The Supreme Court's judgment in Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax (2026) Livelaw (SC) 37 arrives with a seeming contradiction. It simultaneously widens the net of business-income taxation while raising the evidentiary drawbridge the Revenue must cross to haul it in. This is its defining feature. The decision performs a decisive...
The Supreme Court's judgment in Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax (2026) Livelaw (SC) 37 arrives with a seeming contradiction. It simultaneously widens the net of business-income taxation while raising the evidentiary drawbridge the Revenue must cross to haul it in. This is its defining feature. The decision performs a decisive recalibration, shifting the centre of gravity in merger tax disputes away from formal legal characterisation and towards a rigorously factual inquiry into commercial reality. The result is not a substantive victory for either side, but a fundamental reordering of the battlefield on which future disputes will be fought.
In an era where mergers and group restructurings increasingly rely on share swaps rather than cash consideration, this recalibration carries consequences far beyond the immediate facts. While early reactions have sought to label the ruling as either Revenue-friendly or taxpayer-protective, such binaries miss the point. What the Court has done is to redraw the terrain of merger taxation under section 28 of the Income-tax Act, enlarging its reach in principle while simultaneously fortifying the conditions for its application.
I. Factual And Procedural Background: More Than A Remand
The appeals arose from an amalgamation within the Jindal group, carried out pursuant to a court-sanctioned scheme. Shareholders of the amalgamating company received shares of the amalgamated entity in substitution for their existing holdings. The assessees were group investment companies which held the original shares either as capital assets or as stock-in-trade.
Upon substitution, the Revenue sought to tax the difference in value as business income under section 28, proceeding on the footing that substitution of shares held as stock-in-trade amounted to a commercial realisation. The Income Tax Appellate Tribunal rejected this approach, holding that no income arises on substitution in the absence of an actual sale.
The Delhi High Court disagreed. It held that where shares are held as stock-in-trade, substitution pursuant to amalgamation could, in principle, attract section 28, and remitted the matter to the Tribunal for fresh consideration.
Before the Supreme Court, the assessees mounted a further jurisdictional challenge under section 260A, contending that the High Court had exceeded the scope of the substantial questions of law originally framed. The Court rejected this contention in clear terms, holding that an appellate court is not confined to the precise formulation of questions at the admission stage and may examine any substantial question of law that arises on the record and is incidental to those questions.
This is more than a procedural footnote. By insulating the High Court's remand from technical attack, the Supreme Court has disarmed a familiar taxpayer defence and empowered appellate courts to engage with the substance of a case, untethered from the exact phrasing of questions framed at admission. This holding alone reshapes appellate strategy in tax litigation.
II. Section 28 Unmoored From Sale Or Exchange, And Orient Trading Confined
At a conceptual level, the judgment settles a long-standing ambiguity surrounding the scope of section 28. The Supreme Court decisively severs the application of section 28 from the techno-legal requirements of sale or exchange. Section 28 is concerned with profits and gains arising in the course of business, whether realised in cash or in kind, and its operation does not depend on the technical existence of a “transfer” as understood in capital gains jurisprudence.
This clarification decisively unmoors section 28 from the rigidity that has often constrained its application. The absence of a negotiated sale, bilateral exchange or cash consideration does not, by itself, place a transaction beyond the reach of business-income taxation. Where shares are held as trading assets, their substitution pursuant to a statutory scheme is not immunised merely because it occurs by operation of law.
It is in this context that the Court revisits its earlier decision in Orient Trading Company Ltd. v. Commissioner of Income Tax, Calcutta (1997) 3 SCC 340. That precedent is frequently invoked by the Revenue to argue that any substitution of securities held as stock-in-trade constitutes taxable realisation. The present judgment does not overrule Orient Trading. What it does instead is to restore it to its factual and conceptual setting.
Orient Trading concerned a deliberate exchange of securities by a share dealer, resulting in the receipt of a new asset whose gain or loss could be determined with commercial finality. The transaction brought an existing trading position to a close and replaced it with an asset that was immediately capable of valuation and monetisation. Realisation, in that sense, was complete.
The Supreme Court makes clear that this logic cannot be mechanically transposed onto amalgamations. A court-sanctioned substitution of shares does not necessarily bring about the same degree of commercial finality. Particularly in group restructurings, the receipt of new shares may leave the assessee's economic position substantially unchanged, with liquidity constrained and monetisation neither intended nor feasible.
The lesson is clear. Orient Trading stands for the proposition that receipt in kind can constitute business income. It no longer supports the proposition that every statutory substitution of trading assets amounts to taxable realisation. The decisive filter is present commercial realisability.
