BRIEF FOR OPINION

Direct tax implications on acquisition of Project WIP (including land) from Target land
owing Company

1. Objectives

1.1 To ascertain the tax implications as per the provisions of the Income-tax Act, 1961 (“the Act” or
“ITA”) emanating from the acquisition of Project WIP (including land) from Target land owing
Company

2. Background

2.1 WPDPL (hereinafter referred to as ‘Target land owing Company ’or ‘Target Company’) is a
closely held private limited company incorporated under the Companies Act 1956. The entire
paid up equity share capital comprising of 10,000 shares of the target company was held by VS
group of companies and individuals.

2.2 The Target Company acquired freehold land admeasuring 16,136.84 sq. mtrs. situated in
Village Badshahpur, Sector 65, Gurgaon vide sale deed dated 2nd January 2007. Subsequently,
the said company also obtained License vide License No. 249 of 2007 dated 2nd November
2007 for development of commercial colony upon said land parcel. The purchase cost and
subsequent expenses in obtaining approvals etc. have been funded by loans from VS group of
individuals and entities (hereinafter referred to as ‘Sellers Loans’).

2.3 The land parcel represents the sole asset of the target company and is recorded at a carrying
value of approx. INR 77 in the financials. At highlighted aforesaid, the land acquisition was
funded by seller’s loans of commensurate value. The Target Company has no other operating
assets/liabilities-operating or otherwise barring the Land parcel.

2.4 AIPL (hereinafter referred to as ‘Purchaser Company’) which is engaged in the business of
Real Estate Development wanted to acquire the said land parcel to undertake the development
of the project under its own brand name.

2.5 Accordingly, based on the discussions and negotiations with the sellers the acquisition of land
parcel was sought to be effectuated through acquisition of the Target Company holding the
 target land parcel vide agreement dated 9th March 2017. The strictures of the Share Purchase
Agreement(SPA) and based on the mutual understanding the total consideration was towards
the 10,000 fully paid up equity shares of Face Value 10/- each of WPDPL and for transfer of
100% control and management of WDPL and for the transfer of all its assets including the
said land with all rights. The stipulated consideration of Rs. 87.89 was paid or payable in the
following manner by AIPL as per the payment Schedule(Annexure II):

i. Rs. 16.50 to WDPL was paid vide series of payments between 15th October 2016 to
3rd March 2017.
ii. Rs. 2.88 was paid between 21st Jan. 2017 to 9th February 2017 to members of
Seller/VS group against 24% shares of WPDPL.
iii. The payment of the balance consideration was to be effectuated by AIPL to the
Seller group and WPDPL as per the Payment Schedule of the said agreement.

2.6 Broadly out of the aforesaid consideration, INR 12 was payable to respective Seller Group
(shareholders) in lieu of transfer of shares in WPDPL. The balance consideration was payable
to WPDPL to repay Seller Group’s loans in WPDPL.

2.7 Thus, pursuant to the aforesaid payments and share transfers in accordance with the terms of
the SPA:

i. WPDPL is currently wholly owned subsidiary of AIPL. Also,

ii. the Seller Group’s loan in books of WPDPL would be replaced by loan from AIPL.

2.8 Pursuant to SPA, a final SPA dated 7th September 2017 was entered between the AIPL and
VS /Sellers Group, AIPL and WPDPL to give finality to the terms of the original SPA. The
aforesaid transactions have been executed with an objective to acquire the land subsisting in
the Target Company.

