When Can Shares Received After Company Amalgamation Be Taxed As Business Income : Supreme Court Explains

The Supreme Court has ruled that shares received in a corporate amalgamation are immediately taxable as business income under Section 28 of the Income Tax Act if they represent a "real, commercially realizable benefit."

“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.”, observed a bench of Justices JB Pardiwala and R Mahadevan.

The dispute arose from a scheme of amalgamation under which Jindal Ferro Alloys Limited (JFAL) merged into Jindal Strips Limited (JSL). The assesses had held shares of JFAL and, upon amalgamation, were allotted shares of JSL in substitution. The controversy centred on whether this allotment constituted a taxable event when the original shares were held not as investments (capital assets), but as trading assets (stock-in-trade).

The Assessing Officer had denied exemption under Section 47(vii), which applies only to capital assets, and treated the transaction as a realization of stock-in-trade, bringing the difference in market value to tax as business income under Section 28.

While the ITAT had earlier ruled in favour of the assessees, the Delhi High Court reversed that view, holding that where shares are held as stock-in-trade, their substitution in an amalgamation can result in taxable profits.

Aggrieved by the High Court's decision, the assesses moved to the Supreme Court, arguing that they were entitled to exemption under Section 47(vii) of the Income Tax Act.

Affirming the impugned order, the judgment authored by Justice Mahadevan held that the exemption under Section 47(vii) of the Income Tax Act is available only for capital assets (investments). If shares are held as stock-in-trade (trading assets), their substitution in an amalgamation is a business event, making it taxable income under Section 28 of the Act.

“we reiterate that Section 28 of the I.T. Act is of wide import and encompasses all profits and gains arising in the course of 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.”, the court observed.

The Court held that for shares received in an amalgamation to be taxed as business income, the Revenue must establish three conditions:

"(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."

If these conditions are satisfied, the allotment results in a commercial realization taxable under Section 28 in the year of allotment. If not, taxation must await the actual sale of the shares.

“If these conditions are satisfied, the substitution bears the character of a commercial realisation and the profit may be taxed under Section 28. Where, however, the allotment of shares is merely a statutory substitution mandated by the scheme of amalgamation, without yielding an immediately realisable benefit, no income can be said to accrue or be received at that stage, and taxability arises only upon the eventual sale of the shares.”, the court said.

“What must be established is that the transaction has the attributes of a commercial realisation resulting in a real and presently disposable advantage. Where this test is satisfied, taxability may arise at the stage of substitution. Otherwise, the accrual or receipt of income is deferred until actual sale.”, the court added.

Further explaining the test under Section 28, the court said:

“the governing test under Section 28 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.”

Accordingly, the appeal was dismissed. The High Court's directions remand order was affirmed, where the matter was directed to be returned to the ITAT, which must first determine whether the JFAL shares were held as stock-in-trade or as capital assets.

If they are found to be stock-in-trade, the Tribunal must then apply the Supreme Court's three-pronged test to decide whether taxable business income arose in the relevant assessment year.

Headnote

Income Tax Act, 1961 – Section 28 and Section 47(vii) – Amalgamation – Substitution of Shares held as Stock-in-Trade – Whether the receipt of shares of an amalgamated company in lieu of shares of an amalgamating company held as stock-in-trade gives rise to taxable business income – Held: Amalgamation is a statutory process of substitution - While Section 47(vii) exempts capital gains arising from such substitution if the shares are "capital assets," it does not apply if they are held as "stock-in-trade" - Taxable business income under Section 28 arises when an assessee receives a real and presently realisable commercial benefit - In the context of amalgamation, the charge under Section 28 crystallises only upon the allotment of new shares, as this is when the assessee receives realisable instruments capable of valuation in money's worth - At the stages of the "appointed date" or "date of court sanction," no such benefit accrues or is received - The profit arising on receipt of the amalgamated company's shares may be taxed under Section 28 where the shares allotted are tradable and possess a definite market value - This is a fact-sensitive test to be determined based on the realisability of the shares in each case. [Relied on Commissioner of Income-tax, Cochin v. Grace Collis and others (2001) 3 SCC 430; Orient Trading Company Ltd. v. Commissioner of Income Tax, Calcutta (1997) 3 SCC 340; R. Nagaraj v. Rajamani 2025 LiveLaw (SC) 416; Shiv Raj Gupta v. Commissioner of Income-Tax, Delhi (2020) 425 ITR 420 (SC); Paras 18 - 31] 

Income Tax Act, 1961 – Section 260A – Jurisdiction of High Court – Substantial Question of Law – Whether the High Court can decide an issue (taxability under Section 28) not specifically framed as a substantial question of law – Held: Issues incidental or collateral to the main formulated question, on which parties have been heard and which go to the root of the matter, can be considered by the High Court - The absence of a formal formulation does not vitiate the judgment if no prejudice is caused and parties had the opportunity to address the dispute – Appeal dismissed. [Para 9] 

Cause Title: M/S JINDAL EQUIPMENT LEASING CONSULTANCY SERVICES LTD VERSUS COMMISSIONER OF INCOME TAX DELHI – II, NEW DELHI

Citation : 2026 LiveLaw (SC) 37

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Appearance:

For Petitioner(s) :Mr. Ajay Vohra, Sr. Adv. Ms. Kavita Jha, Sr. Adv. Mr. Vaibhav Kulkarni, Adv. Mr. Aniket Deepak Agrawal, AOR Ms. Aabgina Chishti, Adv.

For Respondent(s) :Mr. Raghavendra P Shankar, A.S.G. Mr. Raj Bahadur Yadav, AOR Mr. Udai Khanna, Adv. Mr. Karan Lahiri, Adv. Mrs. Vimla Sinha, Adv. Ms. Seema Bengani, Adv. Mr. Preeti Rani, Adv. Mr. Digvijay Dam, Adv.