Receipt of Amalgamated Company Shares May Attract Business Tax If Readily Realisable, Says Supreme Court

A bench of Justices J.B. Pardiwala and R. Mahadevan heard appeals arising from a Delhi High Court order which remanded matters to the Income‑tax Appellate Tribunal to determine whether shares held in an amalgamating company were stock‑in‑trade or capital assets and whether receipt of shares on amalgamation gave rise to taxable business income under Section 28 of the Income‑tax Act, 1961.

The Court affirmed the High Court’s view in principle and held that substitution of trading shares by shares of the amalgamated company could amount to a commercial realisation taxable as business income, provided the substituted shares were “realisable in money and capable of definite valuation.” The Court emphasised that the charge under Section 28 arose on allotment of the new shares and not on the appointed date or merely on court sanction of the scheme. The Court, in its reasoning, observed: “We thus hold that where the shares of an amalgamating company, held as stock‑in‑trade, are substituted by shares of the amalgamated company pursuant to a scheme of amalgamation, and such shares are realisable in money and capable of definite valuation, the substitution gives rise to taxable business income within the meaning of Section 28 of the I.T. Act. The charge under Section 28 is, however, attracted only upon the allotment of new shares.” The Court also noted that “Such profit must be ascertainable with reasonable definiteness at the relevant point of time, and the assessees must have either received it, or acquired a vested right to receive and commercially realise it, even if the receipt is in kind.”

Background

The appeals arose from assessments for AY 1997‑98 by investment companies in the Jindal Group which held controlling promoter stakes in Jindal Ferro Alloys Ltd. (JFAL). Pursuant to court‑sanctioned schemes, JFAL was amalgamated with Jindal Strips Ltd. (JSL) and shareholders were allotted 45 JSL shares for every 100 JFAL shares. The appellants treated the JFAL shares as capital assets and claimed exemption under Section 47(vii) when allotted JSL shares. The Assessing Officer, however, treated the JFAL shares as stock‑in‑trade, denied the Section 47(vii) exemption and taxed the difference between market value of allotted JSL shares and the book value of JFAL shares as business income under Section 28; the CIT(A) sustained that view. The Tribunal allowed the assessees, relying on Rasiklal Maneklal and holding that no profit accrued absent an actual sale or transfer. The High Court set aside the Tribunal’s order, distinguishing later precedents (including Grace Collis) and remanded the matters to the Tribunal to determine the nature of the holding (capital or trading), observing that substitution of trading stock for realisable shares could amount to a realisation taxable under Section 28. The Revenue’s appeals to the High Court raised whether Section 47(vii) could be applied without first determining whether shares were capital assets and whether taxability could arise under Section 28 if shares were stock‑in‑trade.

The Supreme Court heard arguments for the appellants, led by Mr. Ajay Vohra, who contended that amalgamation effected statutory substitution and, absent specific legislative deeming, notional gains could not be taxed until actual sale; counsel relied on precedents holding that destruction or cessation of an asset did not per se amount to “transfer.” The Revenue, represented before the Court by the Additional Solicitor General, submitted that Section 28 was wide and that profits or gains could arise in kind or otherwise upon realisation in consequence of business operations, relying on Orient Trading and related authorities.

The Court analysed the statutory scheme — notably Sections 2(14), 2(47), 28, 45 and 47(vii) — and applied the doctrine of real income: where substituted shares are actually received, possess a definite market value and are presently realisable, a commercial realisation arises and Section 28 may be attracted; otherwise taxability awaited sale. The Court affirmed the High Court’s conclusion in principle, held that factual questions (whether shares were stock‑in‑trade, whether allotted shares were freely realisable or subject to restrictions, and valuation) remained for the Tribunal, and remitted the matters for fresh adjudication. The appeals were disposed of accordingly with no order as to costs.

Case Details: Case No.: Civil Appeal Nos. 152‑155 of 2026 (Arising out of SLP (C) Nos. 2028/2021, 2190/2021, 2188/2021, 2197/2021) Case Title: M/s Jindal Equipment Leasing Consultancy Services Ltd. & Ors. v. Commissioner of Income Tax, Delhi – I/II (and connected appeals) Appearances: For the Petitioner(s): Mr. Ajay Vohra, Senior Counsel (for appellants) For the Respondent(s): Additional Solicitor General (for the Department)