2.9 The status-qou in terms of the broad Financials of AIPL and WPDPL have been outlined in
the Step 0 in the Annexure.

2.10 AIPL’s based on its original intent of undertaking the project development itself, shall acquire
the PWIP (including land) from WPDPL. The transfer shall be made at the book value of thw
PWIP in the books of WPDPL (based on the assumption that the Stamp duty value of the
PWIP/land is lower than the Book value). The consideration for the transfer shall be satisfied
by AIPL in the form of partial set-off of loan to WPDPL to the extent of INR 66. AIPL shall
 allocate the proportionate right/revenue share in the completed project to be undertaken by
AIPL.( The right/area share shall be decided based on base/launch or mutually agreed price of
the project).(Step 2 in the Annexure)

2.11 Post achievement of some milestones in the project development. The Loan receivable by
AIPL in WPDPL shall be converted in equity share in WPDPL. Subsequently, WPDPL shall
be liquidated and AIPL being the sole shareholder shall receive the asset in WPDPL upon
liquidation of assets.(Step 3 in the Annexure)

3. Queries for opinion

In the light of the above stated facts, the tax treatment has to be ascertained within the gamut of the
following issue/aspects referred to us by the client:

3.1 Whether having regard to the extant provisions of law and in facts, whether there would be any
tax implication upon transfer of PWIP from WPDPL to AIPL in lieu of the partial Loan write-
off and assignment of rights?

3.2 Would the conversion of Loan from AIPL into equity shares of WPDPL entail any tax
implications?

3.3 Whether having regard to the extant provisions of law and in facts, AIPL would be liable to pay
capital gains tax upon liquidation of its wholly owned subsidiary WPDPL?

3.4 What would be cost of the PWIP received by AIPL upon liquidation for the computation of its
subsequent income?

3.5 What would be tax treatment on the cancellation of Liability in the books of AIPL towards
WPDPL?

3.6 Whether having regard to the extant provision of Insolvency and Bankruptcy Code, 2016, debt
subsisting in the books of WPDPL shall be directly set off by transfer of asset or the proceeds
from sale of asset shall be used for discharging the debt.?

3.7 Whether having regard to the extant provision of Income tax Act, WPDPL would be exigible to
pay capital gain tax on sale of asset by liquidator upon liquidation of companies.?
4. Our legal analysis

4.1 Whether having regard to the extant provisions of law and in facts, whether there would be
any tax implication upon transfer of PWIP from WPDPL to AIPL in lieu of the partial Loan
write-off and assignment of rights?

 In reference to the Annexure 2, where Project WIP has been transferred to AIPL, taxability
would not be entailed in the hands of WPDPL based on the premise that as the transfer would
be made at the Book value which would be higher than the stamp duty value.

 It is pertinent to note the provisions laid down in section 43CA of the ITA relevant extracts of
which are usefully reproduced hereunder:

“where the consideration received or accruing as a result of the transfer by an assessee of an

asset (other than a capital asset), being land or building or both, is less than the value
adopted or assessed or assessable by any authority of a State Government for the purpose of
payment of stamp duty in respect of such transfer, the value so adopted or assessed or
assessable shall, for the purposes of computing profits and gains from transfer of such asset,
be deemed to be the full value of the consideration received or accruing as a result of such
transfer.”

 Thus based on the assumption that the sales considerations received by the WPDPL would
not be less than the stamp duty value, provision of section 43CA would not entail any
taxability in the hands of the WPDPL.

 Further, there would not any taxability under income from Profit and Gain from Business and
Profession (“PGBP”) as the Project WIP which is a stock in trade for WPDPL shall be
transferred at its book value.

 Further, the provisions of Section 56(2)(x) of the ITA shall not be attracted on AIPL since it is
not receiving the PWIP for inadequate consideration as it would settling the consideration
towards the land through equivalent amounts: Loan set-off and allocation of right in
completed project.
 4.2 Would the conversion of Loan from AIPL into equity shares of WPDPL entail any tax
implications?

 Section 56(2)(viib) of the ITA is attracted in the case of receipt of consideration upon issuance
of shares for value more than the Fair Market Value1 of shares being issued.

 The loan conversion into equity shares would entail consideration in the form of reduction of
liability of equivalent amount.

 Accordingly, based on the premise that shares would be allocated in lieu of the subsisting debt
at FMV, no taxability would be entailed in the hands of WPDPL.

 Further, the provisions of Section 56(2)(x) of the ITA shall not be attracted on AIPL since it is
not receiving the shares for inadequate consideration.

