Supreme Court Redraws The Tax Line On Amalgamations

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 RemandThe 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 ConfinedAt 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 ...

Supreme Court Redraws The Tax Line On Amalgamations

Rajasekhar V.K

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