FMV Cost Acquisition – HC Sets Liquidation Asset Cost as FMV

Case Details: T.R.Balasubramanium vs. Asst Commissioner of Income-tax City Circle VII(2) - [2025] 174 taxmann.com 328 (Madras)

Judiciary and Counsel Details

• Dr. Anita Sumanth & G. Arul Murugan, JJ.
• Varun Ranganathan for the Appellant.
• T. Ravi Kumar, Senior Standing Counsel for the Respondent.

Facts of the Case

The Madras High Court ruled on a case involving the computation of the cost of acquisition of an asset distributed on liquidation of the Company. The issue before the Court was to determine the cost of acquisition of the asset in the hands of the shareholders.

The assessee contended that the cost of acquisition should be computed as per Section 55(2)(b)(iii) while the AO computed the cost of acquisition as per Section 49(1)(iii)(c).

High Court Held

The High Court held that the unique factor that had transpired in the assessee’s case was that both Section 49(1)(iii)(c) and Section 55(2)(b)(iii) would stand attracted. The transfer of shares, firstly, by way of extinguishment of right therein and in consideration of which the appellant received the asset from the company (transaction 1) and secondly, by transfer of the asset received on liquidation and in consideration of which the assessee received actual money (transaction 2).

Relevantly both transactions, as aforesaid have taken place in the same financial year as the appellants have proceeded to sell their share of the property to MRL in the same year where the asset had been distributed to them, fusing the applications of both applicable statutory provisions.

The High Court further held that the provisions of Section 46(2) as applicable to shareholders, states that where a shareholder, on the liquidation of a company, has received any money or asset from the company, he shall be chargeable to tax under the head ‘capital gains’ in respect of the money received or market value of the assets as on the date of distribution, reduced by dividend received by him and the resultant sum shall be the full value of consideration for the purposes of Section 48 of the Act.

The AO contended that the cost of acquisition shall be computed as per Section 49(1)(iii)(c), but the same is not the correct interpretation of the provisions. In the present case, the assessee had offered the capital gains for taxation in the same year in which the gain accrued. Therefore, the provisions of Section 55(2)(b)(iii) would come into play. The assessee has practically done this only with a slight difference. Instead of making two computations as in the case of the assessee, he has integrated both computations into one. Thus, the computation made by the assessee was just and proper.

List of Cases Reviewed

• Order passed by ITAT Madras Bench in ITA Nos. 1713 and 1714/MDS/1997 dated 22-12-2006
• Order passed by ITAT Madras Bench in ITA No.1388/MDS/1998 dated 20-11-2009 [Para 22] – Set aside