4.3 Whether having regard to the extant provisions of law and in facts, AIPL would be liable to
pay capital gains tax upon liquidation of its wholly owned subsidiary WPDPL?

 The extant provisions governing taxability emanating from distribution of assets by a company
in liquidation as contained in section 46 and section 2(22)(c) of the ITA. It would therefore be
relevant to reproduce these which is done hereunder:

(22) "dividend" includes—

********************
(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 ;

Capital gains on distribution of assets by companies in liquidation.

46. (1) Notwithstanding anything contained in section 45, where the assets of a company are distributed to its
shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the
purposes of section 45.

(2) Where a shareholder on the liquidation of a company receives any 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 other assets on the date of distribution, as reduced by the amount assessed as

1FMV may be determined based on Net Asset Value or Discounted Cash Flow method as per Rule 11UA of the
Income tax Rules, 1962.
 dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be
deemed to be the full value of the consideration for the purposes of section 48.

 From a conjoint reading of sections 2(22)(c) and section 46 of the ITA, it follows that
distribution of assets upon liquidation of company is taxable in two tranches:

 At the first instance, the fair market value of the assets distributed-to the extent the
company under liquidation possesses accumulated profits-assumes the character of
dividend within the meaning of section 2(22)(c) if the Act. Such dividend, in
accordance with Explanation appended below section 115Q, is exigible to dividend
distribution tax under section 115O of the Act.

 At the second instance, in terms of section 46(2) of the Act, fair market value of
assets distributed-as reduced by amount deemed as dividend assessed u/s 2(22)(c)
partakes the character of taxable receipt in the hands of shareholders of the
company. Such amount is deemed as ‘full value of consideration’ for the purposes
of section 48 in respect of shares held in the liquidating company.

 Since, WPDPL does not have any accumulated profits no amount would be assessable as
dividends exigible to dividend distribution tax under section 115-O.

 Thus, the taxability of entire PWIP which would be received by AIPL shall be governed by
Section 46(2) of the ITA. Further, Section 46(1) of the ITA excludes such distribution of assets
from the ambit of transfer in the hands of the company under liquidation.

 As per Section 46(2) of the ITA the Fair Market Value of the asset received by the shareholder
as ‘full value of consideration’ for the purposes of computation of capital gains under section
48.

 Thus in the event of liquidation of WPDPL, the shareholder, i.e. AIPL would be subjected to
capital gains tax. Further, as per Section 46(2) of the ITA, the assets received by the
shareholder may not be a capital asset as defined in section 2(14) of the ITA

Reliance in this regard may be placed on the apex court ruling in the case of N. Bagavathy
Ammal vs. CIT2 wherein it has been held as under;

Therefore, to the extent that a shareholder assessee receives assets whether capital or any other from the company
in liquidation, the assessee is liable to pay tax on the market value of the assets as on the date of the
distribution as provided under section 46(2). That appears to be the plain meaning of the section and we see no
reason to construe it in any other fashion. The invocation of section 2(14) of the Act which defines "Capital
asset" is as such unnecessary for the purpose of construing section 46(2).

2 Reported as [2003] 259 ITR 678 (SC)

 A similar view has been taken by the apex court in its ruling pronounced in the case of Vijay
Kumar Budhia vs. CIT3 wherein it has been held as under;

It is sub-section (2) which is particularly relevant in the present case. Even though the income received by the
assessee in the liquidation proceedings was not on account of any transfer of property, yet Parliament has chosen
to treat such receipt as capital gains, subject of course to certain specified deduction. May be, it is a case of a
fiction created by Parliament—may be not. The validity of the provision is not questioned nor is it in issue
herein. The sub-section says that where a shareholder receives certain amounts or other assets from the company
on its liquidation, he shall be charged to income-tax under the head "Capital gains" in respect of the money so
received or on the market value of the assets received as on the date of the distribution. The only deduction
expressly provided by the sub-section is "the amount assessed as dividend within the meaning of sub-clause (c) of
clause (22) of section 2". The sub-section declares further that the sum so arrived at shall be deemed to be the
full value of the consideration for the purposes of section 48. (Section 48, it may be noted, specifies the
permissible deductions from the full value of the consideration which includes the cost of acquisition of the asset.)
------
We are, therefore, of the opinion that in the light of the specific provision contained in sub-section (2) of section
46, the value of the assets received by the assessee was rightly and properly brought to capital gains tax. There
are no grounds to interfere in the matter.

