Supreme Court: The substantial issue in the present appeal is whether, upon amalgamation, the substitution of shares held as stock-in-trade with shares of the amalgamated company constitutes a taxable event under Section 28 of the Income Tax Act, 1961 (‘Income Tax Act’) or whether tax liability arises only when the new shares are actually sold.
The Division Bench of J.B. Pardiwala and R. Mahadevan*, JJ., stated that the statutory substitution of shares of the amalgamating company is not a mere neutral replacement. Where the new shares are freely marketable and possess a definite commercial value, the event constitutes a commercial realisation giving rise to taxable business income. Thus, the Court held that substitution of stock-in-trade shares with shares of the amalgamated company gives rise to taxable business income under Section 28 of the Income Tax Act, but only upon allotment of new shares, not at the appointed date or court sanction. However, with respect to the present case, whether such shares are freely realisable, restricted, or held as investment requires factual determination, so the matter was remitted to the Tribunal.
Background
In the present case, the appellants are the shareholders of Jindal Ferro Alloys Limited (JFAL) and pursuant to the orders of the Andhra Pradesh and Punjab and Haryana High Courts, dated 19-9-1996 and 3-10-1996 respectively, JFAL merged with Jindal Strips Limited (JSL), a widely held public company. Subsequently, when amalgamation became effective, JFAL ceased to exist as a legal entity. Further, as per the share exchange ratio approved under the scheme, shareholders were allotted 45 shares of JSL against 100 shares of JFAL.
During the relevant assessment year, the appellants claimed exemption under Section 47(vii) of the Income Tax Act, in respect of the receipt of JSL shares, contending that the shares of JFAL were held as capital assets. However, the Assessing Officer denied exemption and accordingly taxed the difference between the value of the JSL shares and the book value of JFAL shares. Further, the Commissioner of Income Tax (Appeals) upheld this view, dismissing the appeals on the finding that the appellants’ acquisition of shares was an adventure in the nature of trade, attracting taxation under Section 28 of the Income Tax Act.
On further appeals, the Tribunal, by order dated 17-2-2005, allowed the assessees’ claims, and declined to decide the factual question that whether the JFAL shares were held as capital assets or as stock-in-trade. The Tribunal held that no profit accrues unless the shares are either sold or transferred for consideration, irrespective of the nature of holding.
Subsequently, the High Court vide impugned judgment, set aside the Tribunal’s order and remitted the matter for fresh consideration. The High Court returned the following two findings:
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If shares are held as capital assets, an amalgamation is indeed a transfer within the meaning of Section 2(47) of the IT Act, though exempt under Section 47(vii). (This finding is not in dispute in the present case.)
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If the shares are held as stock-in-trade, the profit arising to the assessees from the receipt of JSL shares in lieu of JFAL shares would be taxable as “profits and gains of business or profession” under Section 28 of Income Tax Act. (This finding is in dispute in the present case.)
Issue:
The present appeals raised a substantial question: when a company undergoes amalgamation and the shares of the old company, held by traders as stock-in-trade, are replaced with shares of the new company, does this substitution itself amount to a taxable event under Section 28 of Income Tax Act, or is taxation deferred until those new shares are actually sold?
Analysis, Law, and Decision
A. Amalgamation- Whether substitution of shares constitutes income under Section 28
The Court stated that an amalgamation is essentially a statutory substitution of one form of holding for another. The shareholder’s interest in the transferor company is replaced by a corresponding interest in the transferee company. It is settled law that income yielding business profits may be realised in money and in kind. Thus, where an assessee receives shares of the amalgamated company in place of its shares held as trading stock, there is, in form, a receipt of consideration in kind. Though such amalgamations receive the sanction of the Court/Tribunal to be effectuated, they are preceded by decisions taken in meetings of shareholders.
The Court stated that it could not be ruled that that in some cases, the terms of the sanctioned scheme may themselves create, a vested and imminent enforceable right to allotment and in such situations, it could be ‘accrual’. However, the general position is that what the law recognises in amalgamation is the receipt of shares in substitution of trading assets.
