Taxpublishers.in - Monday Corner Answer to the Quiz for the week (01 Jul 2024)

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Quiz for the week (01 Jul 2024): Bernard (P) Ltd is engaged in processing of textile goods. It has authorised capital of Rs.100 lakhs and paid-up capital of Rs.50 lakhs. The business is slowing down due to environment and pollution control measures. It has reserves and surplus of Rs.30 lakhs as on 31st March,2024. The directors of the company decided to go for voluntary winding up after realising the receivables and the machineries were fully exploited to their useful life. Assume that the company would accumulate another Rs.20 lakhs to its reserves and surplus. One shareholder having 25% of equity shares in the company wants to know the tax consequence of getting money on winding up of the company. Can the company issue bonus shares now to reduce the its tax liability or that of the shareholders at the time of winding up? Decide. Best Answer : The query posed shows that the company wants to take some measures now itself as it contemplates its voluntary winding up at a later date in near future. The maximum accumulation by way of reserves and surplus would be Rs.50 lakhs at the time of liquidation after exploiting all the machineries to their useful life. The company contemplates issuing bonus shares to reduce its tax liability or that of the shareholders at the time of winding up. Firstly, issue of bonus shares will not impact the company with any tax liability. However, as per section 2(22)(c) 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 would be regarded as dividend. Therefore, the issue of bonus shares and subsequent distribution to the shareholders will not provide any benefit or relief to the company. The amount attributable to accumulated profits, whether capitalised or not would be regarded as dividend and tax deduction at source under section 194 would be attracted and the TDS shall be @10% where it exceeds Rs.5,000 per shareholder. As regards the shareholders, issue of bonus shares and transfer of those bonus shares presuming it to be before liquidation will not be of any benefit as the cost of acquisition of the bonus shares would be taken as `nil’. The sale consideration hence would be chargeable to tax. Since it is an unlisted share, the capital gain presuming it to be long-term would be chargeable to income-tax @20%. The shareholder will not get benefitted by issue of bonus shares by the company. Assuming there is no proposal to issue bonus shares then reference is invited to section 46. Where the assets of the company are distributed to shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45. Hence, there would be no tax implication in the hands of the company when the assets are distributed to the shareholders on liquidation. Where on the liquidation of a company if a shareholder receives money or other assets from the company, he shall be chargeable to income-tax under the head ‘capital gains’ in respect of the money so received or the market value of the assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of section 2(22)(c) and the resultant sum so arrived at shall be the full value of consideration for the purposes of section 48. Thus, if a shareholder receives assets on liquidation, the company is not liable to tax in respect of such asset distribution. The shareholder however must consider the dividend portion which is quantified with reference to section 2(22)(c) and is to be excluded and the balance of the value of asset must be compared with the cost of acquisition of shares (other than bonus shares) to compute the capital gain thereon.

Quiz for the week (01 Jul 2024):

Bernard (P) Ltd is engaged in processing of textile goods. It has authorised capital of Rs.100 lakhs and paid-up capital of Rs.50 lakhs. The business is slowing down due to environment and pollution control measures. It has reserves and surplus of Rs.30 lakhs as on 31st March,2024. The directors of the company decided to go for voluntary winding up after realising the receivables and the machineries were fully exploited to their useful life. Assume that the company would accumulate another Rs.20 lakhs to its reserves and surplus.

One shareholder having 25% of equity shares in the company wants to know the tax consequence of getting money on winding up of the company. Can the company issue bonus shares now to reduce the its tax liability or that of the shareholders at the time of winding up? Decide.

Best Answer :

The query posed shows that the company wants to take some measures now itself as it contemplates its voluntary winding up at a later date in near future. The maximum accumulation by way of reserves and surplus would be Rs.50 lakhs at the time of liquidation after exploiting all the machineries to their useful life.

The company contemplates issuing bonus shares to reduce its tax liability or that of the shareholders at the time of winding up. Firstly, issue of bonus shares will not impact the company with any tax liability. However, as per section 2(22)(c) 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 would be regarded as dividend. Therefore, the issue of bonus shares and subsequent distribution to the shareholders will not provide any benefit or relief to the company. The amount attributable to accumulated profits, whether capitalised or not would be regarded as dividend and tax deduction at source under section 194 would be attracted and the TDS shall be @10% where it exceeds Rs.5,000 per shareholder.

As regards the shareholders, issue of bonus shares and transfer of those bonus shares presuming it to be before liquidation will not be of any benefit as the cost of acquisition of the bonus shares would be taken as `nil’. The sale consideration hence would be chargeable to tax. Since it is an unlisted share, the capital gain presuming it to be long-term would be chargeable to income-tax @20%. The shareholder will not get benefitted by issue of bonus shares by the company.

Assuming there is no proposal to issue bonus shares then reference is invited to section 46. Where the assets of the company are distributed to shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45. Hence, there would be no tax implication in the hands of the company when the assets are distributed to the shareholders on liquidation.

Where on the liquidation of a company if a shareholder receives money or other assets from the company, he shall be chargeable to income-tax under the head ‘capital gains’ in respect of the money so received or the market value of the assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of section 2(22)(c) and the resultant sum so arrived at shall be the full value of consideration for the purposes of section 48.

Thus, if a shareholder receives assets on liquidation, the company is not liable to tax in respect of such asset distribution. The shareholder however must consider the dividend portion which is quantified with reference to section 2(22)(c) and is to be excluded and the balance of the value of asset must be compared with the cost of acquisition of shares (other than bonus shares) to compute the capital gain thereon.