 While section 46(2) is an independent charging section applicable in the case of liquidation, the
same does not contain independent enabling provisions regards the computation of capital
gains chargeable to tax. Section 46(2) of the ITA only deems market value of assets received as
‘full value of consideration’.

 Further, the section specifically makes a reference to computation section 48 of the ITA. In
this background, it may be averred that even in cases of liquidation of companies, the
computation of taxable capital gains is still governed by section 48 and the provisions of this
section must accordingly be given effect to.

 The provisions of section 48, to the extent relevant with the facts of the instant case, provide
for the computation of taxable capital gains after allowing deductions from (‘full value of
consideration’) for ‘Cost of acquisition’, ‘Cost of improvement’ and ‘Expenses incurred wholly
and exclusively in connection with transfer’.

 Thus, based on the conjoint reading of sections 46(2) and section 48 of the ITA, there would
be no taxable capital gains in the hands of AIPL since the FMV of PWIP received would be
same as the cost of acquisition of the subject capital asset being relenquished i.e. equity shares
in WPDPL:

3 Reported as [1993] 204 ITR 355 (SC)

 In the case of CIT vs. Brahmi Investment (P.) Ltd.4 wherein with regards to the concurrent
operation of sections 46(2) and section 48, the court in para 11 observed as under;

Section 48(1) of the Act lays down the manner in which income chargeable under the head ‘Capital gains’ is to
be computed. Under clause (a) of sub-section (1) of section 48 of the Act Legislature has provided that from the
full value of consideration received or accruing, for the purposes of computing the capital gains chargeable to tax -
(i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of
the asset and the cost of improvement to the asset are to be deducted. Section 48(1) envisages the cost of
acquisition of the asset being deducted from the full value of consideration, viz., the cost incurred by an assessee
for the purchase of the asset which is sold. In a case where section 46(2) of the Act comes into play the full value
of consideration has to be computed by the special mode laid down in the said provision and thereafter provisions
of section 48 of the Act have to be applied. Admittedly, in such a case there is no asset as such for which the
shareholder-assessee can claim the cost of improvement nor could there be any claim for expenditure incurred in
connection with such transfer, because the transaction, i.e., distribution of assets on liquidation itself is a deemed
transfer and no expenditure in connection with such transfer is actually incurred. That leaves only the cost of
acquisition which is required to be taken into consideration for the purposes of levying tax under the head
‘Capital gains’.

4.4 What would be cost of the PWIP received by AIPL upon liquidation for the
computation of its subsequent income?

 Section 55 of the ITA elucidates the meaning of ‘cost of acquisition’ and ‘cost of
improvement’ for the purposes of section 48 and 49.

 Section 49 of the ITA deems the ‘cost of acquisition’ of capital assets as cost to previous
owner in certain limited circumstances. Both these sections, to the extent relevant with the
facts of the instant case are reproduced herein below;

Cost with reference to certain modes of acquisition.

49. [(1)] Where the capital asset became the property of the assessee—
(iii) (a) by succession, inheritance or devolution19, or

[(b) on any distribution of assets on the dissolution of a firm, body of

individuals, or other association of persons, where such dissolution
had taken place at any time before the 1st day of April, 1987, or]

(c) on any distribution of assets on the liquidation of

a company,

4 Reported as [2006] 286 ITR 66 (Gujrat)/[2006] 153 Taxman471

 the cost of acquisition of the asset27 shall be deemed to be the cost for which the previous owner of the property
acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or
the assessee, as the case may be.

