Shares Received on Amalgamation Are Taxable as Business Income If Held as Stock-in-Trade: Supreme Court

The Supreme Court has held that the shares received on amalgamation are taxable as business income if held as stock-in-trade. The bench of Justice J.B. Pardiwala and Justice R. Mahadevan has observed that where shares of an amalgamating company are held as stock-in-trade, the receipt of shares of the amalgamated company pursuant to a court-approved scheme of amalgamation may give rise to taxable business income under Section 28 of the Income Tax Act, 1961, depending on factual determination. The appeals were filed by several investment companies of the Jindal Group, including Jindal Equipment Leasing Consultancy Services Ltd., Nalwa Investment Ltd., Abhinandan Tradex Ltd., and Mansarover Tradex Ltd. The companies were shareholders in Jindal Ferro Alloys Ltd. (JFAL), which was amalgamated with Jindal Strips Ltd. (JSL) under a scheme sanctioned by the High Courts of Andhra Pradesh and Punjab & Haryana. Under the scheme, shareholders of JFAL were allotted 45 shares of JSL for every 100 shares of JFAL. The assessees claimed exemption under Section 47(vii) of the Income Tax Act, asserting that the JFAL shares were held as capital assets, and therefore, no capital gains tax was leviable. However, the Assessing Officer treated the shares as stock-in-trade, denied the exemption, and taxed the difference between the market value of the JSL shares and the book value of JFAL shares as business income under Section 28. This view was upheld by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal (ITAT) allowed the assessees’ appeals, holding that no taxable income could arise unless there was a sale or transfer for consideration, and relying on the Supreme Court’s earlier decision in Rasiklal Maneklal (HUF). The Revenue challenged this before the Delhi High Court, which set aside the Tribunal’s ruling. The High Court held that the Tribunal had erred in ignoring the later binding precedent of CIT v. Grace Collis, and ruled that if the shares were held as capital assets, the transaction would be a “transfer” under Section 2(47), though exempt under Section 47(vii). If the shares were held as stock-in-trade, the receipt of shares on amalgamation could result in taxable business profits under Section 28. The matter was remanded to the Tribunal to determine the true nature of the shareholding. The Supreme Court rejected the assessees’ contention that no income could arise unless the shares were actually sold. The Court made several important observations namely Section 28 has a wide scope: Unlike capital gains under Section 45, business income under Section 28 does not depend on the existence of a “transfer” as defined in Section 2(47). Profits and gains of business may arise in cash or in kind, and even without a conventional sale or exchange. If the shares are held as capital assets, the benefit of Section 47(vii) may apply. However, if they are held as stock-in-trade, the substitution of shares on amalgamation may amount to realisation of trading assets, giving rise to taxable business income. On amalgamation, the amalgamating company ceases to exist, and its shareholders receive shares of the amalgamated company by operation of law. Where such shares form part of trading stock, the transaction cannot automatically be treated as tax-neutral. The Supreme Court rejected the argument that the High Court exceeded its powers under Section 260A by addressing Section 28 without formally framing a separate substantial question of law, holding that the issue was incidental and fully argued by both sides. While affirming the legal position, the Supreme Court did not itself decide whether the JFAL shares were capital assets or stock-in-trade. It upheld the remand to the Tribunal for fresh adjudication on this factual aspect, which will ultimately determine the tax liability of the assessees. Case Details Case Title: M/S Jindal Equipment Leasing Consultancy Services Ltd Versus Commissioner Of Income Tax Delhi – II, New Delhi Case No.: S.L.P. (C) No. 2028 of 2021 Date: January 09, 2026 Click Here To Read Order Read More: CGST Ghaziabad | Bail of Businessman Accused of Rs. 75 Crore GST Fraud Rejected By Meerut Court

Shares Received on Amalgamation Are Taxable as Business Income If Held as Stock-in-Trade: Supreme Court

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