III. Real Income As A Jurisdictional Limit, Not Taxpayer Relief
The most consequential aspect of the judgment lies in the Court's treatment of the real-income doctrine. Far from invoking it as an equitable or discretionary restraint, the Court deploys real income as a jurisdictional condition precedent to the exercise of the charging power under section 28.
This distinction matters. In tax litigation, real income is pleaded defensively, as a corrective to otherwise valid assessments. Here, the Court elevates it to a harder plane. Unless the conditions of real income are satisfied, section 28 does not merely yield in its application; it does not activate at all.
Paragraph 24.3 of the judgment is the fulcrum. Even where shares are held as stock-in-trade, substitution pursuant to amalgamation attracts tax only if the Revenue can establish that the assessee has obtained a real, present and commercially realisable benefit. Absent that showing, there is no accrual of business income capable of taxation.
Two elements are central to this enquiry. First, the benefit must be presently realisable in money. Market value is not an abstract accounting construct but a function of the assessee's ability, upon allotment, to convert the substituted shares into cash. Where shares are unlisted, thinly traded, or subject to lock-ins, non-disposal undertakings or contractual or regulatory restraints, the supposed gain may remain illusory.
Secondly, the advantage must reflect commercial closure rather than mere legal substitution. The Court's emphasis is not on balance-sheet replacement, but on whether the trading position has been brought to a point where profit or loss can be said to have crystallised in commercial terms.
Crucially, the burden of establishing real income rests with the Revenue. Assessing Officers are not entitled to presume realisability merely because shares are classified as stock-in-trade or because an amalgamation has occurred. This transforms the Tribunal's role. It becomes a forum for forensic evidence on share marketability, liquidity, valuation and commercial intent. The burden of proof is the Revenue's new uphill climb.
IV. Commercial Closure Versus Economic Continuity
One of the most fertile fault-lines left open by the judgment lies in the interface between commercial closure and economic continuity. While the decision proceeds on the footing that substitution of shares may, in principle, amount to realisation of trading assets, it stops short of equating legal extinguishment with commercial finality.
As a matter of company law, amalgamation results in statutory blending and extinguishment of the amalgamating entity. But the Court's emphasis on real income acknowledges a commercial reality that this legal fiction can obscure, particularly in intra-group restructurings.
In many promoter-led amalgamations, substitution does not reflect an exit from an economic position but a re-parking of the same interest within a reorganised group structure. Control, risk exposure and economic upside may remain substantially unchanged. Liquidity may remain constrained, and monetisation neither intended nor feasible.
The judgment leaves room for this argument without resolving it. The enquiry is whether the original trading position has been brought to a point of commercial closure, or whether economic continuity negates any real crystallisation of profit or loss. This unresolved tension is likely to be the crucible for future disputes.
V. A Taxpayer Shield: Accrual Anchored To Allotment
An important and enduring clarification in the judgment concerns timing. The Court decisively rejects attempts to anchor taxability to the appointed date of amalgamation or the date of court sanction. Income, if any, can arise only upon actual allotment of shares in the amalgamated company.
This holding shuts the door on a particularly aggressive assessment technique. Until allotment, the shareholder possesses no enforceable right to any specific asset capable of valuation or disposal. Taxing notional gains prior to allotment would rest on conjecture rather than accrual.
By fixing accrual at allotment, the Court aligns taxability with the point at which realisability can meaningfully be examined. This operates as a significant procedural safeguard for taxpayers, while preserving the Revenue's ability to tax genuine commercial gains where freely tradable shares are received.
VI. Policy Rationale And The Anti-Abuse Backdrop
The judgment is animated by a clear policy concern. The Court is alert to the risk that closely held or shell entities could be used to shuffle profits through non-cash restructurings, thereby escaping taxation. This concern explains the Court's insistence that section 28 not be rendered inert merely because consideration is received in kind.
At the same time, the Court refuses to let policy suspicion override statutory limits. The anti-abuse rationale informs the interpretation of section 28 but does not displace the foundational requirement of real income. The Revenue must still prove, on evidence, that a restructuring has yielded a real and presently realisable commercial gain.
A Restrained But Consequential Recalibration
The Supreme Court's decision does not revolutionise merger taxation. It does something more exacting. It affirms the breadth of section 28 while fortifying real income as a condition precedent to its application.
For the Revenue, the battlefield is larger. Business profits realised through share-based restructurings are no longer beyond reach merely because cash has not changed hands. For taxpayers, the fortifications are stronger. The moat of real income must be crossed with evidence, not presumption.
The war over merger taxation has not ended. It has moved to a new, intensely evidence-driven terrain. The Tribunal, not the Supreme Court, is now the decisive theatre in this reordered battlefield.
Author is Former Member (Judicial), National Company Law Tribunal. He continues to engage with insolvency, judicial process, and institutional reform through writing, research, and advisory work. Views are personal