Meaning of "adjusted", "cost of improvement" and "cost of acquisition".

55. (2) For the purposes of sections [ 48 and 49], “cost of acquisition”—
*****
(b) in relation to any other capital asset,
*****
(iii) where the capital asset became the property of the assessee43 on the distribution of the
capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head
"Capital gains" in respect of that asset under section 46, means the fair47 market value of the asset on the date
of distribution

 While principally, the meaning of “cost of acquisition” has been defined in section 55(2) of the
ITA, it is necessary to borne in mind the fact that section 49 of the Act stipulates cost of
acquisition with reference to the specified modes of acquisition. However, Section 49 briefly
applies in determination of cost of acquisition in respect of transactions which have not been
subjected to tax in the first instance. These briefly encompass exempt ‘transfers’ covered under
section 47- the legislative intent being that the assessee must not be able to claim the benefit of
accelerated cost in any manner.

 It may thus be averred that the applicability of section 49 to determine cost of acquisition of
capital assets must be restricted to transactions (from which acquisition of asset emanates)
which have not been subjected to tax in the first instance.

Reliance may be placed on the ruling of the Gujrat High Court pronounced in the case of CIT
vs. Brahmi Investment (P.) Ltd.5, wherein regarding the applicability of section 49, it has
been observed as under:

Sections 47 and 49 of the Act go together and have to be read as part of one scheme, the legislative intent being
that when the first transaction is not brought to charge, the assessee having benefited once should not benefit once
again by claiming a higher cost at the time of subsequent transaction. This would be so in the normal course of
events.
One may also usefully refer to the ruling of the ITAT-Chennai bench pronounced in the case
of ACIT vs. T.R. Srinivasan6, wherein analyzing the interplay between sections 55 and 49 in
the case of liquidation of companies, the ITAT observed as below;

5 Reported as [2006] 286 ITR 66 (Gujrat)/[2006] 153 Taxman471

6 Reported as [2010] 36 SOT 312 (Chennai)
 Section 49(1)(iii )(c) provides that where a capital asset becomes the property of the assessee on distribution of
asset on the liquidation of a company, the cost of acquisition of the asset shall be deemed to be the cost to the
previous owner. Section 55(2)(b)( iii) provides that where the asset becomes the property of the assessee on the
distribution of assets on liquidation, and if the assessee has been assessed to capital gains tax in respect of that
asset under section 46, the cost of acquisition would be the fair market value of the asset on the date of
distribution. It will be noticed that both the provisions provide for the cost of acquisition of an asset which
becomes the property of the assessee on the distribution of assets by a company on its liquidation. However, the
applicability of either of the provisions would depend on the situation in each case. If the assessee has been
charged to capital gains tax on receipt of the property, then, as per section 55(2)(b)( iii), the cost of acquisition
would be the fair market value of the asset on the date of distribution.

 It would be pertinent to highlight that the aforesaid aspect would not strictly be applicable to
the case at hand as the PWIP acquired on liquidation would not be a capital asset but a stock-
in trade/inventory for AIPL. However, the same may the relied on to buttress the position
that the benefit of FMV of the PWIP received which has been subjected to tax as per Section
46(2) of the ITA would be available to AIPL.

4.5 What would be tax treatment on the cancellation of Liability in the books of AIPL
towards WPDPL?

 The liability of AIPL would cease to exist upon liquidation as it would impossibility of
payment to self. Accordingly, the cancellation of liability of AIPL may be deemed to be
income from PGBP for AIPL.

 The expression "income" is defined in Section 2(24) of the Act to include:

(i) profits and gains;

(ii)….
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41
or section 59
….
(vd) the value of any benefit or perquisite taxable under clause (iv) of section 28

 Further, Section 41(1) of the ITA provides for taxability in the case of cessation or remission
of trading liability as under:

Profits chargeable to tax.

