1993 (4) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Liability to capital gains tax on amalgamation of shares.
2. Computation of "distributable income" for tax credit under section 236 of the Income-tax Act.

Issue 1: Liability to Capital Gains Tax on Amalgamation of Shares

The first issue pertains to the assessment year 1964-65 and involves whether the assessee was liable to capital gains tax on its 15,606 shares in Sankey Electrical Stampings Ltd. (S.E.S.) upon the amalgamation of S.E.S. with Guest Keen Williams Ltd. (G.K.W.).

The Tribunal's question was reframed to: "Whether, on the facts and in the circumstances of the case, the assessee was liable to capital gains tax in the aforesaid transaction?"

Facts:
- The assessee held 15,606 shares in S.E.S., which was a subsidiary of G.K.W.
- G.K.W. decided to merge S.E.S. with itself and proposed acquiring the assessee's shares in S.E.S.
- The assessee transferred its shares in S.E.S. to G.K.W. in exchange for 2,14,583 shares of G.K.W.
- The Income-tax Officer considered this a transfer u/s 2(47) of the Act and liable to capital gains tax.
- The Appellate Assistant Commissioner upheld this view, stating the shares were transferred before the amalgamation.

Tribunal's Decision:
- The Tribunal accepted the assessee's contention that the transaction did not constitute a transfer u/s 2(47) of the Act.

High Court's Judgment:
- The High Court reframed the question to address the real issue.
- It concluded that the transaction was indeed a transfer within the meaning of section 2(47) of the Act, as the shares were exchanged prior to the amalgamation.
- The assessee was liable to capital gains tax on this transaction.

Issue 2: Computation of "Distributable Income" for Tax Credit u/s 236

The second issue involves whether both the deficit in depreciation allowance and the excess development rebate provided in the accounts should be considered for computing the "distributable income of the previous year" as defined in Explanation 2 to section 236 of the Act for the assessment years 1962-63, 1963-64, and 1964-65.

Background:
- Section 236 provides relief to companies in respect of dividends paid out of past taxed profits.
- The section aims to address anomalies arising from changes in the method of taxing dividend income.

Facts:
- The assessee and the Income-tax Officer had different computations for "distributable income."
- The assessee argued that allowances for depreciation and development rebate should be considered together, not itemwise.
- The Income-tax Officer computed distributable income itemwise, leading to different tax credits.

Tribunal's Decision:
- The Tribunal accepted the assessee's method of computing distributable income by considering allowances collectively.

High Court's Judgment:
- The High Court disagreed with the Tribunal, stating that the provisions of section 236 are not of a "beneficial nature" and should be interpreted to minimize anomalies.
- The distributable income should be computed itemwise as done by the Income-tax Officer.
- The question was answered in favor of the Revenue, holding that the Income-tax Officer's computation was correct.

Conclusion:
Both issues were decided in favor of the Revenue and against the assessee. The High Court held that the assessee was liable to capital gains tax on the share transfer and that the computation of distributable income for tax credit should be done itemwise.