Income Tax Act | Substitution of Shares held as Stock-in-Trade upon Amalgamation constitutes Taxable Business Income if Commercially Realisable: Supreme Court

“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.”— In a seminal ruling Supreme Court of India, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, held that the receipt of shares in an amalgamated company in lieu of shares held as stock-in-trade in the amalgamating company can attract tax liability under Section 28 of the Income Tax Act, 1961, provided the shares are commercially realisable.

The Controversy: Capital Asset vs. Stock-in-Trade

The judgment arises from a complex tax dispute involving investment companies of the Jindal Group. The appellants held shares in Jindal Ferro Alloys Limited (JFAL), which amalgamated with Jindal Strips Limited (JSL). Under the scheme, the appellants received shares of JSL in lieu of their holding in JFAL. The appellants claimed exemption under Section 47(vii) of the Income Tax Act, treating the shares as capital assets. However, the Assessing Officer treated the holding as stock-in-trade, thereby taxing the notional appreciation in value as business income under Section 28.

The core legal conundrum before the Apex Court was whether the mere "substitution" of shares pursuant to a court-sanctioned amalgamation scheme constitutes a "transfer" or "realisation" of profit taxable as business income, specifically when the shares are held as trading stock rather than capital investments.

“It is sufficient if there is ‘income’, and the ‘transfer’, whether it is actual, material, or immaterial, is not relevant.”

Section 28: The Wide Net of Business Income

Justice Mahadevan, authoring the judgment, undertook a granular analysis of Section 28, distinguishing it from the capital gains regime under Section 45. The Court observed that Section 28 is a comprehensive charging provision designed to capture all real profits arising in the course of business, whether received in cash or in kind. Unlike Section 45, which hinges on the definition of "transfer" under Section 2(47), Section 28 is agnostic to the mode of realisation.

The Bench rejected the appellant's contention that no taxable event occurs until the actual sale of the new shares. The Court clarified that if the old stock-in-trade is extinguished and replaced by a new asset (shares of the amalgamated company) that possesses a definite and ascertainable market value, a commercial realisation has occurred.

The Doctrine of Real Income and Commercial Realisability

The Supreme Court, however, introduced a critical safeguard: the Doctrine of Real Income. The Bench held that taxability is not automatic upon the sanction of the scheme. For the substitution to be taxable under Section 28, the profit must be "real and presently realisable."

The Court laid down a three-pronged test for taxability:

1. The old stock-in-trade must cease to exist.

2. The new shares must possess a definite market value.

3. The assessee must be in a position to immediately dispose of such shares (i.e., they must be freely tradable).

“Stock-in-trade represents circulating capital: it is held not for preservation or appreciation, but for conversion into money in the ordinary course of business.”

Distinction from Capital Gains Exemption

The judgment draws a sharp line between Section 47(vii) and Section 28. The Court noted that while the legislature expressly exempted the transfer of capital assets during amalgamation from capital gains tax, no such "carve-out" exists for business assets (stock-in-trade).

The Court reasoned that stock-in-trade represents circulating capital meant for conversion into money. To exempt traders from tax at the point of substitution would open avenues for tax evasion, allowing enterprises to warehouse profits in shell entities and amalgamate them to convert trading stock into new shares without tax incidence.

Timing of Taxability

Clarifying the "taxable event," the Court held that the charge under Section 28 crystallizes only upon the allotment of the new shares. It is at this stage that the assessee receives a realisable instrument. The tax is not attracted merely on the "appointed date" or the date of the Court's sanction of the scheme.

“The touchstone is, therefore, the doctrine of real income... ensuring that the tax charge operates neither oppressively nor evasively.”

The Supreme Court also dismissed the appellant's preliminary objection regarding the High Court's jurisdiction under Section 260A. The appellants argued that the High Court exceeded its brief by addressing Section 28 when the substantial question of law was limited to "transfer." The Apex Court held that the issue of taxability under Section 28 was incidental and fundamental to the dispute, and the High Court was empowered to address it.

While upholding the High Court's view on the principle of law, the Supreme Court remitted the matter to the Income Tax Appellate Tribunal (ITAT). The Tribunal is now tasked with the factual determination of whether the specific shares in question were held as stock-in-trade or capital assets, and whether they were, in fact, freely realisable and tradable upon allotment to justify the levy of tax under Section 28.

Date of Decision: 09/01/2026