41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss,
expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person)
and subsequently during any previous year,—
 (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount
in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or
cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed
to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that
previous year, whether the business or profession in respect of which the allowance or deduction has been made
is in existence in that year or not;
…….
 Also, Section 28 (iv) of the ITA which is of a wider amplitude provides for taxability of any
benefit received in the course of business as under:

Profits and gains of business or profession.

28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or
profession",—
…..
….
..
(iv) the value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of a profession;

 At the outset it would be imperative to highlight that the taxability and treatment of waiver
with respect to principal portion of loan amounts would be dependent upon the actual
purpose and utilization of the loans.

 In the recent case of Esplanade Developers (P.) Ltd. v. ACIT [2017] 86 taxmann.com 61
(Bengaluru – Trib) Bengaluru Tribunal averred the same principles as under:

The issue hinges on the aspect whether the loan taken by the assessee was in the nature of capital or revenue.
This aspect was not examined by the authorities below. The nature of loan taken by the assessee could be
determined on the basis of the purpose for which the loan was taken. If the loan is taken for a purpose which
gives enduring benefit, then it may be termed as a capital receipt. If it does not give any enduring benefit to the
assessee, then it is to be treated as revenue in nature. Besides, the examination of this aspect by the lower
authorities, it is also required that the aspect of the assessee's statement before the Assessing Officer that this
loan was taken as a stop-gap arrangement, till the loan is disbursed by the financial institution/bank, has
also to be examined.

 The provision of section 41 gets triggered where an allowance or deduction in respect such trading
liability has been made in any assessment year and some benefit in respect of such trading liability by
way of remission or cessation is obtained in the subsequent years.

 Thus in the absence of any allowance or deduction with respect of such trading liability by AIPL,
subsequent cancelation thereof on liquidation of WPDPL would not entail income of AIPL in
accordance with section 41 of ITA.
 However, trading liability cancellation in the books of AIPL would attract taxability the provision of
section 28(iv) of the ITA which is of a much wider amplitude and treated as income in the form of
benefit from business.

 Recourse of the principle of double jeopardy (or dual taxation of the same income in the hands of
the same assesse) may be taken to assail that the amount in the form of liability would have already
suffered taxation in the hands of AIPL based on POCM method applicable and adopted.
Accordingly, loan write-off by virtue of operation of law should not again be subject to tax in the
hands of AIPL.

4.6 What would be the tax implications in the hands of WPDPL on setting off of liability by
issuing shares?

 WPDPL, acquires a rights in the constructed property of AIPL which will be financed by AIPL. .

 Further, WPDPL shall pay off the above liability (i.e. loan) by issuing equity shares to AIPL which
will accordingly increase the investment amount in the books of AIPL.

 In the above scenario, one may analyze the provisions laid under section 56(2)(viib) of Act which
provides for the taxability in the hands of recipient where he receives any consideration on issuance
of shares which exceeds the face value of shares, the aggregate consideration received for such shares
as exceed s the fair market value (“FMV”) of shares..

 However, in the given case, we understand that, the liability is being paid off to the AIPL by issuing
shares .Accordingly, based on the premise that shares would be allocated in lieu of the subsisting
debt at FMV, no taxability would be entailed in the hands of WPDPL.

 Further, the provisions of Section 56(2)(x) of the ITA shall not be attracted on AIPL since it is not
receiving the shares for inadequate consideration.

4.7 Upon liquidation, what would be the tax implacability in the hands of AIPL on receiving
the right on constructed property in lieu of their shareholding in WPDPL

 Section 46(2) of the Act provides for the taxability in the hands of shareholders on time of
liquidation which states that,

46(2) "Where a shareholder on the liquidation of a company receives any 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 other assets on the date of distribution, as reduced by the amount assessed as dividend within the
meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the
consideration for the purposes of section 48.”
  However, in the case of assesse, fair market value of the right in the constructed property transferred
to AIPL upon liquidation is less than the value of investment that AIPL hold in WPDPL.
Accordingly, the said transaction would result in capital loss in hands of AIPL on liquidation of
WPDPL.

