Income Tax | Shares Received On Amalgamation Can Be Taxed as Business Income If Held As Stock-in-Trade: Supreme Court

The Supreme Court has held that when shares held as stock-in-trade are replaced with shares of another company under an amalgamation scheme, the allotment can result in taxable business income, provided the new shares can be realised in money and have a definite value.

The bench, consisting of Justices J B Pardiwala and R Mahadevan, opined that "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 Income Tax Act."

Section 28 of the Income Tax Act covers profits and gains from business. The Supreme Court said the provision looks at whether real business income arises, not at the form in which it is received.

"Section 28 does not prescribe any precondition as to the precise mode through which the profit must arise. The moment any income arises out of a business or profession, the provision becomes applicable. It does not incorporate the definition of “transfer” under Section 2(47), unlike Section 45. It is sufficient if there is “income”, and the “transfer”, whether it is actual, material, or immaterial, is not relevant" the top court said.

At the same time, the court clarified that tax under Section 28 is triggered only when the new shares are actually allotted. No taxable benefit arises either on the appointed date in the merger scheme or when the court approves the amalgamation.

In this case, the appellants are four finance companies belonging to the Jindal Group. These companies held shares in two operating companies of the same group, i.e., Jindal Ferro Alloys Ltd. (JFAL) (the amalgamating company) and Jindal Strips Ltd. (JSL) (the amalgamated company).

The appellants were part of the promoter group and held shares in JFAL. In the balance sheets, their shares of JFAL were consistently reflected as investments and not as stock-in-trade.

In 1996, after the approval of the Andhra Pradesh, Punjab and Haryana High Courts, JFAL amalgamated into JSL.

The dispute arose when, for the Assessment Year 1997-98, the appellants claimed exemption under Section 47(vii) of the Income Tax Act, 1961, which provides a capital gains tax exemption for shareholders during a corporate amalgamation (merger), treating JFAL shares as capital assets. 

The Assessing Officer treated the JFAL shares as stock-in-trade and denied the exemption.

The appellants filed an appeal before the Commissioner of Income Tax (Appeals), who confirmed the order of the Assessing Officer.

Further, the Income Tax Appellate Tribunal (ITAT) allowed the appeal filed by the appellants. The Tribunal held that receipt of JSL shares in lieu of JFAL shares under the amalgamation did not amount to a transfer, and therefore, was not taxable in the hands of the appellants.

The revenue challenged the ITAT order before the Delhi High Court. The High Court set aside the Tribunal's order and remanded the matters back to ITAT for fresh consideration.

The appellants argued that the receipt of shares of the amalgamated company does not amount to either a “sale” or an “exchange”. Upon amalgamation, the amalgamating company stands dissolved, and consequently, its shares cease to exist.

It was further pointed out that, therefore, when shareholders receive shares of the amalgamated company in lieu of the extinguished shares of the amalgamating company, there is no subsisting property capable of being exchanged and, accordingly, no taxable business income arises from such transaction.

On the other hand, the Additional Solicitor General for the revenue argued that if shares are held as stock-in-trade, the profit accruing from the receipt of shares of the amalgamated company in lieu of those of the amalgamating company would be taxable under the head “profits and gains of business or profession”.

The bench stated that 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, thereby conferring a presently realisable commercial advantage. 

The Apex Court observed that the charge under Section 28 is not attracted on the mere sanction of the scheme or on the appointed date, but only upon the receipt of the new shares, when the statutory substitution translates into a concrete, realisable commercial advantage.

The bench reiterated that Section 28 of the Income Tax 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 bench added. 

The Apex Court held in favour of the revenue 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. 

The bench further clarified that, however, the actual application of this principle to the facts of the present case, including whether the shares received are freely realisable or otherwise subject to restrictions, or whether the shares are held only as investment, is a matter requiring factual determination. In these circumstances, the proper course is to remit the matter to the Tribunal for fresh adjudication in accordance with law. 

In view of the above, the bench disposed of the appeals and upheld the judgment passed by the High Court.

Citation: 2026 LLBiz SC 1

Case Title: Jindal Equipment Leasing Consultancy Services Ltd. v. Commissioner of Income Tax, New Delhi

Case Number: CIVIL APPEAL NO. 152 OF 2026

Counsel for Appellants: Advocate Ajay Vohra