Substitution Of Shares On Amalgamation Taxable U/S 28

Case Details: Jindal Equipment Leasing Consultancy Services Ltd. v. CIT - [2026] 182 taxmann.com 219 (SC)

Judiciary and Counsel Details

R. Mahadevan & J.B. Pardiwala, JJ.
Ajay Vohra, Ms. Kavita Jha, Sr. Advs., Aniket Deepak Agrawal, AOR, Vaibhav Kulkarni & Ms. Aabgina Chishti, Advs. for the Appellant.
Raghavendra P Shankar, A.S.G., Raj Bahadur Yadav, AOR, Udai Khanna, Karan Lahiri, Mrs. Vimla Sinha, Ms. Seema Bengani, Preeti Rani & Digvijay Dam, Advs. for the Respondent.

Facts of the Case

The core issue before the Supreme Court was whether the receipt of shares of the amalgamated company in lieu of shares of the amalgamating company, when the original shares were held as stock-in-trade, gives rise to taxable business income under section 28, or whether no income can be said to accrue until such substituted shares are actually sold.

Supreme Court Held

The Supreme Court held as under:

The Supreme Court first examined the statutory scheme of the Income-tax Act and drew a clear distinction between the fields occupied by Sections 45 (capital gains) and 28 (business income). It observed that while Section 45 is triggered only upon a “transfer” of a capital asset, Section 28 is much wider in scope and taxes “profits and gains of business or profession” irrespective of the mode in which such profits arise, whether in cash or in kind, and without requiring any transfer in the strict legal sense. Therefore, the definition of “transfer” in section 2(47) is not determinative for the purposes of section 28.

The Court then analysed the legal nature of amalgamation and held that although in company law it operates as a statutory substitution whereby the amalgamating company ceases to exist, and its shareholders receive shares of the amalgamated company, this does not conclude the tax enquiry.
Relying on earlier precedents including Grace Collis [2001] 115 Taxman 326 (SC), the Court reiterated that amalgamation does involve a transfer in the tax sense, but more importantly, for the purposes of section 28, the real question is whether the assessee has, in the commercial sense, realised its trading asset and obtained something of determinable value in its place.

The Supreme Court emphasised that income under section 28 can arise even without a sale or exchange in the conventional sense. It noted that business profits may be realised in kind, and what is relevant is commercial realisability. If stock-in-trade ceases to exist and is replaced by another asset of ascertainable value, and the assessee is in a position to commercially exploit or realise that asset, then a real business profit can be said to have arisen.

Applying these principles to amalgamation, the Court observed that shares held as stock-in-trade constitute trading assets. Upon amalgamation, those shares are extinguished, and the assessee receives in substitution shares of the amalgamated company with a definite and determinable value. This substitution, in substance, amounts to the realisation of the trading asset, even though the consideration is shares rather than cash.
The Court rejected the assessees’ argument that taxation must wait until the actual sale of the substituted shares. It held that this approach confuses timing of sale with accrual of business income. Once the trading asset is converted into another asset of ascertainable value through a statutory process and the assessee acquires a vested and realisable right in it, the profit has already accrued in the commercial sense, even if the assessee chooses to hold the asset further.

List of Cases Reviewed

Order of High Court of Delhi Order in ITA Nos. 935, 822, 853, and 961 of 2005 dated 07.08.2020 (para 33) affirmed
Shiv Raj Gupta v. CIT [2020] 117 taxmann.com 871 (SC)/[2020] 272 Taxman 391 (SC)/[2020] 425 ITR 420 (SC) (para 9.4) distinguished

List of Cases Referred to

CIT v. Rasiklal Maneklal (HUF) [1989] 43 Taxman 259 (SC)/[1989] 177 ITR 198 (SC) (para 3.4)
CIT v. Grace Collis [2001] 115 Taxman 326 (SC)/[2001] 248 ITR 323 (SC) (para 3.6)
Orient Trading Co. Ltd. v. CIT [1997] 90 Taxman 535/224 ITR 371 (SC) (para 3.6)
Shiv Raj Gupta v. CIT [2020] 117 taxmann.com 871 (SC)/[2020] 272 Taxman 391 (SC)/[2020] 425 ITR 420 (SC) (para 4)
Vania Silk Mills (P.) Ltd. v. CIT [1991] 59 Taxman 3 (SC)/[1991] 191 ITR 647 (SC) (para 4.2)
E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) (para 4.4)
CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) (para 4.4)
State Bank of Travancore v. CIT [1986] 24 Taxman 337 (SC)/[1986] 158 ITR 102 (SC) (para 4.4)
Godhra Electricity Co. Ltd. v. CIT [1997] 91 Taxman 351 (SC)/[1997] 225 ITR 746 (SC) (para 4.4)
CIT v. Excel Industries Ltd. [2013] 38 taxmann.com 100 (SC)/[2013] 219 Taxman 379 (SC)/[2013] 358 ITR 295 (SC) (para 4.4)
R. Nagaraj v. Rajamani 2025 Livelaw SC 416 (para 9.2)
Mansarovar Commercial (P.) Ltd. v. CIT [2023] 149 taxmann.com 178/293 Taxman 312/453 ITR 661 (SC) (para 9.5)
Mazagaon Dock Ltd. v. CIT and Excess Profits Tax AIR 1958 SC 861 (para 15.1)
Commissioner of Customs (Import) v. Dilip Kumar and Company (2018) 9 SCC 1 (para 15.1)
Ujagar Prints Etc. v. Union of India (1989) 3 SCC 488 (para 15.1)
CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 88 Taxman 429 (SC)/[1996] 222 ITR 344 (SC) (para 15.2)
Religare Finvest Ltd. v. State (NCT of Delhi [2023] 154 taxmann.com 263 (SC) (para 16)
Saraswati Industrial Syndicate Ltd. v. CIT [1990] 53 Taxman 92 (SC)/[1990] 186 ITR 278 (SC) (para 16)
CIT v. Mahagun Realtors (P) Ltd. [2022] 137 taxmann.com 91 (SC)/[2022] 287 Taxman 566 (SC)/[2022] 443 ITR 194 (SC) (para 16.2)
Kanchanganga Sea Foods Ltd. v. CIT [2010] 192 Taxman 187 (SC)/[2010] 325 ITR 540 (SC) (para 18)
Californian Copper Syndicate Ltd v. Inland Revenue (1904) 5 TC 159 (para 19)
Raja Raghunandan Prasad Singh v. CIT (1933) 1 ITR 113 (para 20)
Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 (SC) (para 21)
CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC) (para 22)
CIT v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326 (SC)/[2009] 312 ITR 254 (SC) (para 24.1)
CIT v. Express Newspapers Ltd. [1964] 53 ITR 250 (SC) (para 27.1).