Implication of New enacted Insolvency and Bankruptcy Code, 2016 on above

transaction

4.8 Whether having regard to the extant provision of Insolvency and Bankruptcy Code, 2016,
debt subsisting in the books of WPDPL shall be directly set off by transfer of asset or the
proceeds from sale of asset shall be used for discharging the debt?

 Based on the extant provision of IBC, it is pertinent to highlight that the whole objective to bring
IBC into existence to expedite the process of liquidation. On cursory perusal of IBC, it is to be noted
that it does not confers any power to liquidator in liquidation proceedings of the company to
discharge transfer the asset in lieu of liability directly.

 However on analysis of the IBC, one may note that there are plethora of sections which used the
term “proceeds from sale of asset” with respect to discharging of liabilities, further section 59 of IBC
specifically dealt with the scenario of which states perquisites for a company willing to go for
voluntary winding up requires the company to use the proceeds of assets sold to pay the debts it also
states requirement to appoint an official liquidator, the section has been reproduced below for your
reference.

Section 59. (1) A corporate person who intends to liquidate itself voluntarily and has not committed any default may
initiate voluntary liquidation proceedings under the provisions of this Chapter.
(2) The voluntary liquidation of a corporate person under sub-section (1) shall meet such conditions and procedural
requirements as may be specified by the Board.
(3) Without prejudice to sub-section (2), voluntary liquidation proceedings of a corporate person registered as a company
shall meet the following conditions, namely:—
(a) a declaration from majority of the directors of the company verified by an affidavit
stating that—
(i) they have made a full inquiry into the affairs of the company and they have formed
an opinion that either the company has no debt or that it will be able to pay its debts
in full from the proceeds of assets to be sold in the voluntary liquidation; and
(ii) the company is not being liquidated to defraud any person;
(b) …………….
(c) within four weeks of a declaration under sub-clause (a), there shall be—
(i) a special resolution of the members of the company in a general meeting requiring
the company to be liquidated voluntarily and appointing an insolvency professional
to act as the liquidator; or
 (ii) a resolution of the members of the company in a general meeting requiring the
company to be liquidated voluntarily as a result of expiry of the period of its duration,
if any, fixed by its articles or on the occurrence of any event in respect of which the
articles provide that the company shall be dissolved, as the case may be and
appointing an insolvency professional to act as the liquidator:
Provided that the company owes any debt to any person, creditors representing two thirds in value of the debt of the
company shall approve the resolution passed under sub-clause (c) within seven days of such resolution.
(4) …………….
(5) ………………
(6) The provisions of sections 35 to 53 of Chapter III and Chapter VII shall apply to voluntary liquidation
proceedings for corporate persons with such modifications as may be necessary.
(7) Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the
liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate person.
(8) The Adjudicating Authority shall on an application filed by the liquidator under sub-section (7), pass an order
that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved
accordingly.
(9) A copy of an order under sub-section (8) shall within fourteen days from the date of such order, be forwarded to the
authority with which the corporate person is registered.

 In furtherance to above, it is imperative to highlight that IBC also provides the mechanism wherein
the proceeds shall be used by the liquidator.
Section53 of the IBC 2016, which provides that
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature
for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order
of priority and within such period and in such manner as may be specified, namely :—
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following :—
(i) …………..
(ii) ……………….
(c) …………..
(d) financial debts owed to unsecured creditors;
(e) ………….
(i) ………………..
(2) …….
(3) …….
Explanation.—For the purpose of this section—
(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank
equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of
recipients, if the proceeds are insufficient to meet the debts in full; and
(ii) …………..
 Based on the above premise, it can be construe that in liquidation process it is imperative to appoint
a liquidator who shall realize the assets of the company and use the proceeds for pay off the debts.

 Thus it is pertinent to highlight that the aforesaid aspect of receiving PWIP by AIPL on liquidation
(as elucidated in point 3.4 above) shall not be practically functional, as the same shall be realized by
the liquidator of WPDPL.

