922 (XI of 1922), as a company for the assessment year commencing on the 1st day of April, 1947, or which is declared by general or special order of the Board to be a company for the purposes of this Act.’ In other words, the very definition of the term ‘company’ under Section 2(17) of the IT Act did not include a foreign body corporate or company.

However, the definition of the term ‘company’ as appearing in Section 2(17) of the IT Act, has been amended since to expressly include ‘any body corporate incorporated by or under the laws of a country outside India’.^[2] Therefore, an offshore subsidiary of an Indian company would qualify as a ‘company’ for the purposes of Section 46 of the IT Act. As a result, any receipt of money or assets by the Indian parent upon liquidation of the offshore subsidiary, in our view, would be taxable in accordance with Section 46(2) of the IT Act.

[1] CIT v. R.M. Amin, [1977] 106 ITR 368 (Supreme Court).

[2] Section 2(17) of the IT Act, as amended by Finance (No. 2) Act, 1971, w.e.f. April 1, 1971.