Distribution on Liquidation of Company Under Dividend

When a company goes into liquidation, it distributes its assets among its creditors and shareholders. One aspect of this distribution is the payment of dividends to shareholders. In India, the distribution of assets on the liquidation of a company is governed by the Companies Act, 2013 and the Income Tax Act, 1961. This article will discuss the distribution on the liquidation of a company under dividend and the income tax implications of such distribution.

Distribution Under Dividend

When a company goes into liquidation, its assets are used to pay off its liabilities, including debts to creditors, outstanding taxes, and other obligations. Once these liabilities are settled, the remaining assets are distributed among the shareholders of the company. This distribution can take the form of a dividend, as it represents the return of the shareholders’ investment in the company.

The distribution of assets on the liquidation of a company is governed by the Companies Act, 2013. Section 53 of the Companies Act provides for the order of priority in which the company’s assets are to be distributed. It states that the company’s assets are to be distributed in the following order:

Payment of debts to secured creditors
Payment of workmen’s dues for the preceding 24 months
Payment of wages to employees for the preceding 12 months
Payment of other debts and liabilities
Distribution of remaining assets among the shareholders.

Once the company’s assets are distributed in accordance with the Companies Act, the shareholders receive their share of the distribution. This distribution is treated as a dividend under the Income Tax Act, 1961, and is subject to tax.

Income Tax Implications

The income tax implications of the distribution on the liquidation of a company under dividend are governed by the provisions of the Income Tax Act, 1961. When a company goes into liquidation and distributes its assets to shareholders in the form of a dividend, the shareholders are liable to pay tax on the dividend received.

Section 2(22) of the Income Tax Act defines the term “dividend” to include any distribution by a company of accumulated profits, whether capitalized or not, to its shareholders. The definition of dividend also includes the distribution of assets on the liquidation of a company, to the extent to which the distribution is attributable to the company’s accumulated profits.

The tax implications of the distribution on the liquidation of a company under dividend are as follows:

Taxation of Dividend: The dividend received by the shareholders on the liquidation of a company is subject to tax under the head “Income from Other Sources” as per the provisions of the Income Tax Act, 1961. The shareholders are required to include the amount of dividend received in their total income and pay tax on it at the applicable rates.
Tax Deduction at Source (TDS): The company making the distribution on the liquidation of its assets is required to deduct tax at source on the dividend paid to the shareholders. The rate of TDS on dividend is specified under Section 194 of the Income Tax Act, and the company is required to deduct TDS at the time of making the payment to the shareholders.
Reporting Requirements: The shareholders receiving the dividend on the liquidation of a company are required to report the dividend income in their income tax return. They are required to provide details of the dividend received, including the name of the company, the amount of dividend, and the tax deducted at source.
Advance Tax: The shareholders receiving the dividend on the liquidation of a company may be liable to pay advance tax on the dividend income, depending on the amount of dividend received and their total income during the financial year.
Exemptions and Deductions: The dividend received on the liquidation of a company may be eligible for certain exemptions or deductions under the Income Tax Act, such as the dividend received from specified domestic companies or the deduction for expenses incurred in relation to earning the dividend income.

Conclusion

The distribution on the liquidation of a company under dividend is governed by the Companies Act, 2013 and the Income Tax Act, 1961. When a company goes into liquidation, its assets are distributed among its shareholders, and this distribution is treated as a dividend for income tax purposes. The shareholders receiving the dividend on the liquidation of a company are liable to pay tax on the dividend received, and the company making the distribution is required to deduct tax at source. It is important for shareholders to understand the income tax implications of the distribution on the liquidation of a company under dividend and fulfill their tax obligations in accordance with the provisions of the Income Tax Act.