Share exchange before amalgamation counts as transfer, and distributable income must be computed itemwise under statutory adjustments.

An exchange of the assessee's shares for shares in another company, completed before amalgamation, was treated as a transfer within section 2(47) because the rights in the original shares were extinguished and capital gains tax under section 45 applied. For computation of distributable income under Explanation 2 to section 236, the deficit in depreciation allowance and excess development rebate had to be examined separately and adjusted itemwise according to the statutory scheme, rather than netted together as a composite figure. Both issues were answered against the assessee and in favour of the Revenue.

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Issues: (i) whether the transfer of the assessee's shares in Sankey Electrical Stampings Ltd. to Guest Keen Williams Ltd. in return for shares of the latter amounted to a "transfer" giving rise to capital gains tax liability under the Income-tax Act, 1961; (ii) whether, for computing "distributable income of the previous year" under Explanation 2 to section 236 of the Income-tax Act, 1961, the deficit in depreciation allowance and the excess development rebate shown in the accounts were to be taken together or itemwise.

Issue (i): Whether the transfer of the assessee's shares in Sankey Electrical Stampings Ltd. to Guest Keen Williams Ltd. in return for shares of the latter amounted to a "transfer" giving rise to capital gains tax liability under the Income-tax Act, 1961.

Analysis: The transaction showed that the assessee handed over its Sankey shares to Guest Keen Williams Ltd. before the amalgamation was completed and received allotment of Guest Keen Williams shares in consideration. On the facts, the exchange of one set of shares for another was complete prior to amalgamation. The statutory definition of "transfer" in section 2(47) was wide enough to include such exchange and the extinguishment of rights in the transferred shares.

Conclusion: The transaction was a transfer within section 2(47), and the capital gains charge under section 45 applied. The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether, for computing "distributable income of the previous year" under Explanation 2 to section 236 of the Income-tax Act, 1961, the deficit in depreciation allowance and the excess development rebate shown in the accounts were to be taken together or itemwise.

Analysis: Explanation 2 required the total income to be reduced by specified deductions and then increased only by the amounts expressly contemplated by clause (b). The structure of the provision showed that each allowance had to be examined separately. The scheme was designed to determine the distributable income by reference to the statutory adjustments and not by combining distinct allowances and reserves into one net figure.

Conclusion: The computation had to be made itemwise and the Revenue's method was in law. The issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: Both questions were answered against the assessee, and the reference was disposed of in favour of the Revenue with no order as to costs.

Ratio Decidendi: An exchange of shares completed before amalgamation constitutes a transfer for capital gains purposes, and "distributable income" under Explanation 2 to section 236 must be computed in accordance with the specific statutory adjustments, itemwise and not by a composite netting of unrelated allowances.

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