4.9 Whether having regard to the extant provisions of the Income tax Act and in facts, AIPL
would be liable to pay capital gains tax upon liquidation of its wholly owned subsidiary
WPDPL?

 The extant provisions governing taxability emanating from distribution of assets by a company
in liquidation as contained in section 46 and section 2(22)(c) of the ITA. It would therefore be
relevant to reproduce these which is done hereunder:

(22) "dividend" includes—

********************
(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 ;

Capital gains on distribution of assets by companies in liquidation.

46. (1) Notwithstanding anything contained in section 45, where the assets of a company are distributed to its
shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the
purposes of section 45.

46(2) "Where a shareholder on the liquidation of a company receives any 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 other assets on the date of distribution, as reduced by the amount assessed as
dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be
deemed to be the full value of the consideration for the purposes of section 48.”

 Upon liquidation the proceeds left after discharging of debts and other expenses received by
the AIPL shall be governed by Section 46(2) of the ITA. Further, Section 46(1) of the ITA
excludes such distribution of assets from the ambit of transfer in the hands of the company
under liquidation.

 As per Section 46(2) of the ITA the money received by the shareholder shall be deemed to be
‘full value of consideration’ for the purposes of computation of capital gains under section 48.
 Thus in the event of liquidation of WPDPL, the shareholder, i.e. AIPL would be subjected to
capital gains tax and there will be no tax liability in the hands of the WPDPL.
Annexure

Step 0: Current scenario

AIPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)

Share Capital 300,000,000 Investments 120,000,000

Current Liahilities 200,000,000 Loans & Advances 780,000,000

Non Current liabilities 400,000,000

900,000,000 900,000,000

WPDPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)

Share Capital 100,000 Project WIP(including Land) 780,000,000

100000
Non current liabilities 780,000,000 P&L(Dr. Bal)

780,100,000 780,100,000

AIPL has bought the shares of WPDPL from its eastwhile shareholders @ Rs. 12. WPDPL is a wholly owned
subsidiary of AIPL
Further, AIPL has paid provided loans @ INR 78 to WPDPL through which it paid off its existing loans
STEP 2: Transfer of PWIP
AIPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)

Share Capital 300,000,000 Investments 120,000,000

Non Current liabilities 600,000,000 Project WIP 780,000,000

Sales Advance 5,00,000 Current Asset 5,00,000
900,500,000 900,500,000

WPDPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)
Share Capital 5,00,000 Right in share of
constructed property 4,00,00,000
Non current liabilities 3,95,00,000

4,00,00,000 4,00,00,000

Transfer of Project WIP at book value from WDPL to AIPL @INR 78.
Consideration for Project WIP to be settled by AIPL in the form of:
1. Settlement of Loan to the extent of INR 78.
2. WPDPL has taken loan amounting to Rs.4 for the purpose of acquiring the right in the constructed
property whose stamp duty value at the time of acquisition is @4.
3. WPDPL has given advance @0.05 to AIPL to acquire right in the constructed property

STEP 3: Liquidation of WPDPL

AIPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)

Share Capital 900,000,000 Investments 120,000,000

Sales Advance 5,00,000 Project WIP 780,000,000

Current asset 5,00,000
900,500,000 900,500,000
 WPDPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)
5,00,000 Right in share of
Share Capital constructed property 40,000,000
3,95,00,000
Non Current liabilities
40,000,000 40,000,000

Liquidation of WDPL:
i) On liquidation, proceed realized on sale of right to
be utilized to pay off the liability @3.95 and
remaining to be paid to the shareholder i.e AIPL in
lieu of their investment

FINAL: Post liquidation

AIPL
Equity and Liabilities Amount(Rs.) Assets Amount (Rs.)
Share Capital 780,000,000 Investments 120000000

Project WIP 780,000,000

Project WIP
(received from subsidiary
company*)
780,000,000 780,000,000

i) Remaining proceed after paying off liability to be paid to the shareholders in lieu of their investment.