B. Commercial realizability
The Court stated that mere receipt of shares does not suffice to attract Section 28 Income Tax Act; commercial realizability is also required when income is received in kind. The governing test under Section 28 Income Tax Act is not the presence of a sale, exchange, or extinguishment of rights in the technical sense, but whether the assessee has, in consequence of business operations, come into possession of a real and presently realisable commercial benefit. This may take the form of money directly received, or assets in kind capable of being immediately disposed of for money’s worth. The shares, therefore, must be readily available for trading to be treated as stock-in-trade.
Thus, the Court stated that where under a scheme of amalgamation the shareholder merely receives shares of the amalgamated company in lieu of the shares held in the amalgamating company, there is no real or completed profit capable of being taxed under Section 28 Income Tax Act, unless it is shown that the shares are held as stock-in-trade and are readily available for realisation.
C. Definite Valuation and timing of taxability
The Court stated that it is well settled that profit must be capable of definite valuation, so that the real gain or loss stands crystallized. Further, “profits”, in the commercial sense, are ascertainable only when the old position is closed and the new position is determined in terms of money’s worth. This principle is an application of the doctrine of real income, and it applies to stock-in-trade. Therefore, the Court stated that the test is not satisfied merely by the receipt of realisable shares in substitution of earlier holdings, such shares must also be capable of quantification.
With regards to timing of taxability, the Court stated that the charge under Section 28 Income Tax Act is not attracted on mere sanction of the scheme or on appointed date, but only upon the receipt of the new shares, when the statutory substitution translates into a concrete, realisable commercial advantage.
D. Distinction between Capital and Business assets
The Court stated that nature of stock-in-trade is wholly different from that of an investment. Stock-in-trade represents circulating capital, and not held for preservation or appreciation, but for conversion into money in the ordinary course of business. Thus, the Court stated that substitution of one trading asset by another, cannot be equated with a mere continuation of an investment. It represents a commercial realisation in kind, for the new shares are distinct assets with a definite and presently realisable market value.
The Court further stated that if trading stock amalgamations were exempt from tax, it would enable evasion by creating shell entities, parking profits or losses, and converting them into shares without taxation. Unlike investors who restructure holdings, traders use stock-in-trade for profit; exempting them at substitution would erode the tax base.
E. Conclusion
The Court reiterated that Section 28 of Income Tax Act is of wide import and encompasses all profits and gains arising during business, even when such profit is realised in kind. The statutory substitution of shares of the amalgamating company by shares of the amalgamated company is not a mere neutral replacement. Where the new shares are freely marketable and possess a definite commercial value, the event constitutes a commercial realisation giving rise to taxable business income.
Thus, the Court held that substitution of stock-in-trade shares with shares of the amalgamated company gives rise to taxable business income under Section 28 of the Income Tax Act, but only upon allotment of new shares, not at the appointed date or court sanction. The Court further held that receipt of shares of the amalgamated company in substitution of stock-in-trade can amount to taxable business profits under Section 28 Income Tax Act. However, with respect to the present case, whether such shares are freely realisable, restricted, or held as investment requires factual determination, so the matter was remitted to the Tribunal.
The Court further observed that business profits may arise in money or kind, but must be concrete and commercially realisable, not mere paper adjustments. Amalgamation substitutes one form of holding with another; if these yields assets of definite market value, Section 28 of Income Tax Act applies. Courts must distinguish genuine gains from hypothetical accretions, applying the doctrine of real income to ensure taxation of true profits while avoiding illusory gains.
[Jindal Equipment Leasing Consultancy Services Ltd. v. CIT, 2026 SCC OnLine SC 41, decided on 9-1-2026]
*Judgment authored by- Justice R. Mahadevan
Advocates who appeared in this case:
For the Appellants: Ajay Vohra, Sr. Adv.; Kavita Jha, Sr. Adv.; Aniket Deepak Agrawal, AOR; Vaibhav Kulkarni, Adv.; Aabgina Chishti, Adv.
For the Respondents: Raghavendra P Shankar, A.S.G.; Raj Bahadur Yadav, AOR; Udai Khanna, Adv.; Karan Lahiri, Adv.; Vimla Sinha, Adv.; Seema Bengani, Adv.; Preeti Rani, Adv.; Digvijay Dam, Adv.