Shares Received On Amalgamation Are Taxable As Business Income Where Stock-In-Trade Shares Are Money-Realisable And Capable Of Definite Valuation: Supreme Court
Kiran Raj
The Supreme Court of India Division Bench of Justices JB Pardiwala and R Mahadevan has held that when shares of an amalgamating company are held as stock-in-trade and are replaced under a court-approved amalgamation by shares of the amalgamated company that are money-realizable and capable of definite valuation, the replacement itself can generate taxable business income under the Income Tax Act. The dispute concerned whether such allotment creates chargeable business profits at the point of substitution, or only when the new shares are later sold. The Court answered the legal issue in favour of the tax department in principle and sent the matters back for fresh fact-finding on whether the holdings were stock-in-trade and whether the allotted shares were freely realisable.
The appeals arose from a common judgment of the Delhi High Court remanding income tax appeals for fresh consideration on the taxability of shares received pursuant to a court-sanctioned scheme of amalgamation. The appellants were investment companies belonging to the same corporate group, holding shares of an operating company as part of promoter holdings. These shares were reflected as investments in their balance sheets.
During the relevant assessment year, the operating company was amalgamated with another company under schemes sanctioned by jurisdictional High Courts. Under the approved exchange ratio, the appellants received shares of the amalgamated company in lieu of the shares held in the amalgamating company. In their income tax returns, the appellants claimed exemption under Section 47(vii) of the Income Tax Act, 1961, treating the shares as capital assets.
The Assessing Officer rejected the claim, holding that the shares constituted stock-in-trade and taxed the value of the substituted shares as business income under Section 28. This view was affirmed by the Commissioner (Appeals). The Income Tax Appellate Tribunal allowed the assessees’ appeals, holding that no income accrued in the absence of sale or transfer. The Revenue challenged this finding before the High Court, which set aside the Tribunal’s order and remanded the matter for determination of the nature of the shareholding.
The Supreme Court examined the scope of Section 28 of the Income Tax Act and its application to amalgamation involving shares held as stock-in-trade. The Court observed that “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.”
It was “recorded that the definition of ‘transfer’ under Section 2(47) is confined to capital assets and does not control the operation of Section 28.” The Court clarified that “the presence or absence of a sale, exchange, or transfer in the strict legal sense is not determinative for the purposes of business income.”
On amalgamation, the Court “stated that the substitution of shares of the amalgamating company by shares of the amalgamated company is a statutory substitution of one form of holding for another.” However, it observed that “such substitution may amount to a commercial realisation where the shares are held as stock-in-trade and the substituted shares are freely tradable and capable of definite valuation.”
The Court further “recorded that the doctrine of real income governs the charge under Section 28, and only real and presently realisable commercial benefits can be brought to tax.” It clarified that “mere notional appreciation or hypothetical accretion cannot constitute taxable income.”
On timing, the Court “observed that the charge under Section 28 is not attracted on the appointed date or on court sanction of the scheme, but only upon the actual allotment of shares, when the old stock-in-trade ceases to exist and is replaced by new shares of ascertainable market value.” The Court stated that “the determination whether such shares confer a real and immediately realisable benefit is a fact-dependent exercise.”
The Supreme Court held that “where 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 under Section 28 of the Income Tax Act. The charge under Section 28 is attracted only upon the allotment of the new shares, and not on the appointed date or the date of court sanction.”
“Accordingly, the main issue is answered in favour of the Revenue, in principle holding that the receipt of shares of the amalgamated company in substitution of stock-in-trade can give rise to taxable business profits under Section 28. However, the actual application of these principles, including the nature of the shareholding and the realisability of the shares received, requires factual determination.” Accordingly, “the matter was remitted to the Income Tax Appellate Tribunal for fresh adjudication in accordance with law.”
The Court observed: “Before parting, we may observe that business, by its very nature, admits of profits arising in diverse forms, whether in money or in kind, yet the common denominator is that the benefit must be concrete, capable of commercial realisation, and not a mere paper re-arrangement. Amalgamation, as a statutory substitution, ensures continuity of enterprise but also extinguishes one form of holding and replaces it with another. As we have held, where such substitution confers on the assessee realisable assets of definite market value, a commercial realisation takes place, and Section 28 is attracted. At the same time, courts must remain alive to the distinction between genuine commercial gain and hypothetical accretion. The touchstone is, therefore, the doctrine of real income, applied with due regard to the facts of each case, ensuring that the tax charge operates neither oppressively nor evasively, but in harmony with the legislative design, to tax true profits of business, however manifested, while eschewing illusory gains.
The Supreme Court “affirmed the judgment passed by the High Court” and “disposed of all the appeals in the aforesaid terms,” while “making no order as to costs.”
Advocates Representing the Parties
For the Appellants: Mr. Ajay Vohra, Sr. Adv. Ms. Kavita Jha, Sr. Adv. Mr. Vaibhav Kulkarni, Adv. Mr. Aniket Deepak Agrawal, AOR Ms. Aabgina Chishti, Adv.
For the Respondents: 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.
Case Title: M/s Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax
Neutral Citation: 2026 INSC 46
Case Numbers: Civil Appeal Nos. 152–155 of 2026
Bench: Justice J.B. Pardiwala, Justice R. Mahadevan
