The Supreme Court has held that where shares of an amalgamating company held as stock-in-trade are substituted by shares of an amalgamated company pursuant to a scheme of amalgamation, the profit arising from such substitution constitutes taxable business income under Section 28 of the Income Tax Act, 1961, provided the new shares are realisable and capable of definite valuation.
A Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan affirmed the view taken by the Delhi High Court, ruling that while the mere sanction of an amalgamation scheme does not trigger tax liability, the actual allotment of shares that are commercially realisable results in a “commercial realisation” of profit. The Court, however, remanded the matter to the Income Tax Appellate Tribunal (ITAT) for factual determination regarding the nature of the shareholding and their realisability.
Background of the Case
The appeals were filed by investment companies of the Jindal Group, including M/s Jindal Equipment Leasing Consultancy Services Ltd. The appellants held shares of Jindal Ferro Alloys Limited (JFAL) as part of their promoter holding. Pursuant to a scheme of amalgamation approved by the High Courts of Andhra Pradesh and Punjab & Haryana in 1996, JFAL was amalgamated with Jindal Strips Limited (JSL). Under the scheme, shareholders of JFAL were allotted 45 shares of JSL for every 100 shares of JFAL held by them.
For the Assessment Year 1997-98, the appellants claimed exemption under Section 47(vii) of the Income Tax Act, treating the shares as capital assets. However, the Assessing Officer treated the shares as stock-in-trade, denied the exemption, and taxed the difference between the value of JSL shares and the book value of JFAL shares as business income.
The Tribunal ruled in favor of the assessees, holding that no profit accrues unless shares are sold or transferred for consideration, and that the allotment of shares under an amalgamation scheme did not amount to a “transfer” or “exchange.”
On appeal by the Revenue, the Delhi High Court set aside the Tribunal’s order. The High Court held that if the shares were held as stock-in-trade, the receipt of shares in the amalgamated company resulted in the realisation of the value of trading assets, making the difference taxable as business profit under Section 28.
Arguments of the Parties
The appellants argued that the receipt of shares in the amalgamated company did not amount to a “sale” or “exchange” and that no taxable business income arises until the shares are actually sold. Reliance was placed on the Supreme Court’s decision in Commissioner of Income Tax, Bombay v. Rasiklal Maneklal (HUF), arguing that amalgamation is merely a substitution of shares and not a transfer. They contended that hypothetical or notional benefits cannot constitute taxable income.
The Revenue contended that Section 28 of the Act is wide enough to cover profits and gains realised in cash or kind. It was argued that once the stock-in-trade (shares of the amalgamating company) ceased to exist and was replaced by shares of the amalgamated company having a definite value, a commercial realisation occurred. The Revenue relied on the decision in Orient Trading Company Ltd. v. Commissioner of Income Tax, arguing that “realisation” can occur upon exchange or substitution.
Court’s Analysis
Justice R. Mahadevan, writing for the Bench, analyzed the scope of Section 28, observing that it is a comprehensive charging provision designed to tax all real profits arising in the course of business, whether convertible into money or not.
On the Scope of Section 28 The Court observed that Section 28 does not predicate the existence of a “transfer,” “sale,” or “exchange” in the strict legal sense, unlike Section 45 (Capital Gains). “The moment any income arises out of business or profession, the provision becomes applicable,” the Court noted.
Commercial Realisability The Bench established a test for taxability in such cases, stating that the substitution of shares must result in a “commercial realisation.” The Court held:
“The enquiry for the Court is whether, as a result of the amalgamation, the assessee has in fact realised a profit in the commercial sense. This assessment may turn on whether: (A) The old stock-in-trade has ceased to exist in the assessee’s books; (B) The shares received in the amalgamated company possess a definite and ascertainable value; and (C) The assessee, immediately upon allotment, is in a position to dispose of such shares and realise money.”
The Court clarified that if the substituted shares are subject to a statutory lock-in period or are not quoted on a recognized stock exchange (making them difficult to sell), the allotment might not equate to a commercial realisation.
Distinction Between Capital Assets and Stock-in-Trade The judgment highlighted that while Section 47(vii) expressly exempts transfers of capital assets in a scheme of amalgamation from capital gains tax, no such exception exists for business assets under Section 28.
“The nature of stock-in-trade is wholly different from that of an investment… In this context, the substitution of one trading asset by another, such as the receipt of shares in an amalgamated company in lieu of shares held as stock-in-trade in the amalgamating company, cannot be equated with a mere continuation of an investment.”
Timing of Taxability The Court clarified that the charge under Section 28 is attracted “only upon the allotment of new shares,” not on the date of the court sanction or the appointed date. It is at the stage of allotment that the “statutory substitution translates into a concrete, realisable commercial advantage.”
Decision
The Supreme Court affirmed the High Court’s judgment in principle. It held that where shares of an amalgamating company held as stock-in-trade are substituted by shares of the amalgamated company which are realisable in money and capable of definite valuation, the transaction gives rise to taxable business income under Section 28.
However, recognizing that the actual application of this principle depends on facts—such as whether the shares were actually held as stock-in-trade or investment, and whether they were freely realisable—the Court remanded the matter to the Tribunal for fresh adjudication.
“In fine, the judgment of the High Court is affirmed… The proper course is to remit the matter to the Tribunal for fresh adjudication in accordance with law.”
Case Details:
- Case Title: M/S Jindal Equipment Leasing Consultancy Services Ltd v. Commissioner of Income Tax Delhi – II, New Delhi (and connected appeals)
- Case Number: Civil Appeal No. 152 of 2026 [Arising out of S.L.P. (C) No. 2028 of 2021]
- Bench: Justice J.B. Pardiwala and Justice R. Mahadevan
